An overabundance of investment capital has driven a wedge between US midstream asset valuations and actual shipping demand for infrastructure, and the imbalance looks to only be getting more severe as time goes on. In the Permian, for instance, there are 2.16 million b/d of pipeline takeaway capacity, already above the 1.932 million b/d November production, according to Platts’ unit Bentek Energy. But there is also 1.17 million b/d more capacity slated to come online in the form of new projects and expansions in 2016 and 2017, set against oil prices that may still be low enough to weigh on production. The culprit behind both the overbuild and the severity of its impact is the commitment structure that supports the projects. Most projects have a dependable investment return in the form of take-or-pay contracts, under which shippers agree to move a certain volume of crude on the pipeline years in advance, and have to pay for the space regardless of whether or not they actually use the space. That makes pipelines look like particularly attractive investments, and Plains All American CEO Greg Armstrong has pointed to the ready access to capital as the source of the overbuild in recent earnings calls. The
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Source: CTRM Center