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Insights across the energy value chain

An “Equation” to Be Solved

Hardly any topic receives as much attention from the oil and gas community as the Permian crude takeaway “bottleneck” problem. A careful reader may have spotted occasional discussions of capacity issues on the Permian-to-GoM route as early as the fall of 2017. It was about that time that the market became convinced that in 2018 oil prices would keep rising as OPEC continued to restrict its production and global demand, especially in Asia, remained robust. These factors converged to create an opportunity for more U.S. crude oil exports.

In the past weeks, however, the issue caught fire. The theoretically possible quickly turned into plausible, and then soon into mathematically probable.

The math here is transparent enough. Permian oil production, according to EIA data, hit 3.2 million bbl/d in early May. Current projections call for output to continue to rise to 3.6 million bbl/d by the end of 2018, and to reach as high as 5.3 million bbl/d in 2020. On the takeaway side, current pipeline capacity available for Permian producers to transport oil out of the basin equaled 2.8 million bbl/d in 1Q 2018. Several major projects are planned and being put in service (see chart below). If all of these are successfully funded and accomplished, total transportation capacity should rise to as high as 5.8 million bbl/d by the end of 2020. That will balance the supply/takeaway equation.

On the takeaway side, current pipeline capacity available for Permian producers to transport oil out of the basin equaled 2.8 million bbl/d in 1Q 2018. Several major projects are planned and being put in service (see chart below). If all of these are successfully funded and accomplished, total transportation capacity should rise to as high as 5.8 million bbl/d by the end of 2020. That will balance the supply/takeaway equation.

However, experts are warning that the actual “clogging” may occur in the interim. The EIA had estimated that as of December 2017, available space was only about 160,000 bbl/d on the region’s pipeline system, or about 4 percent of Texas’ output. Capacity may be insufficient by mid-year 2018, with a deficit possibly reaching as much as 290,000 bbl/d during the first half of 2019. In April 2017, Genscape estimated pipeline utilization from the Permian to the Gulf Coast at an average of 89 percent,   climbing to 96 percent in a year’s time. At this level, some smaller producers may begin to suffer. Walk-up shippers that do not have their rising output fully committed to a particular pipeline may find no access, or only very high-priced access. By the end of 2017, Enterprise Products Partners (with its Midland-Sealy pipeline placed into timely service) was able to set a 62 percent higher tariff for non-committed volumes than the next best available option.

The takeaway problem is also manifested in the growing price differential ‘Midland to Cushing WTI’ from a $0.93 premium in January to a $3-4 discount in May. The price spread between Permian oil and Gulf Coast oil has been exceeding $15 /bbl in recent days, and is possibly soon headed for $20/bbl. The extra supplies of Permian crude are almost exclusively sold on the export market, so producers are driven to discount their output to accommodate higher transportation rates.

Other evidence of the issue is the 30 percent fall in prices for Permian natural gas. As more crude is produced, more associated natural gas is also produced. Existing natural gas pipelines are overwhelmed with supply and are not able to transport these growing volumes of gas out of the basin. Since flaring is restricted, if there is no gas takeaway producers have to cut back on their crude production. Texas state authorities recently said they were considering lobbying to expand flaring options (to greater than the typical limit of 180 days) to support producers.

Naturally, the bottlenecks are temporary and will eventually be resolved. In the meantime, producers are switching to alternate modes of transport such as rail or trucks. Some companies have reported still using pipelines but accepting new routing (usually less effective, but available).

Midstream operators are executing on short-term actions to increase their immediate takeaway capacity, at the same time they proceed with their long-term expansion plans.

Among the largest projects soon in service (see chart), Midland-to-Sealy and BridgeTex are expansion projects that are adding capacity to existing pipelines. The number of new projects approaches 20 pipelines/extensions that are planned to be ready by 2020. Not all of these will be built; experts point out that margins on many of the projects are expected to be very low due to high competition for existing customers.

By using Rextag’s pipeline mapping database, you can easy visualize the scale of the proposed infrastructure.

Pipeline Company Project Name Planned Capacity as of Mid-May 2018, Bbl/d Route Becomes Operational Details
EPIC Midstream Holdings EPIC Crude Oil Pipeline 400,000 Near the New Mexico border to Corpus Christi End of 2019
Enterprise Products Midland-to-Sealy crude oil pipeline 35,000 Midland-to-Sealy (Houston Ship Channel) June 2018 Came into service in the end of 2017 with 300,000 bbl/d capacity. Keeps on expanding since then. Now adding new capacity again. Will eventually total 575,000 bbl/d
Magellan Midstream Partners, Plains All American Pipeline BridgeTex oil pipeline 40,000 West Texas to the Houston area Early 2019 Expansion project from 300,000 initially in the middle of 2017 to 400,000
Plains All American Pipeline Cactus II 585,000 Permian to Corpus Christi Fall of 2019
Phillips 66 Gray Oak Pipeline 700,000 Permian-to-Corpus Christi Late 2019 Can be expanded to 1 MMbbl/d
Enterprise Products Seminole / Chaparral N/A By 2020 One of the two will be converted from NG into crude oil pipeline
Enterprise Products 143-mile pipeline system 300,000 Permian’s Delaware Basin to Midland’s Enterprise Terminal July 2018 Gathering system
Other Than Crude Oil Pipelines
Enterprise Products Shin Oak Pipeline Permian to the Houston area NG pipelines
NAmerico Pecos Trail Pipeline West Texas to Corpus Christi 2 Bcf/d
Permico Energia Permico’s Texas NGL Project Permian to Corpus Christi To transport NGLs to service its planned 300,000 barrels per day-fractionator

Some operators make adjustments to increase the throughput of crude in their existing systems. Using DRA (drag-reducing agents) for this purpose is one solution. This does not require long-term and costly changes but rather looks like an ongoing improvement. Enterprise Products is trying another approach by converting one of two (Seminole or Chaparral) natural gas pipelines into a crude oil line.

Midstream operators also turn to local producers to tackle the problems. A ”quick-fix” solution is to build additional local gathering pipelines that help producers better access local markets. This can often be done “within the approved budget” and in reasonable time.

Industry analysts often turn to data providers such as Rextag to better understand a region’s growth history and its infrastructure bottlenecks.

As an illustration, you can see in the animation below how the industry has responded over the past 10 years for the Eagle Ford build-out.

Are any lessons already available for us?

Yes, there are some. Two conclusions seem obvious:

  • While global forecasting again misses the desired level of precision (and may do that again and again), what counts as a big plus is the industry’s flexibility. This is the flexibility of producers that can use all modes of transportation and that are ready to take risks on price differentials. This is also the flexibility of midstream players that are ready to get the maximum out of a situation by boosting capacity and building those extra local gathering paths for smaller producers.
  • You are always better off having a data-based plan than having no plan at all. Our highly competitive industry often finds itself fragmented when a cohesive and harmonious response to crises is most needed. Yet, there is a way to unite us all: it is using and letting others make use of accurate and integrated industrial data.

So, united with expertise and good-quality data we stand!

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Reinold Tagle

Contact Reinold at : rtagle@hartenergy.com (619) 564-7313

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