Just like everything else, the bankruptcy river flows downstream, and as upstream players look to pass their debt burdens onto midstream operations through a rash of Chapter 11 filings, investors are wondering what is going to happen to all the pipelines as the industry continues to batten down the hatches amid the continued oil price downturn.
Two such companies, Sabine Oil and Quicksilver, recently filed for Chapter 11 bankruptcy protection, arguing at bankruptcy court that they need to be relieved of their contracts with pipeline operators for shipping their oil and gas from the wellhead—a move that would leave the pipelines with no income, making it nearly impossible for them to stay afloat.
Sabine and Quicksilver insist they should not be obliged to continue using the services of the pipeline operators under Chapter 11 restructuring circumstances, arguing that they would be able to save money ($35 million in the case of Sabine Oil, according to a Reuters report) this way. This money, so the argument goes, could be put to better use finding an alternative way of transporting the company’s crude oil and gas.
For the time being, Chapter 11 may save Sabine and Quicksilver from defaulting on massive debt loads, but what of the pipelines? Related: The Allure Of Shale Is Wearing Off
Until recently, pipeline operators felt safe in the knowledge that their contracts were long-term and untouchable, banning producers from transporting their oil and gas by any other route or network. That worked well for them, but not quite so well for the producers.
Although the two lawsuits aren’t large enough to cause much of a wake in the industry on their own, a favorable ruling for Sabine and Quicksilver would set a precedent for other energy companies to follow. As a consequence, many midstream companies may find themselves threatened by the upstream bankruptcies, fearing that they will be the ones left holding the bag.
The pipelines are already suffering from their close ties with producers and operators, as the recent stock price fall for Chesapeake Energy and Williams illustrates. As a bankruptcy lawyer with McKoos Smith told Reuters, “It’s a hellacious problem. It will end with even more bankruptcies.” Related: Why Oil Booms And Busts Happen
This downhill action has already hit contracts for new pipelines, as seen by Gazprom’s cancelling its $832 million contract with Saipem to lay a new natural gas pipeline in the Black Sea, and Whiting Petroleum’s halting of its deal with Tesoro Logistics to build a pipeline.
Kinder Morgan, North America’s largest pipeline, remains confident despite the precarious position of pipelines in the overall chain. Kinder Morgan investors question how the company can withstand the onslaught of upstream bankruptcies and a hefty percentage of customers with questionable credit.
If an effort to allay investor concerns, Kinder Morgan’s Chief Financial Officer Kim Dang had this to say: We think if every single one of these guys went bankrupt on us at the beginning of the year, that’s about 2.5 percent of our revenue.” Related: UK Oil Industry At The “Edge Of A Chasm”
Investor Superhero Warren Buffett is buying in—literally. Earlier in February, undaunted by the possibility that pipelines may be soon eating their contracts with upstream companies, Buffet’s company Berkshire Hathaway Inc. purchased a $400 million stake in Kinder Morgan.
If the pipelines indeed are left to bear the weight of its debt-laden clients, are the refineries—which are further downstream—next?
Buffett’s January purchase of a 12 percent stake in refiner Phillips 66 says no.
To what degree the pipelines—and possibly refineries—will be affected is anyone’s guess, but it’s clear they are now both at the mercy of the upstream momentum, and pipeline operators can no longer maintain the take-it-or-leave-it stance with its customers.
By Irina Slav for Oilprice.com
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