ExxonMobil and Plains All American gave the greenlight to another major pipeline in the Permian basin, which would move 1 million barrels per day (mb/d) from West Texas to the Gulf Coast.
The project, in partnership with Lotus Midstream, is another indication of the rising upstream production from the Permian. But the pipeline also came after Exxon gave a separate final investment decision on another project.
On Tuesday, the oil major said it was moving forward on a near-doubling of its Beaumont, Texas refinery, adding a 250,000-bpd crude unit that would process light sweet oil from the Permian. The facility already has the capacity to refine 365,644 bpd, and the expansion could make Exxon’s Beaumont facility the largest refinery in the country. Saudi Aramco’s Motiva Enterprises refinery in Port Arthur currently ranks in the top spot with a capacity of 603,000 bpd. Once Exxon is finished with its expansion – slated for 2022 – the Beaumont facility will have a capacity of 615,644 bpd.
Even that is only part of Exxon’s plans for the region. Last year, Exxon unveiled its “Growing the Gulf” campaign, which consisted of massive refinery expansions on the Gulf Coast, including in Baytown, Beaumont and Baton Rouge. The entire initiative included $20 billion in planned spending across 11 refining, chemical and petrochemical projects along the Gulf Coast over a 10-year period.
The refinery expansions should be viewed in the context of Exxon’s plunge into the Permian. After arriving late to the scene, ExxonMobil has quickly become one of the largest shale drillers in West Texas and New Mexico. In early 2017, Exxon spent nearly $6 billion to acquire huge tracts in the Permian, which doubled the company’s holdings in the basin. Related: Global Deepwater Oil Production To Hit New Record In 2019
A year later, Exxon announced a long-term vision, laying out an aggressive spending and drilling plan that would help the company increase production over the next decade. The plan was intended to shake the company out of its current malaise, reversing several years of stagnant output and waning faith from Wall Street.
There were a few key pillars to the long-term vision: Offshore Guyana (where Exxon, along with Hess, have made a string of major discoveries), LNG projects in Papua New Guinea and Mozambique, shale drilling in the Permian, and downstream chemical and petrochemical projects on the Gulf Coast. Obviously, the last two of those pillars – the Permian and projects on the Gulf Coast – are linked.
When Exxon announced these long-term growth plans last year, shareholders were not happy. Exxon’s shares sold off, a sign that heavy spending – even if that translates into production growth – had fallen out of favor with Wall Street. The reaction was notable because the share prices of some of Exxon’s peers were on the upswing, and the difference was they were focused on keeping costs in check and boosting shareholder payouts, not stepping up spending.
Nevertheless, Exxon is ploughing forward. The latest FID on the Beaumont refinery and the Permian pipeline are critical the oil major’s growth plans. Exxon is aiming to triple its Permian production by 2025, raising output to 600,000 bpd. Related: Global Outages Boost Oil Prices
The latest slide in oil prices won’t impact this outlook much. Even though the U.S. shale industry has shown signs of a slowdown, lower prices will hit small- and medium-sized drillers much harder than the oil majors. Large integrated companies can not only take a long view, but they also have their hands in midstream and downstream assets that can still perform well during a pricing downturn.
Another interesting wrinkle in the refinery buildout is the unfolding global mismatch between light and heavy oil. Surging U.S. shale production is occurring alongside production curtailments from medium and heavy oil producers – Canada, Mexico, Saudi Arabia, Venezuela, Iran, etc. The result is a glut of light oil and a tighter market for heavier blends. Refiners cannot easily swap in one type of oil for another.
As those disparities work their way through the system, the market is now seeing a ballooning glut of gasoline. Lighter oils tend to produce relatively more gasoline than diesel, while heavier blends are better suited for diesel and other distillates.
The downstream investments by Exxon along the Gulf Coast will relieve bottlenecks in the U.S. – it will provide a market for surging U.S. shale production, which is being held back by pipeline constraints as well as limits on Gulf Coast refining and export terminals. But the refineries will still add to the gasoline conundrum. But that’s a problem for another day, and it may be resolved by the time Exxon’s new facilities come online.
Exxon’s recent FIDs on both a major refinery expansion, and another enormous pipeline that will carry Permian oil to that refinery, highlight how important U.S. shale is to the company’s global growth plans. ExxonMobil’s fortunes are now very much tied to the explosion of drilling and downstream processing in Texas.
By Nick Cunningham of Oilprice.com
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