Kinder Morgan to target brownfield expansions for Permian takeaway capacity

Kinder Morgan is in discussions to increase capacity on its Permian Highway Pipeline and Gulf Coast Express Pipeline by up to 1.2 Bcf/d as soon as fourth quarter 2023, executives said in the company's first quarter 2022 earnings call April 20.

The company would add horsepower to existing compressor stations as well as add a "small amount of [pipeline] looping," CEO Steven Kean said.

Executives said that the expansion work could potentially be completed in an 18-month timeline after contracts have been secured and FID taken, which shippers have communicated is essential to meeting expectations of rising Permian Basin production.

Expanding capacity on existing pipelines has increasingly become a popular option for pipeline developers wary of costly delays stemming from the permitting process and legal challenges. Recent brownfield expansion projects, such as Williams' Leidy South expansion on Transcontinental Pipeline, have largely avoided the kind of lengthy legal wrangling that has befallen greenfield projects, such as Mountain Valley Pipeline.

These advantages have not been lost on Kinder Morgan's leadership, with Kean noting that "compression expansions allow for speed to market" and "one of the great things [about brownfield pipeline expansion projects] is that they are very permit light."

"We think we can avoid issues that would otherwise not trigger a more active federal review by the Corps [of engineers] or anyone else, and there is some good mitigation built into our plans to avoid endangered species, to avoid open-water crossings, etcetera," Kean said.

Kinder Morgan is also considering a greenfield pipeline to move gas out of the Permian to Gulf Coast demand markets, executives said, but on an estimated time scale of 2026.

Permian production outlook

Through mid-April, Permian gas production has averaged just under 13.8 Bcf/d, which is down about 140 MMcf/d from its fourth-quarter 2021 average, S&P Global data shows. In recent months, though, operators across the Permian have continued to expand their drilling footprint with the addition of nearly 40 rigs since early January. As of the week ended April 13, Permian rig count is now estimated at 337, marking its highest since April 2020, data published by Enverus shows.

In March, an estimated 362 new wells were drilled in the Permian – also the most numerous since first-quarter 2020, new data published April 18 by the US Energy Information Administration showed. Over the past four months, well completions are also on the rise, reaching 433 in March to hit their highest in 12 months, the EIA's latest drilling productivity report showed.

Based on recent activity, S&P Global's updated Permian production forecast shows output growing as much as 2 Bcf/d in 2022, potentially reaching 16 Bcf/d by early next year. While production is expected to grow more slowly in 2023, it could hit 17 Bcf/d by the fourth quarter, current projections show.

With midstream capacity currently estimated at 17 Bcf, analysts predict that basis price dislocations, flaring and other downside pressures on gas production would begin soon thereafter, absent a significant expansion in midstream capacity from West Texas. With the US Gulf Coast offering some of the most attractive spreads for Permian shippers, brownfield expansions to Permian Highway Pipeline and Gulf Coast Express could ensure a runway for Permian growth into the mid-2020s.

Financial results

For the quarter ended March 31, Kinder Morgan had net income of $667 million, or 29 cents per share, compared with net income of $1.409 billion, or 62 cents/share, for the corresponding quarter a year prior.

Kinder Morgan's earnings during the first quarter of 2021 were substantially boosted by the February 2021 deep freeze event, the company said in an April 20 statement.