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The Rise and Fall of Master Limited Partnerships

The Rise and Fall of Master Limited Partnerships

Master limited partnerships (MLPs) were…

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 U.S. Faces A Pipeline Crisis


The U.S. threatens to swamp the world with oil in the next few years, although that will only be possible if there is a commensurate construction boom for pipelines to move all of that oil to market.

The Permian basin will account for the bulk of the production growth going forward. The International Energy Agency predicts that the U.S. will add about 3.7 million barrels per day (mb/d) between now and 2023, and 2.7 mb/d – or more than 70 percent – of that new supply will come from the Permian and the Eagle Ford.

But those two shale plays are a long way from the Gulf Coast, where the oil can either be refined into fuels or exported abroad. Thus, the oil industry needs a lot of pipeline capacity.

Already, there has been an enormous buildout of pipelines in the last few years. Between 2012 and 2014, the surge in output from the Permian was impressive, but it was also constrained by the lack of pipeline capacity, which forced producers to sell their product at a discount, which reached as high as $20 per barrel relative to WTI. However, new pipelines smoothed out those price differentials, easing the bottleneck that had cropped up when oil production skyrocketed.

The problem is that oil production is set to double in West and South Texas over the next five years, which means that another pipeline wave will be required if the U.S. is to actually expand oil production by as much as everyone thinks it will. Related: $9.5B Deal Creates Biggest Player In The Permian

In fact, the Permian is starting to bump up against the limits of the region’s pipeline capabilities. The IEA said that as of December 2017, there was only about 160,000 bpd of available space on the region’s pipeline system, or about 4 percent of Texas’ output. A series of pipeline projects are under construction, which, again, could relieve some pressure. But because the oil industry is pouring mountains of cash into shale drilling, the pipeline construction could struggle to keep up.

“This small capacity cushion is likely to come under pressure this year, despite capacity expansions of the Midland to Sealy, BridgeTex and Permian Express 3 pipelines,” IEA analyst Olivier Lejeune wrote in a March 28 commentary. “Ultimately, Permian and Eagle Ford takeaway capacity is likely to become insufficient by mid-year, with a deficit possibly reaching as much as 290,000 barrels a day during the first half of 2019.”

The pipeline deficit would necessarily result in a pricing discount, which could weigh on shale drillers.

Interestingly, a pipeline shortage is already showing up in the Permian, although the capacity problem is for natural gas. Gas is gushing out of West Texas, but largely as a byproduct as companies are mainly targeting oil. At this point, shale companies have more gas on their hands than they know what to do with. Predictably, amid the glut, natural gas prices have plunged by 30 percent in the Permian, and Bloomberg notes that Permian natural gas prices are the lowest in the country.

The gas glut has become such a problem that some E&Ps are under pressure to cut back on oil production in order to cut off the flow of gas. “The ultimate downside scenario is you have to effectively slow down on your oil production because you can’t evacuate gas from the basin,” Colton Bean, director of midstream research at Tudor Pickering Holt & Co., told Bloomberg. Related: Barclays: Expect $51 Oil This Year

While some gas can be flared, there are state regulations that limit that practice. Spring weather will also lead to a drop off in demand, and so in the next few weeks “natural gas prices in the Permian can go to zero because it’s literally a byproduct,” Kyle Cooper, a consultant at ION Energy, said in a Bloomberg interview. “There’s so much gas coming the system really pushes and fights to get it out.” There are gas pipelines in the works, but it will take time.

The IEA says that the oil pipeline bottleneck could be temporary, if the various projects on the drawing board succeed in moving forward. “If all planned investments come to fruition, Permian nameplate capacity will more than double from its current 2.8 mb/d to 5.8 mb/d by the end of 2020,” Lejeune wrote.

One potential hurdle for the pipeline construction wave is the possibility of steel tariffs. Oil and gas pipelines in the U.S. have depended on foreign suppliers for about three-quarters of the steel needed in their projects. The Trump administration has published a process by which certain industries can apply for exemptions, and under the guidelines, it would seem that the Commerce Department would exempt pipeline builders from the tariffs.


The bottom line is that the heady projections for oil supply growth in the U.S. hinge on pipeline capacity keeping pace.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Alex on March 30 2018 said:
    If this is all true, why are the stocks of midstream MLPs doing so poorly? Are we close to an inflection point, or are the MLP's forever doomed? Can someone please enlighten me? Thanks
  • Randy Verret on March 30 2018 said:
    Even though this is Texas, don't discount the impact of Environmental NGO's & other organized "activists" to obstruct & delay pipeline projects. Look no further than the Marcellus/Utica region and the ongoing struggles to increase gas takeaway in that area. All I hope is when the lights go out in the Northeast, those "activists" are held accountable for their role when the media cranks up the "blame game"...
  • Kr55 on March 31 2018 said:
    Fun problem to watch. Nat gas prices already tanking. Any extra gas production have to be flared now, any extra shale oil production needs to get to the coast to be exported because no refiners want it at home.
  • Kendall on April 12 2018 said:
    The abundance of oil and natural gas is coming up against the greatest scientific fraud in history---that carbon dioxide is a significant climate driver. Ignorant politicians, the U.N., radical environmentalists, grant hungry scientists on the take, and companies like, ironically, ExxonMobil which panders to ignorant environmentalists among it's consumer base, advance this bogus narrative. They have succeeded in making an environmental mountain out of a data molehill. The much trumpeted "97 of all scientists" meme which they endlessly trot out, including the scientificslly illiterate Obama, has been exposed as a fraud. Professor Legates' scrutiny of those 12,000 scientific papers revealed that less than 1% believe man is responsible for 50% or more of our recent (1978 - 1998) warming. This relegates man's role to a far smaller number, undoubtedly less than 20%, if that. That means that all this hyperbole and mass hysteria is about what amounts to about 0.05 degrees warming over that period (i.e. 20% of the 0.24 degree Celsius rise over that period according to satellite data), or one half the margin of error. The rest is a result of the same natural forces that have governed climate from time immemorial. Yet these chicken littles would topple our fossil fuel-based economies, and capitalism itself, for what amounts to a BIG LIE. Future historians will look back in wonder at how the people of the Earth so readily succumbed to such an unfounded delusion.

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