Biweekly, we highlight three things going on in the energy industry that we think you should know about. This week’s top item is the Colonial Pipeline ransomware attack. Plus, we look at oilfield deal announcements and tensions around a pipeline that runs across Wisconsin and Michigan to Ontario. Here’s the latest.
1. Midstream pipeline cyberattack
On May 7, the Colonial Pipeline—the largest pipeline on the East Coast—fell victim to a ransomware attack. As a result, the company shut down its entire primary pipeline system, which spans more than 5,500 miles between Texas and New Jersey, for several days. The pipeline transports more than 2.5 million barrels of fuel daily, which equates to approximately 45% of all fuel consumed on the East Coast, according to the company’s website. This type of malicious attack not only puts the energy supply chain at risk but also highlights the vulnerability of the broader energy infrastructure in the United States.
Ransomware is “a form of malware designed to encrypt files on a device, rendering any files and the systems that rely on them unusable,” according to the Cybersecurity and Infrastructure Security Agency. “Malicious actors then demand ransom in exchange for decryption.” Ransomware has become an escalating threat and is one of the most damaging cybercrimes, as well as being among the most difficult to prepare for. The FBI said on May 10 that the Darkside ransomware group is responsible for the attack on the Colonial Pipeline networks. The FBI also said it will continue to work with the company and government partners on the investigation.
While Colonial restarted its pipeline on May 12, it will take time for shortages to fully resolve. The company does not expect to be fully up and running before the end of the week. According to Bloomberg, additional supply (to cover the shortage due to shutdown) will come primarily from storage inventories, increased East Coast refinery runs, other pipelines and shipments from Canada. Bloomberg estimates that current gasoline storage inventories could last for 20 days, distillate inventories 30 days, and jet fuel inventories 92 days. However, Bloomberg points out that the typical cycle is to stockpile inventory this time of year to prepare for the summer demand spike, so drawing down inventory now will result in a need to replace it before summer, putting pressure on the market.
In addition to uncertainty about East Coast supply, retail gasoline prices are at a national average of $2.95 a gallon, their highest since 2014, according to the American Automobile Association.
Although this incident is at the forefront of the media and is the biggest pipeline attack of its kind to date, there have been many similar attacks to critical infrastructure across industries. As cyber risk rises, organizations, especially those managing critical infrastructure, should prioritize investment in cybersecurity practices. It is critical that organizations are proactive in keeping up with evolving threats and managing their cybersecurity programs.
2. Deals, deals, deals
We wrote recently about several M&A deals in the oilfield, and activity has only picked up since. The industry has long been calling for consolidation and asset rationalization, but conditions in 2020 were challenging, leading to the lowest number of deals in more than a decade. Market fundamentals and commodity prices have stabilized, and recent activity from the majors, independents and private equity firms reflects this trend.
Here are a few notable deals as of late:
- Oasis Petroleum Inc. purchased Diamondback Energy’s Bakken assets for $745 million: The cash transaction divests certain Diamondback Williston Basin assets acquired in the $2.2 billion all-stock acquisition of QEP Resources from earlier this year. Diamondback also agreed to divest additional “non-core” Permian assets for $87 million.
- Chevron offered up $100 million in Permian acreage: Chevron has set a May 20 deadline for bids on 73,000 acres in the Permian’s Central Basin. The Central Basin of the Permian is between the prolific Midland and Delaware Basins, and the acreage up for bid includes 1,000 producing conventional wells operated by ConocoPhillips Co., BXP Operating LLC, and Providence Energy Services Inc.
- Vencer Energy will acquire 44,000 Permian acres from Hunt Oil: Vitol is the largest independent oil trader and set up U.S. upstream company Vencer Energy last year to take advantage of distressed assets. This is Vencer’s first upstream asset, reportedly purchased for more than $1 billion.
- Dallas-based independent Permian energy company Pioneer Natural Resources acquires two companies:
- Pioneer completed its acquisition of Austin-based Parsley Energy in a $4.5 billion all-stock transaction. Notably, Pioneer CEO Scott Sheffield is the father of Parsley CEO Bryan Sheffield. At the time of deal closure, the combined company controlled nearly 1 million Permian acres in both the Midland and Delaware basins.
- Pioneer agreed to acquire Fort Worth-based DoublePoint Energy for $6.4 billion in cash and stock. The transaction conveys 97,000 producing acres (located in an area where there is no exposure to the current federal lands drilling ban) and production of 100,000 barrels of oil per day to Pioneer. This additional acreage takes Pioneer’s portfolio to more than 1 million acres.
Every deal presents unique opportunities, risks and challenges. As a potential buyer, it’s important to perform enough buy-side due diligence to ensure the acquisition delivers the right fit for the right price. As a potential seller, performing due diligence reduces the risk of having surprises surface during the sales process; sell-side due diligence can result in increased surety of close and value retention.
Buyers and sellers looking for an advisor on such deals—which might involve thorough financial reviews, operational and strategic considerations, and identifying potential risks—can learn more about RSM’s transaction advisory services on our website.
3. More pipeline tensions between Canada and U.S.
The Biden administration’s decision to revoke the Keystone XL pipeline’s presidential permit in January continues to have impacts on industry players; on Friday, Calgary-based TC Energy reported that it was taking a $2.2 billion asset impairment charge as a result of that permit revocation. Now, a second major revocation is further straining pipeline tensions between Canada and the United States.
Michigan Gov. Gretchen Whitmer issued an executive order revoking Calgary-based Enbridge’s Line 5 pipeline easement. The order also called for the pipeline to be shut down by May 12 due to the potential for an oil spill in the Straits of Mackinac, which Line 5 runs through. The 68-year-old pipeline transports 540,000 barrels of crude oil and petroleum products per day across Wisconsin and Michigan to Ontario, and has never experienced a leak.
Enbridge has appealed Michigan’s order in U.S. federal court and the company said it would not be shutting down Line 5. As of the May 12 deadline, Enbridge continued operating the Line 5 pipeline, news outlets reported.
We expect impacts of a Line 5 shutdown would be felt on both sides of the border. Michigan is the largest propane-consuming state in the United States, and Line 5 supplies 55% of Michigan’s propane for residents to heat their homes. The executive director of the Michigan Propane Gas Association calculates that it would take approximately 10,000 propane railcars per year to transport the volumes going through Line 5.
In Canada, Line 5 provides approximately half of Ontario’s fuel needs, including the jet fuel used at Toronto Pearson International Airport, Canada’s busiest airport. Line 5 also supplies Quebec’s refineries and provides half of the province’s fuel needs. Canada’s Natural Resources Minister Seamus O’Regan stated in March that “we are fighting for Line 5 on every front” and that “the operation of Line 5 is non-negotiable.” The federal government is also expected to invoke the 1977 Transit Pipelines Treaty signed between the two countries, which was written to prevent the impeding of hydrocarbon transmissions, should diplomatic efforts fail.
In 2018, Enbridge reached an agreement with the previous Michigan governor to construct a $500 million underground tunnel to house a new pipeline segment and eliminate the possibility of a leak into the Straits of Mackinac, with construction expected to be completed by 2024. With an estimated 2,100 trucks or 800 railcars required each day to replace the transport of Line 5’s 540,000 barrels of oil per day should it shut down, and our expectation that transporting oil by railcar will increase through 2021, it is worthwhile to reflect on whether pipelines, or railcars and trucks, are the safest and most efficient methods to transport hydrocarbons.