Paucity of Permian Pipelines | Russell T. Rudy Energy LLC
When you see the price for WTI (West Texas Intermediate) quoted on the evening news, this is the price the oil brings at the transportation hub in Cushing, OK. Producers in the Permian Basin of West Texas and Southeast New Mexico receive this price, less the cost of transportation to get the crude to Cushing.
In 2014 Permian production exceeded the pipeline capacity to transport it to markets. Consequntly, WTI in West Texas was selling at a $21 per barrel discount to Cushing deliveries. Now, operators in the basin are faced with a potential bottle neck, and a drop in net back prices by the end of this year. According to William Foiles with Bloomberg Intelligence, Permian production is expected to reach 2.65 million barrels of oil per day (bopd) by year-end. However, pipeline capacity might only be 2.54 million bopd.
Enterprise Energy Partners plans to start up a new pipeline from Midland to Sealy, Texas which will come on line in the fourth quarter, but is not expected to reach its full capacity of 450,000 bopd until early 2018.
Mara Roberts with BMI Research, opines “From the looks of it there could be a several thousand bbl/day worth of midstream capacity shortages by the end of the year. The rate of growth in takeaway pipeline capacity is going to be where the bottleneck is, and that will choke access to the market for producers.”
A long term solution might be a proposed pipeline from the Permian Basin to Corpus Christi on the Texas Gulf Coast. This project, a joint venture between TexStar Midstream Logistics, Castleton Commodities International, and Ironwood Midstream Energy, would only go forward if enough producers commit to ship via the new line. Even then, it would not start operations until 2019.
Nevertheless, Paul Grigel with Macquarie Capital USA does not foresee $20/barrel discounts to WTI for oil in the Permian Basin as was previously case. Rather he anticipates a possible discount of around $5 per barrel.
While less troubling, at today’s prices, that would be about a 10% reduction in revenue for Permian producers.
To read the article in its entirety, please go to http://www.worldoil.com/news/2017/3/31/texas-drillers-face-threat-of-too-much-oil-too-few-pipelines .
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