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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The Permian Could Soon Have Too Much Pipeline Capacity

permian sunset

The Permian could soon have too much pipeline capacity, a glut that will present problems for midstream companies.

You could be forgiven for doing a double take on that sentence. There has been a lot of attention paid to the pipeline woes in West Texas, but because of the unfolding shortage, not a surplus. The flood of supply over the past few years suddenly ran up against a wall of fixed takeaway capacity in 2018. The result has been maxed out pipes, painful discounts for crude in Midland and concerns about a production slowdown sweeping over the basin.

Now there is a rush to build more pipelines to load up all of that crude coming out of the ground. But with several projects in the works and set to come online essentially at the same time – late 2019 and early 2020 – the Permian could see a massive increase in pipeline capacity, hitting the market in lump-sum fashion at the same time.

The Permian has around 3.1 million barrels per day (mb/d) of takeaway and local refining capacity, plus some 300,000 bpd of local refining capacity. The Permian is producing just around 3.4 mb/d, which means the pipelines are nearly full or already at capacity. Production is expected to continue to rise over the next year, although pipeline constraints could curtail output by around 200,000 to 300,000 bpd, Barclays said a few weeks ago. Still, the EIA sees the region adding around 600,000 bpd in 2019, which will be difficult for the midstream sector to digest.

But over the next two years, a series of new pipelines will come online, with in-service dates scheduled close together. According to S&P Global Platts, an estimated 2.6 mb/d of pipeline capacity will come online by 2020, with a further 1 mb/d on the drawing board but lacking a timeline. Related: India’s Coal Reliance Deepens

That is great news for oil producers who have seen the discount for Midland WTI relative to WTI in Houston balloon to double-digits. With benchmark WTI trading in the upper-$60s, Permian producers that have not secured pipeline space or hedged their production are selling oil in the mid- to low-$50s. That discount should worsen over the next year until new pipelines come online.

But when the wave of takeaway capacity does hit the market, the discount should narrow considerably. For that reason, most analysts still see robust production growth in the Permian and although Permian-focused shale drillers have seen their stock prices beaten down this year relative to their peers, many market watchers are still bullish on their fortunes beyond next year.

The flip side of this dynamic is that a rush of new midstream capacity could be negative for midstream companies. A glut of pipeline space, as S&P Global Platts frames it, could “spell trouble for existing pipelines should shippers prefer to move barrels on newer projects, which could jeopardize cash flows to infrastructure already in place if operators have to swallow lower re-contracted rates and a decline in spot traffic.”

In fact, securities analysts gave the thumbs-up to Plains All American Pipeline LP and Magellan Midstream Partners for moving to sell the BridgeTex Pipeline for $1.438 billion because it could lose out to newer pipelines when they come online. The assessment of that transaction is notable given the current premium placed on pipeline space right now, but the analysts see the medium-term outlook a little less favorable to pipeline operators. Related: Will Saudi Arabia's Geopolitical Strategy Backfire?

Still, others view the problem as relatively minor because over time Permian production is expected to continue to relentlessly climb higher. According to an estimate from IHS Markit from June, Permian oil production will surge over the next five years, driven by an expected $308 billion in upstream spending between 2018 and 2023, which will translate into an additional 41,000 wells drilled.

“In the past 24 months, production from just this one region—the Permian—has grown far more than any other entire country in the world,” said Daniel Yergin, vice chairman, IHS Markit. “Add an additional 3 mbd by 2023—more than the total present-day production of Kuwait—and you have a level of production that exceeds the current production of every OPEC nation except for Saudi Arabia.”

The IHS forecast incorporated expected infrastructure bottlenecks, but largely dismissed them as short-term problems.

By Nick Cunningham of Oilprice.com

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  • Mitch on August 27 2018 said:
    Ive wondered what the pipeline operators plans are with the permin peak being called in 2025. Seems like 5-7 years to make the money back on the pipeline investment is not enough. And the high decline rates for shale, the permians production will dry up fast once the area is heavily drilled. Will be losing production faster than Venezuela by %
  • Mamdouh G Salameh on August 28 2018 said:
    How could Daniel Yergin project a 3 million barrels a day (mbd) rise in the Permian by 2023 when the US Energy Information Administration (EIA) expects well production per rig in the Permian to fall by 10,000 barrels a day (b/d). With 480 rigs currently operating in the Permian, it means that overall daily production in the Permian is projected to fall by 2.4 mbd. This contradicts Dr Yergin’s claim of a rise of 3 mbd by 2023.

    Moreover, Iraq is projected to raise its crude oil production from 4.47 mbd currently to 6-7 by 2021/22 with the help of the oilfield development being undertaken by BP, Chevron, ExxoMobil, CNPC and ENI. So the Permian production could never match Iraq’s projected production by 2023 as Dr Yergin stated.

    No amount of hype by the EIA and the International Energy Agency (IEA) or spending could overcome the productivity problems in the Permian. These problems are symptoms of bigger problems in the whole US shale oil industry. It is an industry which will probably never become profitable and is currently facing diminishing returns. It is also a reflection of the fact that shale drillers have exhausted the rich spots.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Bill Simpson on August 30 2018 said:
    It is better to have more than you need, than to need more than you have.
    Needing more oil than you have globally would be a catastrophe.

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