The race to transport ballooning oil and gas supplies from the Permian Basin to markets on the Gulf Coast risks turning into an infrastructure glut unless some pipeline companies either combine or cancel their projects.

Analysts who cover oil and gas infrastructure companies are particularly concerned about the potential for oil pipeline and natural gas liquids fractionation capacity to be overbuilt. If new capacity does start to outpace new production, operators of legacy systems may be at risk of losing revenue.

"The new [oil] pipelines because of their size and scale are seeing rates well below $2 per barrel. Some of the legacy rates are closer to $3, so when those contracts come up for re-contracting and if there is an overbuild, those guys have the option to get on one of the new pipelines. … You will see [legacy pipeline] rates come down because of that," East Daley Capital Advisors Inc. analyst Matthew Lewis said in an interview.

When Permian crude oil takeaway bottlenecks appeared earlier than expected in the spring of 2018, midstream companies rushed to announce projects to fill the widening gap between booming production and pipeline space. Fast forward to early 2019 and two of those planned pipelines are already in serious discussions about consolidating.

Plains All American Pipeline LP, Exxon Mobil Corp. and Lotus Midstream LLC formed the Wink to Webster Pipeline LLC joint venture to move more than 1 million barrels of crude and condensate per day from the Permian to Gulf Coast markets beginning in the first half of 2021, while MPLX LP, Energy Transfer LP, Magellan Midstream Partners LP and Delek US Holdings Inc. have proposed the competing Permian to Gulf Coast pipeline, which would carry 600,000 bbl/d of crude oil to Houston markets starting in mid-2020. Executives at the companies involved said in recent weeks that they are all talking to each other about teaming up given the projects' similar paths.

"These new projects pitched to relieve the 2018 congestion and premised on continued rapid production growth currently look to have massively overshot demand," Sandy Fielden, director of oil research for Morningstar, wrote in a Feb. 25 note to clients.

Energy investment bank Tudor Pickering Holt & Co. analyst Colton Bean estimated there will be 4 million bbl/d of Permian pipeline capacity in the second quarter of 2019. He said that number will grow to 6.3 million bbl/d by the end of the year. Wink to Webster and Permian to Gulf Coast would provide an additional 1.6 million bbl/d, but Tudor Pickering Holt only expects production to reach about 5.4 million bbl/d in 2021.

That supply-demand imbalance's impact on older pipelines' more expensive rates "amounts to robbing Peter to pay Paul," Fielden said.

An overbuild is not a foregone conclusion, however. IHS Markit executive director for energy Raoul Leblanc expects that new pipes will have a stimulating effect on production growth.

"It's not going to unleash a tidal wave … but there are a lot of people who have been waiting on this for a while now and they'll be anxious to complete some of the wells they've wanted to complete," he said in an interview.

Frac frenzy

Fractionation rates are not public, but Lewis said that older Gulf Coast plants could also see lower re-contracted rates if all projects planning to begin commercial service by 2022 come online.

Energy Transfer is eyeing the potential capacity glut as its seventh Mont Belvieu, Texas, fractionation facility is due to come online in 2020. "I worry about fractionation overbuild, but what the heck do you do there?" CEO Kelcy Warren said Feb. 21. "We have no choice. We have a contractual obligation to frac a product, and we must honor those contracts."

"There's definitely some truth to that," Lewis said about Warren's concerns. He said fractionation capacity is expected to outstrip Mont Belvieu receipts by 521,000 bbl/d in the third quarter of 2019.

The pipelines carrying NGLs to Mont Belvieu and other locations are also due for a near-term overbuild and will have 421,000 bbl/d of excess space on pipelines by the third quarter of this year, according to Lewis. He does not expect any new capacity needed until 2022. And at that point, midstream companies will be able to add on to existing projects by building new pump stations.

"You can run these pipes at a significantly higher capacity with relatively little investment," Bean said.

Oneok Inc. expects to complete a second expansion of its West Texas LPG Pipeline LP system in the first quarter of 2020 that would boost the mainline capacity by 80,000 bbl/d, and Targa noted in a 2018 shareholder presentation that the 300,000-bbl/d Grand Prix pipeline it plans to place into service during the third quarter of 2019 can expand to 550,000 bbl/d "with relatively low additional capital outlay."

Permian gas market finding balance

Natural gas transportation capacity is lagging behind production, but Permian volumes and pipeline space are expected to reach an equilibrium later this year.

The U.S. Energy Information Administration predicts that production will approach 13.4 Bcf/d from the Permian in March. Bean said takeaway capacity is significantly lower than the 11 Bcf/d technically available because pipelines to Mexico are not being fully utilized.

The 1.92-bcf/d Gulf Coast Express project, under development by Targa Resources Corp., Kinder Morgan Inc., Altus Midstream Co. and DCP Midstream LP, and NAmerico Energy Holdings' 1.85-Bcf/d Pecos Trail pipeline should help alleviate those bottlenecks once they begin operating in the third quarter of 2019. The 2-Bcf/d Kinder Morgan-led Permian Highway project scheduled to start up in late 2020 is the only other gas pipeline that has reached a final investment decision.

With Permian gas production projected to grow 2 Bcf/d per year, "you're effectively treading water from a supply-demand dynamic," Bean said. "We do need to see readable investment beyond Permian Highway."

The joint venture 2-Bcf/d Whistler pipeline and Williams Cos. Inc.'s 2-Bcf/d Bluebonnet pipeline are scheduled to possibly come online toward the end of 2020. East Daley's Lewis said combining those two projects "could make sense" to accommodate 2021 production growth. Energy Transfer's Warren took a more conservative view on building Permian gas takeaway capacity.

"This is just what [pipeline operators] do," he said about a future overbuild. "Energy Transfer didn't show up as one of the big 42-inch offtake pipelines coming out of the Permian and there's arguments that maybe we should have, but we couldn't reason our way through it. The returns did not justify it."