Permian pipelines key to production growth: Fuel for Thought

When Willie Chiang, chief executive officer of Plains All American, rose to address an audience at the Houston Petroleum Club in mid-September, his message was clear: crude production from the Permian Basin will continue to grow and timing will be a critical factor to build pipelines.

Delays will result in widening of price discounts for Permian crudes and prove to be counterproductive for producers, he noted.

Despite operators reducing breakevens in the Permian, they will always be wary of reducing exposure to wide variations in differentials.

Like in August 2014, Midland WTI averaged a $12.10/b discount to Cushing WTI primarily due to a lack of pipeline capacity, compared to a discount of 35 cents/b late last week, according to Platts data.

Five pipelines have been proposed by leading midstream players from the prolific basin in southwest Texas to the Port of Corpus Christi in the US Gulf Coast, potentially offering a total of some 2.14 million b/d of new takeaway capacity starting in stages from late 2019/early 2020.

The planned major projects include a 650,000 b/d pipeline announced in May by Magellan Midstream; a second phase of the Plains-backed Cactus pipeline to add another 500,000 b/d of throughout; Buckeye Partners’ 400,000 b/d South Texas Gateway pipeline; and the 400,000-b/d EPIC pipeline.

Capacity additions are also planned by fellow midstream player NuStar Energy and an expansion of the EPIC pipeline, to name a few, that will add in excess of another 400,000 b/d post-2020.

Growth in Permian Basin output has been largely a case of a moving goal post that continues to challenge all forecasts, Chiang said.

While 800,000 b/d of new production has already been added between June 2014 and June 2017, the industry will see another 2.3 million b/d being added by 2022 in the Permian, he said.

Platts Analytics projects Permian production to grow from 2.43 million b/d in 2017 to 3.467 million b/d by 2022.

“Our experience proves prices always fix prices, and US production—particularly Permian—has been growing since the downturn of late 2014,” Chiang said.

There is currently 300,000 b/d of excess pipeline takeaway capacity from the Permian and midstream players are careful of an over-build.

Still, they are tempted to take advantage of a likely widening of the Midland WTI crude discount to Cushing WTI, to $5/b to $8/b in the coming six to nine months, assuming the current pace of drilling, RBC Capital Markets said in a recent research note.

Midland WTI was assessed at a 45 cents/b discount Thursday.

“We see the next pinch point looming later this year,” it said. “The spread blew out to $12/b in late 2013/early 2014 when Permian production bumped up against takeaway capacity, along with local refining options [and that was the genesis of the race to build new capacity].”

Doubts about production

While the midstream players are now clearly focused on their pipeline build-out plans, doubts have been raised about the sustainability of Permian growth.

“Technology gains in the past few years have propelled Permian well performance to new levels,” Wood Mackenzie said in a recent report. “But it is very likely that the upcoming level of activity will introduce a new set of issues, particularly reservoir deliverability.”

“Countless other shale plays have proven that the first few years of growth are typically the easiest,” it said. “Beyond that, producers require more breakthroughs to keep their barrels at the bottom of the cost curve.”

The Marcellus hit regulatory and midstream bottlenecks, the Bakken contended with huge differentials, the Haynesville dealt with a massive cyclical downturn, and the Eagle Ford sweet spots ended up being much smaller than originally modelled, WoodMac said.

In the Permian, the growth challenge could relate to the industry ultimately finding hard subsurface limits for tight oil recovery.

An analysis of high-intensity, long-lateral and close-proximity drilling and fracking could reduce future estimated ultimate recovery (EUR) value by 30% compared with today, with sweet spots being exhausted, it said.

Corpus eyes export growth

Some 600 miles southeast in the Port of Corpus Christi, executives remain on track for the US to become a leading global exporter of crude oil based on shale output, particularly from the Permian.

“We are positioning the port to be an export point from the US Gulf Coast,” Charles Zahn, chairman of the Port of Corpus Christi Authority, said at an industry event in heartland Midland, Permian, last week.

The expectation is based on crude exports crossing the 1 million b/d mark by 2020, Zahn said.

“This is our high-case forecast,” he said, defining it as a scenario where at least two pipelines get built from the Permian to the port by 2020.

Sean Strawbridge, chief operating officer of POCCA, said a likely declining curve in Permian output will be compensated with about 1 million b/d from the Bakken in North Dakota.

The loading of a VLCC at Corpus Christi will allow a producer savings of some $1.5 million for loading 2 million barrels of crude, Strawbridge said.

The Port of Corpus Christi will face competition from the Louisiana Offshore Oil Port, or LOOP. But “distance” will be an issue.

“To transport crude all the way [from the Permian] to LOOP is economically challenging. I am not saying it can’t be done,” Strawbridge.

Perhaps, the key to success lies in the hands of midstream players, like Plains, and their ability to quickly lay pipes.

“We are advancing talks with shippers [for Cactus Phase 2] and hope to have action on that soon,” Chiang said.