Pipelines Set to Expand Amid Successful Open Seasons

• Pipelines represent significant undertakings, and firm customer commitments are needed before construction begins.
• Pipeline operators will often gauge market interest in new pipeline capacity through open seasons, where prospective customers can contract future capacity.
• A number of pipeline projects have been announced so far this year after successful open seasons.

Pipelines play an important role in the U.S. energy value chain as the safest and cheapest way to move energy commodities. While their function is straightforward, investors may be less familiar with how companies decide to build or expand a pipeline or how companies determine the appropriate capacity for a pipeline. A key gating factor for pipeline projects is an open season, which companies use to gauge market demand for pipeline capacity. Today’s note provides an overview of pipeline open seasons and looks at some recent pipeline announcements.

Pipelines are the cornerstone of midstream energy infrastructure, transporting both raw and finished energy commodities from one point to the next stop in the energy value chain. Pipelines are expensive, multi-year endeavors that carry significant execution risk, so pipeline operators do not start projects without firm customer commitments received during an open season.

Open seasons are used to notify potential customers of new pipeline capacity and may be announced in press releases. Shippers can bid on capacity in what is essentially an auction. The intent is for open seasons to be a fair and transparent process for shippers. A pipeline’s tariff (filed with government regulators) will provide details on the open season process, including timing, criteria for bids, and the method used to evaluate bids (i.e., determine who wins the auction). Typically, to allocate capacity, pipelines will calculate a net present value for the bids, factoring in fee, volumes, and tenure.

An open season tends to follow informal customer conversations. Pipelines may do a non-binding open season initially. If sufficient interest is received, a binding open season will follow, where the customer commits to capacity under a contract. Pipeline services are provided under fee-based long-term contracts with typical tenures of five to 20 years.

Customer feedback from open seasons can also help determine the appropriate size of a newbuild pipeline or an expansion. If the offered capacity is fully covered by customer commitments, the open season or project may be referred to as “fully subscribed.” In other cases, pipelines may not receive commitments for 100% of the contemplated capacity, but 85-90% may be sufficient to move forward with the project. Alternatively, the expansion may be downsized. Extra capacity may be used for spot shipments at a higher fee, used by the pipeline operator, or could be contracted in the future.

After a successful open season, companies will typically begin the next steps in developing the project such as beginning the permitting process and starting environmental impact assessments. To be clear, these processes can also run parallel to an open season and are not necessarily dependent on an open season.

While some new pipelines are being built, expansions tend to be more commonplace as companies leverage existing assets. Expansion projects are less expensive, quicker to complete, easier to permit, and as such, tend to generate strong returns. For example, the Permian Highway Pipeline (PHP) operated by Kinder Morgan (KMI) and the Whistler Pipeline operated by WhiteWater Midstream are natural gas pipelines out of the Permian that completed expansions of around 0.5 billion cubic feet per day (Bcf/d) in 2023. PHP was expanded by 0.55 Bcf/d after originally offering 0.65 Bcf/d in its open season..

A handful of pipeline companies have held open seasons recently and have begun announcing final investment decisions (FID) for projects. FID is the point at which a company formally commits to move forward with a project after it secures sufficient customer commitments.

KMI recently held a successful binding open season on the proposed South System Expansion 4 project, which will add 1.2 Bcf/d of natural gas capacity. The project is generally supported by 20-year take-or-pay agreements, under which companies agree to either utilize the contracted pipeline capacity or pay the equivalent transportation fee.

Enbridge (ENB CN) recently sanctioned a 120,000 barrel per day (Bpd) expansion on its Gray Oak crude pipeline from the Permian to supply its Ingleside Energy Center export terminal, after holding a successful open season in 2Q24. ENB indicated on its recent earnings call that the capital-efficient expansion would have an EBITDA multiple below 5 times, which implies returns above 20%.

ONEOK (OKE) held an open season for a 35,000 Bpd refined products pipeline expansion project that would increase capacity from Kansas to Colorado. OKE noted that the project was fully subscribed with long-term contracts. Additionally, Enterprise Products Partners (EPD) launched a binding open season in June for a diluent pipeline expansion that would increase transportation capacity between Mont Belvieu, Texas and the Chicago-area that is expected to be in service by July 2025.

Pipelines are the cornerstone of the energy infrastructure space, and open seasons are an important gating factor for newbuild or expansion projects. Customer commitments in binding open seasons de-risk projects and provide visibility to returns.

Natural Gas Drives Permian Pipeline Growth

For more news, information, and analysis, visit the Energy Infrastructure Channel.