With Permian crude oil production expected to more than double by 2022, plans by the biggest North American oil companies to scale their operations in the region pose challenges to independent operators in the region, potentially making them acquisition targets if they are unable to pivot from domestic to international markets.
"The Permian and the supply chain for domestic refined products are increasingly being consolidated by major operators … and this would require independent producers to export their crude," an Aug. 26 white paper by the University of Houston's UH Energy program said. "Independent producers are relatively inexperienced with exporting and likely to face challenges in the absence of appropriate intermediaries stepping into the market."
The authors said plans by oil majors, including Exxon Mobil Corp., Chevron Corp., BP PLC, and Royal Dutch Shell PLC, add to the pressure that independent operators already face from "the flight of capital from the Permian" because of "the relatively weak return on investment."
"The findings of the study are clear: independents must combine balance sheets to buy downstream assets, or form a combined marketing organization to sell their product internationally," an Aug. 26 statement announcing the report's release said.
According to the report commissioned by Hastings Equity Partners, a private equity firm focused on lower, middle-market energy and industrial services businesses, Permian Basin crude oil production will grow from 3.2 million barrels per day in 2018 to approximately 7 million bbl/d in 2022.
"U.S. refineries have all the light crude they need from current domestic suppliers and Gulf Coast refineries have not imported significant quantities of light crude since 2015. As a result, most of the 4 million barrels per day of incremental crude coming out of the Permian Basin will have to be exported," the report said.
Executives from Phillips 66 and Marathon Petroleum Corp. have highlighted their participation in crude oil pipeline projects designed to connect the Permian Basin with their refineries and export terminals along the Gulf Coast. While the projects provide the companies' refineries with more crude oil supply options, they still prefer to import and process heavier grades of crude oil from abroad.
Phillips 66 Chairman and CEO Greg Garland told investors in June that the 850-mile, 900,000-bbl/d Gray Oak Pipeline will connect to five refineries and four export facilities, including the South Texas Gateway, in which Phillips 66 has a 25% stake. Meanwhile, Marathon Petroleum, through its MPLX LP subsidiary, is one of the parties developing the Swordfish pipeline to transport up to 600,000 bbl/d of crude oil from terminals in St. James, La., and Raceland, La., to the Louisiana Offshore Oil Port terminal facility in Clovelly, La.
The study's authors noted a "significant uncertainty regarding the dislocations in timing of completions of the pipeline and export" projects.
"The announced pipeline capacity and timing will be more than adequate for the evacuation of additional crude oil to be produced in the Permian," the report said. "However, new bottlenecks will emerge further downstream as the export terminals in Corpus Christi, in particular, are unlikely to be ready to handle the volume, even though it is designed for the operation of very large crude carriers."
