Jump in Permian basin output clogs pipelines, cuts prices

oil production
Permian basin production may be slowed or even shut in this year because of limited space on pipelines to transport crude out of the oil rich region.  Williams Ranch Group photo.

Permian basin production may be slowed or even shut in this year because of limited space on pipelines to transport crude out of the oil rich region.  Williams Ranch Group photo.

Permian basin production is estimated to be a record-high 3.08 million b/d in March

Rising production in the Permian basin has caused bottlenecks for pipeline companies carrying crude out of the oil-rich region, resulting in lower prices.  But it has also boosted the bottom line of pipeline companies that serve the region, according to a report by Reuters.

Production in the Permian is estimated to have hit a record high of 3.08 million barrels per day (b/d) in March and the US Energy Information Administration says the Permian basin now accounts for nearly one-third of all US crude production.

The rise in production has filled pipelines to near-capacity levels and there are few new pipelines on the books for this year.  As such, producers could be forced to cut production or maybe even shut in active production.

As well, drillers are now heading out to relatively less-profitable areas in the Permian basin, according to energy analyst John Zanner.

“As these fringe areas begin to get exploited, we are seeing more and more crude that needs to find a pipeline to Cushing or the Gulf Coast,” he told Reuters.

Analysts had expected pipelines transporting crude out of the Permian would fill to capacity by mid-2018, but market intelligence firm Genscape says pipeline capacity from the Permian has been at 96 per cent for the past four weeks.

Prices are under pressure as a result.  US crude delivery in Midland, Texas, traded down as much as $5.50/barrel under the price of benchmark futures on Wednesday.  This is the weakest price since October 2014.  West Texas Sour, the sour grade delivered into Midland traded as much as $6.25/barrel below futures.  And Midland light sweet crude is now trading at over $8/barrel less than WTI, the biggest discount ever.

“What the spreads are telling you is that these pipelines are full going to the Gulf Coast,” Kendrick Rhea at energy consultancy East Daley Capital told Reuters.

Traders and analysts say the wide spreads show that pipeline operators are dealing with a surge in demand and throughput.  According to Reuters, spreads have widened enough to cover spot shipping rates, which are usually higher than long-term committed rates offered by pipeline companies.

Pipeline companies will likely see a boost in earnings for several quarters.  Thomson Reuters data shows analysts’ projections for revenue for Enterprise Products Partners LP, Energy Transfer Partners LP and Plains All American Pipeline LP have been revised higher in the past 90 days.

The three pipeline companies are in the top 10 per cent of companies with upward revisions according to Thomson Reuters data.  The same model projects all three companies will exceed revenue projections in the first quarter.

“They’re going to see record flows coming out, they’re going to see record margins on marketing and on walk-up tariffs for the rest of the year,” Rhea said.

Genscape reports that as of March 2018, the Permian basin had a total of 3.175 million b/d of outgoing pipeline, rail and local refining capacity.  Pipeline capacity accounts for 2.725 million b/d.

The Permian Express 3 pipeline is undergoing expansion and, once complete, will add 200,000 barrels of daily capacity by late 2018 and the Enterprise Midland-to-Sealy pipeline expansion could boost capacity to 450,000 b/d from 330,000 b/d late last year.

Next year, projects including Cactus Pipeline 2 and EPIC lines will significantly boost capacity, adding 1.5 million b/d.



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