Permian pipeline construction is booming. Right now, oil companies are struggling to ship their crude from the shale-rich Permian Basin to the US Gulf Coast, but by 2019, three major pipelines that could double capacity are slated to open. Tyler Morning Telegraph photo by Sarah A. Miller.
Some companies shifting to Eagle Ford shale play to avoid Permian pipeline pinch
Currently in the world’s hottest shale play, some oil companies struggle to get their crude to market because of the Permian pipeline pinch. The lack of capacity out of the Permian Basin has even seen some producers leave the patch and allocate assets elsewhere to avoid pipeline bottlenecks.
In the second quarter of this year, Permian pipelines carried 2.9 million barrels per day (b/d), according to analysts at Bloomberg NEF. These pipelines are operating at full capacity from Midland to the Gulf Coast.
But in 2019, three major Permian pipeline projects, which could potentially add over 2 million b/d, are slated to go online.
The additional capacity is critical to the Permian where the output is expected to more than double to 5.4 million b/d by 2023.
While the construction is welcome news to oil companies operating in the area, pipeline companies find themselves competing for everything from labour to steel.
“They want to move heaven and Earth to get these projects done,” John Kilduff, a partner at hedge fund Again Capital LLC told Bloomberg. “In a situation like this, the economics just make it so compelling that they rush resources into the area, and that’s what you’re seeing.”
Projects include Plains All American’s Cactus II pipeline, which will carry as much as 670,000 b/d of crude from Midland to Corpus Christi. In late 2019, Phillips 66 Partners’ and Andeavor’s Gray Oak pipeline 700,000 to 1 million b/d pipeline is expected to be open as well as the 675,000 b/d EPIC pipeline.
Kilduff says these new pipelines will offer “substantial relief” to oil producers.
And some pipeline companies are increasing capacity on existing lines, which is expected to add 400,000 b/d by the middle of 2019.
Other pipelines projects, including two that are expected to ship over 1 million b/d are not expected to be operational until 2020 or 2021.
In the meantime, some companies like ConocoPhillips are shifting some of their resources out of the Permian to the more accessible Eagle Ford shale play in South Texas to work around the pipeline bottlenecks.
“Why would I drill into that headwind if I can reallocate that capital somewhere else?” said ConocoPhillips’ Chief Executive Officer Ryan Lance.
Pipeline constraints have resulted in some producers selling their crude at deep discounts to other oil companies which have contracted pipeline space available. Some companies have to truck or transport their crude by rail, increasing their transportation costs.
Currently, crude sold in Midland is going for $15.35 less than crude sold in Houston. At the beginning of the year, the discount between the two amounted to $4.
Permian pipeline construction is critical to the shale play, however, some are concerned that by 2020, producers may have more pipeline capacity than they need, according to John Zanner, RBN Energy analyst.
But John Kilduff is not concerned. “They’re finding more and more oil every day”, said Kilduff. “The good old days are back, and you’re going to see all of these be put into action.”