The oil and gas industry hoped they would be spared from Donald Trump’s trade war, but the Permian basin was just hit with some bad news.
The Permian basin has run up against a bottleneck for pipeline capacity. Gushing oil from West Texas will surpass the available space on the region’s pipelines this year, which could force output growth to suddenly plateau after expanding at a blistering pace over the past few years. New pipelines are still a year away.
One of the crucial pipeline projects slated to come online at some point next year is the Plains All American Pipeline LP’s Cactus II project, which will ferry 585,000 bpd crude oil from the Permian basin to the Gulf Coast at Corpus Christi.
Plains All American sent a request to the Trump administration, seeking an exemption from the 25 percent tariffs on imported steel. An industry estimate finds that about three-quarters of all the steel used in oil and gas pipelines comes from abroad, often because projects use a special type of steel that is hard to find domestically.
The Trump administration just shot down the request from Plains All American, the first rejection for a major oil and gas project. The denial could significantly raise the cost of the $1.1 billion Cactus II pipeline. The Commerce Department justified its rejection by arguing that there was sufficient supply of steel found within the United States.
A long line of other companies are also seeking exemptions, and the Commerce Department has to go through one by one. The agency has granted 267 exemptions and denied another 452, according to Reuters. There have been over 25,000 requests. Royal Dutch Shell and Chevron recently received an exemption on steel used in specific types of equipment for their offshore drilling projects in the Gulf of Mexico.
Plains All American wants to import its steel from a manufacturer in Greece, one of only three producers in the world making the specific type of steel that it wants to use. Plains says none of those three suppliers are in the United States. The company said that the rejection from the Trump administration was “unjust” because it placed the order with the steel supplier last year.
“Collecting a tariff on steel pipe orders for projects like this constitutes a tax on the construction of critical U.S. energy infrastructure,” Plains All American said in a statement. The rejection “is a significant unintended consequence of current trade policy and risks U.S. energy security and American jobs.”
The pipeline company also warned that having to use steel from a U.S. manufacturer would likely translate into project delays. “If a purchase order was issued today, the mill would not likely be able to meet the pipeline system’s completion targets,” James Ferrell, a Plains All American vice president, wrote in the application to the Commerce Department, according to the WSJ. Plains has said that it would “move forward as planned” with the project, but has not offered specifics about how the tariffs might impact its decision to source the steel or how it might affect the targeted completion date, originally set for the third quarter of 2019.
Some steel pipe makers have disagreed with Plains, arguing that pipe made in the U.S. can be swapped in for the type of pipe that Plains wants to use. “Its decision not to do so for the entire project was based purely on the unfair traded prices of Greek imports, and Plains should not now receive an exemption for these products.” the American Line Pipe Producers Association said in a letter to the Commerce Department in May.
The rejection by the Trump administration is not just a problem for Plains All American. The Cactus II pipeline is one of three key pipeline projects that are expected to come online by the end of 2019, relieving the entire Permian basin of the midstream bottleneck that it currently faces.
Over the past few months, oil prices in Midland have suffered from a discount to WTI that has consistently exceeded $10 per barrel because of pipeline bottlenecks, and this week the discount widened to as much as $13 per barrel. The lack of pipeline space will continue to weigh on Midland crude prices, likely until a new project comes online. Should the steel tariffs delay the Cactus II project, the discounts for Midland crude would last longer and might even widen further, impacting upstream Permian producers.