How Enterprise Products suddenly became the nation’s largest crude exporter
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The Houston-based pipeline company has spent billions over the past decade to become the pre-eminent waterborne exporter of propane and butane, two fuels derived from natural gas, and it soon will be the largest exporter of ethane, a chemical that is key to making plastics.
Shale drilling operations have flooded the U.S. with propane, butane and light oil, and this surplus can be shipped to faraway consumers such as the giant petrochemical plants of China. The push into foreign markets with these products has placed Enterprise in the lead among North American oil and gas companies that are pushing to export crude now that the ban has been lifted.
“Once we recognized that this country was going to produce more than it could consume, it became obvious to us that you needed to be positioned to export,” said Jim Teague, chief executive of Enterprise Products Partners.
The company’s large stake in exporting fuel has helped turn the business from the two-truck shop founded locally by energy entrepreneur Dan Duncan into a truly global transporter of oil and gas. Today, Enterprise Products is one of Houston’s largest companies, racking up more than $5 billion in revenue last quarter.
Its rapid expansion and the company’s reputation as a tough competitor, though, have at times left it at odds with Federal Trade Commission regulators – and some of its own customers – who have worried that the company’s large holdings have given it too much influence over the business of shipping crude oil abroad.
The rebirth of exports
When the ship sailed, the export ban on U.S. crude oil was still in effect. Lawyers and executives at Enterprise Products had spent weeks working with the U.S. Department of Commerce to open a loophole in the 1975 ban that allowed them to slip through shipments of lightly processed condensate, a type of thin and very flammable oil that was common in the U.S. but a poor fit for refineries on the Gulf Coast.
The discovery of the loophole was somewhat of an accident, Enterprise executive Bill Ordemann said. His colleagues and lawyers had pitched to regulators the idea that lightly processed condensate oil could be exported under existing laws.
“I left that meeting frankly flabbergasted, because at the end of the presentation they said, ‘Well, that’s very good,’ ” Ordermann said. “When I got out of there, I looked at the lawyer and said, ‘What just happened?’ ”
Once discovered, the oil began to flow through the loophole.
The U.S. exported an average of 40,000 barrels per day of processed condensate from July 2014 to April 2015, according to figures from consulting group McKinsey & Co. Other companies, such as driller Pioneer Natural Resources and natural gas pipeline giant Kinder Morgan, rushed into the condensate export business as well.
By the end of 2015, Enterprise estimated it was shipping 134,000 barrels per day of processed condensate and crude oil abroad. A portion of that oil was crude that was re-exported from the Gulf Coast.
That’s a small amount of the roughly 9 million barrels per day American drillers produced during that period, but a significant increase for a country that had locked itself out of international exports for more than 40 years.
It also formed a small, but growing part of Enterprise’s business. In the first quarter 2016, the company reported that its pipelines moved 5.2 million barrels per day of oil, fuels and chemicals. It moved 1.3 million barrels of those fuels through its marine terminals.
In December, U.S. lawmakers repealed the ban on exports entirely, clearing companies to begin shipping oil abroad without even the light processing condensate exports had previously required. The first cargoes of wholly unprocessed oil left U.S. shores shortly after. Enterprise was the second company to send a cargo abroad.
For the first quarter of 2016, Enterprise said it expects to load about 165,000 barrels per day of oil onto ships headed abroad.
“They’ve worked their way into the enviable position of being the largest oil exporter,” said Darren Horrowitz, an analyst who tracks the company for Raymond James. Enterprise “is doing things that other folks aren’t doing right now.”
Export volumes and the business of loading oil onto tankers have been hurt somewhat by low oil prices. U.S. oil production has fallen from 9.6 million barrels per day in early 2015 to 9.1 million barrels today as drillers have cut back, meaning there’s less U.S. oil to send abroad.
Most of the oil currently exported is crude that isn’t a good fit for the refineries in the U.S., said Kurt Barrow, an oil market expert at consulting group IHS. But volumes should grow when prices recover.
“We’re seeing exports that used to go only to Canada are now going to Japan, China, the Netherlands and Italy,” he said. Light crude oils such as condensate “really have a better market in Asia, where they’re needed for petrochemical feedstock.”
Its control of the market dates back to 2010, when propane and butane were fuels in search of a burner.
Neither fuel is pumped out of the ground, but instead is pulled out of natural gas and crude oil as the two raw fuels are processed. A shale boom had production of oil and gas surging, and propane and butanes had been caught up in the rush.
