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They're Drawing Straws For Oil Pipeline Space Here

The explosion in unconventional gas and oil production across America has been a boon for E&Ps and their investors. But could rapidly rising output now be becoming a curse?

News this week suggests that big rises in production are certainly becoming an issue in at least one play: the Permian Basin of Texas. Where exploding oil output is leaving producers with fewer and fewer options for transporting their supply.

Platts reports that the oil supply glut here is creating huge demand for new pipeline capacity in the region. So much so, that midstream companies are looking to never-before-seen methods for choosing who gets access to upcoming projects.

Such as Enterprise Products Partners. Which said it will use a lottery system to decide what oil producers get space on the company's newly-constructed Basin Pipeline.

This kind of "random draw" approach has never been used before. With usual practice being for would-be oil shippers to bid on capacity in new pipelines.

But the massive demand for takeaway from the Permian play is making such a system too difficult. With Enterprise noting that it has received requests from 214 separate oil producers, for pipeline capacity totalling 1.8 million barrels per day.

That's 300% more space than the line itself will have. With planned operational capacity for the Basin Pipeline only running 450,000 barrels per day.

This sky-high demand for pipeline space makes perfect sense looking at recent production numbers from the Permian. Platts estimates that current oil output from the play is running 1.7 million barrels per day. While existing pipeline takeaway is only 1.27 million barrels per day. Meaning producers have 430,000 barrels daily with no place to go.

That oversupply is also having a notable effect on local oil prices. With crude at the nearby Midland hub trading at a discount of $11.50 per barrel as compared to product at the Cushing, Oklahoma hub, where West Texas Intermediate (WTI) oil is benchmarked. That discount is up notably the last few weeks--with the gap having averaged just $5.70 per barrel over the past year.

These lower sales rates are going to be a challenge for producers in the Permian. At least until other new pipelines come online in the region, most of which will happen in mid-2015.

Here's to moving it on out,

Dave Forest

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