Tesoro's logistics subsidiary will pay $2.5bn to purchase Rocky Mountain and midcontinent natural gas pipelines, expanding the company beyond its traditional crude and refined products services.
Tesoro Logistics LP expects to close on the purchase from QEP Field Services, a natural gas gathering and processing company with assets in the Bakken, Pinedale, Uinta and Vermillion basins, in the fourth quarter.
The purchase moves Tesoro Logistics beyond absorbing pipelines and terminals owned by its parent, US independent refiner Tesoro, to a more diversified, freestanding logistics company.
While US refiners consume tremendous volumes of natural gas, few have experience operating their own field gathering and processing systems. The QEP acquisition will increase the portion of Tesoro Logistics revenue received from third parties to more than half and positions the company to add natural gas and produced water services to its prior crude and refined products roles.
"We don't view it as a step out," chief executive Greg Goff said. "We view it more as creating the platform to expand our services with many of the things we do already."
QEP will use money from the sale to reduce debt and invest in expanding its upstream assets in the Williston basin of North Dakota's Bakken field as well as the Permian basin of west Texas and New Mexico.
Tesoro was among the first US refiners to drop its logistics assets into a master limited partnership, a publicly-traded entity that enjoys the tax advantages of a limited partnership that pays dividends. All US independent refiners now have a logistics subsidiaries, and majors have begun to follow suit — Shell today launched the initial public offering of Shell Midstream Partners.
Tesoro Logistics will operate more than 3,500 miles of pipelines, including its existing logistics businesses, and hold more than 2.9bn cf/d of natural gas throughput capacity following the transaction. QEP Midstream operates gas gathering and processing in Wyoming, Utah, Colorado and the key Williston basin of North Dakota.
Natural gas handling has quickly become an issue for oil producers in the fast-growing Bakken, where Tesoro has already developed an oil gathering network. Producers in North Dakota must meet state-mandated limits on natural gas flaring or face constraints on their crude production.
A lack of natural gas infrastructure has frustrated compliance in certain sections of the Bakken, creating opportunities that QEP's expertise may help Tesoro pursue. The company has already developed crude gathering, storage and rail loading facilities in the region essential both to its logistics revenue and to supplying its US west coast and North Dakota refineries with cheaper crudes.
Interest in the Rocky Mountain region for both Tesoro and crude developers remains in its early stages. Tesoro's 58,000 b/d facility in Salt Lake City, Utah, is its smallest. But Tesoro has begun planning and permitting work for an insulated pipeline to move waxy crudes currently trucked out of the Uinta basin into Salt Lake City.
"With the production growth of crude oil and natural gas throughout the Rockies, we see this as an area where we want to extend our capture value from advantaged feedstock for our existing business," Goff said.
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