trending Market Intelligence /marketintelligence/en/news-insights/trending/i1d40zq2smvie0oeriltxw2 content esgSubNav
In This List

Maxed out: Oil, gas pipeline shortage looms for booming Permian industry

Podcast

Next in Tech | Episode 49: Carbon reduction in cloud

Blog

Using ESG Analysis to Support a Sustainable Future

Research

US utility commissioners: Who they are and how they impact regulation

Blog

Q&A: Datacenters: Energy Hogs or Sustainability Helpers?


Maxed out: Oil, gas pipeline shortage looms for booming Permian industry

Two years ago, America's oil and gas industry gathered at a relatively dour CERAWeek conference in Houston with some wondering: Can we survive a price war with OPEC that pushed oil below $30 per barrel?

Thanks to a price rebound and improved technology to pull oil and gas out of the ground, the answer was yes. But with production booming again, many of the same faces returned to Houston with another question: How will we get all of this to market?

The U.S. is producing about 10 million barrels of oil per day. About 30% of that is coming from Texas' Permian Basin and more oil is on the way. Wood Mackenzie estimates that 80% of the projected 1.1 MMbbl/d production growth this year will come from the play. Continued growth may soon depend on new pipelines to connect the oil fields in West Texas to ports along the Gulf.

"There are going to be times, like later this year, where production outpaces infrastructure," IHS Markit Senior Director for Energy Aaron Brady said. "That could happen in late 2018 and into 2019."

Even though the Permian has been a major producer of oil for decades, the boom in unconventional production came at a time when the industry was trying to save money across the board. Midstream companies now find themselves playing catch-up, and some believe that they are too far behind.

"A commodity is only worth something if you can get it to market," said Daniel Jaeggi, the co-founder of Mercuria Energy Trading SA. "Whatever the predictions of growth are for U.S. crude production over the next two or three years, my thesis is that this oil is going to have to be long-hauled and leave this market."

Corey Prologo, the director of North American oil trading for Trafigura Trading LLC, said the lack of supply chains is going from a potential problem to a foregone conclusion for many observers. "Everyone agrees that production is growing and logistics has to grow with them. All the current pipelines are getting filled out, which previously they weren't. Everything we see coming out of the Permian is at max capacity."

Permian producers are thinking about the potential problems caused by having more barrels than pipe. Exxon Mobil Corp. subsidiary XTO Energy Inc. President Sara Ortwein said the midstream sector is starting to respond to the need for more pipelines to move shale oil out of the Permian.

"The announcements are starting to come," she said. "Takeaway capacity is going to be significant for the region."

While Permian producers both want and need new pipelines to carry their oil to the Gulf Coast, they also need what they may not want: new gas pipelines to carry away the massive amounts of associated gas being produced in the search for more profitable liquids.

"Only 10% of their profit stream comes from natural gas, but there are environmental constraints. They can't flare it off," said Chris Carter, the managing partner of private equity firm NGP.

Ortwein said Kinder Morgan Inc.'s Gulf Coast Express Pipeline, which would carry nearly 2 Bcf/d when completed in the fourth quarter of 2019, will help relieve some pressure to carry gas but "we'll need another after that."

Centennial Resource Development Inc. Chairman and CEO Mark Papa took aim at Apache Corp. for causing much of the gas transportation constraints projected to start in West Texas later this year.

"What upset the apple cart for the southern Delaware Basin is Apache's development of the Alpine High. So, in addition to the oil development in the southern [Delaware Basin], you've now got a huge amount of gas that I call nonassociated gas coming in," he said.

An infrastructure shortfall for gas, which cannot be hauled away by truck, could be ugly for producers looking to find a way to get it out of the Permian.

"By 2020, natural gas coming out of the Permian could be 15 Bcf/d, and there's not enough infrastructure to move it out," Carter said. "It's coming, but it won't be there probably until 2019, 2020. There was a day [in Canada] where producers literally had to pay to get their gas out, and it could happen in the Permian."