Magellan v. Occidental - Playing Devil's Advocate?
Much of 2017 has been spent speculating on production potential in the Permian Basin, its impacts on oil and natural gas markets, and the pipeline likely to win big as a result. Magellan Midstream Partners L.P. appears to be making moves to get ahead, or perhaps, just catch up, with its stiff competition in the basin. Industry has speculated about the motives behind Magellan seeking a declaratory order from the FERC, as well as the impact to Magellan and other Permian players following the FERC's denial of the order. Could this have been a move to strengthen the company's positioning ahead of its most recent open season? Some believe Magellan's recent spat with Occidental Energy Marketing (Oxy) involving the pending BridgeTex expansion may support that position.
On December 1, Magellan announced that it intends to develop a new pipeline to transport various grades of crude oil and condensate. Simultaneously, Magellan launched an open season, which closes on February 1, 2018, to assess interest in transporting from the Permian and Eagle Ford Basins to multiple destinations in the Corpus Christi and Houston, Texas markets. The proposed system is expected to have an initial capacity of at least 350,000 barrels per day (bpd), with the ability to expand up to 600,000 bpd for each destination, to include Magellan's existing crude oil terminals. Service is expected by the end of 2019.
Magellan's announcement was made, conveniently, a week after the FERC's denial of its petition for declaratory order. While surprising to some, it appears that the request may have been designed to elicit a negative ruling in an effort to thwart what Magellan apparently saw as unfair competition by pipelines with marketing affiliates. Magellan proposed that it, like many of its competitors, would begin to operate a marketing affiliate that would provide transportation service on its system but which could result in a discounted rate.
Magellan characterized the transactions, apparently, in a way that was least likely to gain approval by essentially describing the sale of the commodity at market prices with a discounted transportation fee. The same transaction could have been characterized as a discounted commodity sale with full tariff transportation. And as those who supported the position have pointed out, the Interstate Commerce Act (ICA) does not give FERC authority over the sale of the commodity. The FERC's decision, however, did not reference much Commission precedent, of which there is little on this matter, but rather discussed the ICA itself. So, perhaps this is also the beginning of a push to change the law.
At this stage, it seems unlikely that FERC will take affirmative steps to find that these types of transactions are not allowed. Rather, the impact of this decision will likely rest on whether shippers not receiving discounted transportation will complain to FERC. In general, enforcement under the ICA is affected by a complaint initiated investigation. For such a complaint to occur, shippers that are not receiving the discount would need to determine that a similar marketing affiliate structure is in place and discounted transactions are occurring. That could be difficult to determine, given the difficulty in identifying when a crude oil marketing affiliate resells the space at a lower rate than the tariff.
In further signs of the intense competition in the Permian, Oxy, an anchor shipper that underwrote construction of Magellan's and Plains All American's 400-mile long BridgeTex pipeline -- and currently takes service under a ten-year transportation service agreement -- filed complaints at the state and federal level against BridgeTex. According to Oxy, BridgeTex refused its request for service on the recent 100,000 bpd expansion capacity and is currently discriminating against it and other shippers. Oxy has asked to fast track the FERC review process, and comments are due by December 21, 2017. It is this type of complaint under the Magellan decision which one would expect to see if a shipper or competing pipeline believes that a marketing affiliate of a pipeline is offering discounts not available to the pipeline's direct customers.
And, due to what Oxy believes is BridgeTex's "jurisdictional gamesmanship," Oxy has also, unsurprisingly, recently protested BridgeTex's petition to seek approval of its proposed rate structure and terms and conditions of service on the expansion capacity. The petition contemplates interstate shipments, despite BridgeTex's current refusal to provide interstate service on the expansion capacity. Both proceedings will likely be consolidated.
Further understanding of the gas and liquids players in hot shale plays, such as the Permian, can be gleaned from regulatory filings. For liquids pipelines, leverage our timely alerts of the above regulatory events and our unique database of shippers on interstate pipes. On the gas side, gain a better understanding of the players with our recently added intrastate data.
Intrastate Shippers (Q3 2016-Q3 2017)
This communication has been prepared by LawIQ, LLC. The information contained in this communication has been obtained from publicly available data, but we do not represent or warrant that it is accurate or complete. This communication is for informational purposes only and not for the purpose of providing legal advice. Your receipt or use of this communication is not provided in the course of and does not create or constitute an attorney-client relationship. LawIQ, LLC, its affiliates, and their respective officers, directors, partners, and employees do not accept any liability for any direct or consequential loss arising from any use of this communication or its contents.