But while the U.S. had plenty of pent-up demand for oil and some for gas, there was little need for the flood of propane and butane. Propane is best known as a blue flame that grills meats or heats homes, and butane is an even lighter fuel that’s used to light cigarettes or is blended into gasoline. Both are key ingredients for the chemicals that make plastics.
By 2008, supply for the light gases had far outpaced demand in some parts of the U.S. While petrochemical plants in Asia were clamoring for propane and butane, drillers in some parts of the U.S. were essentially paying customers to take the fuel off their hands.
Enterprise decided it would be the one to link the two markets.
The company already owned a propane terminal it had set up on the Houston Ship Channel to import the fuel before the shale boom. In 1998, founder and then-CEO Duncan had decided to add a small hookup that would cool propane and butane into a gas, then load it onto tankers, where it could then be shipped across the globe. The terminal sat mostly unused until the shale boom.
“In 2009, all the sudden we got a lot of people wanting to export,” said Teague, the current CEO of Enterprise. The company went on a full building spree: “We just kept having people wanting capacity.”
By 2013, the company had most of the waterborne-export market for propane in the U.S. Enterprise had enough dock capacity to load 6.81 million tons of the liquefied fuel onto tankers each year, while the entire U.S. capacity totaled 9.32 million tons per year, according to IHS figures. Enterprise owned almost 75 percent of the exporting capacity.
And business was good. Even though a cold winter had led to higher propane prices and cut into exports, Enterprise’s chief financial officer, Randy Fowler, told analysts during a 2013 conference call that new customers were calling “every day.”
“The U.S. has gone from being not a player in the export market to being the largest player in the world in 10 years,” IHS’ Debnil Chowdhury said of propane and butane.
About the same time, Enterprise began eyeing the company it had long partnered with in its export business. Oiltanking Holdings Americas, an affiliate of German company Oiltanking, had for some time offered additional ship loading and dock space for the fuel that Enterprise was shipping abroad, and the latest expansion by Enterprise had brought the two to sign a 50-year contract to work together.
But Enterprise wanted more than partnerships, and Enterprise began negotiating an outright purchase of Oiltanking’s Houston Ship Channel assets in the summer of 2014.
Oiltanking Partners owned 12 docks on the Houston Ship Channel and in Beaumont, and controlled another 24 million barrels of storage for oil and refined products. The assets didn’t come cheap: Enterprise paid about $5.8 billion for the deal, which was fully consummated in early 2015.
“We’ve been lusting after those assets for years,” Michael Creel, Enterprise’s chief executive officer at the time, said during a conference call with analysts.
In 2016, with the merger for Oiltanking completed and the final expansion of its Ship Channel assets finished, Enterprise will have the capacity to load about 16 million tons per annum of LPG onto tankers – just under half of the capacity in the U.S.
Enterprise has also pioneered exporting American ethane, a fuel that’s pulled out of natural gas and used as an ingredient in plastics manufacturing.
So much ethane has been pulled from shale recently that prices for the fuel have at times collapsed low enough that processors don’t even bother to pull it from natural gas. But in Asia, it’s a key part of the manufacturing chain that has plenty of value.
Enterprise Products is building the world’s largest ethane export facility at Morgan’s Point on the Houston Ship Channel. When it begins ramping up in the third quarter of 2016, the Morgan’s Point facility will have two trains and two docks capable of loading about 200,000 barrels per day onto ships.
Stepping on toes
Enterprise hasn’t come to dominate the export markets for several fuels without ruffling feathers.
In February 2015, the Federal Trade Commission began asking questions about Enterprise’s acquisition of Oiltanking and business practices. The Texas attorney general followed in April, according to Enterprise’s ilings.
The Federal Trade Commission doesn’t acknowledge its investigations, and a spokeswoman declined to comment. Enterprise declined to comment past what it has already said. An inquiry is a non-public investigation that can, but doesn’t always, lead to an official action by the commission.
The questions came after Enterprise’s customers reportedly complained that the company had raised the fees it charged customers to load oil onto ships. The higher fees raised the costs of their logistics services and made Enterprise’s own logistics business more competitive.
When asked about the complaints at an analyst meeting in early 2015, Teague said Enterprise itself was paying an 85-cent fee to load oil onto ships, a lower rate secured by offering a long-term 50-year contract. If other companies wanted to sign long-term contracts, Enterprise would be happy to give them deals, he said.
“We believe if you want a service, you pay for it,” he said.
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