With oil producers in the Permian Basin and Eagle Ford Shale running up against steep price discounts at their usual trading hubs, pipelines coming in 2019 and beyond to serve these booming production areas areas are focusing on the Gulf Coast, with its access to export markets.
The need for pipeline capacity is pressing. Production in the Permian, centered in West Texas, could reach 5 million barrels of oil per day in 2019, and the Eagle Ford in south Texas is threatening its production records from a half-decade ago. Midstream companies are responding with what Morningstar Inc. analysts described as a "tsunami" of projects, most of which are due to be completed in 2019 and 2020.
The research and investment firm said 15 new pipeline projects were announced in 2018 that target the Gulf Coast. Four of them, with a total of 2.1 million bbl/d of capacity, are planned to go from the hub at Cushing, Okla., to the Gulf Coast, while another will take an undetermined amount of crude from the Bakken Shale in North Dakota to the Gulf. The remainder of the projects are intended to transport crude from the big Texas shale plays to the coast.
Increasing amounts of crude oil are avoiding the traditional Cushing, Okla., hub to reach the Gulf Coast and export markets beyond.
Source: The Associated Press
"A further 2 mmb/d of pipeline capacity has been announced between the Permian and Eagle Ford basins and the Texas Gulf Coast at Houston or Nederland/Beaumont/Port Arthur," Morningstar said. "Another six projects plan to bring as much as 3.5 mmb/d of incremental crude from the Permian and Eagle Ford into the Corpus Christi region. … Doing the math, if all these pipes are built and run near to capacity, the additions would carry as much as 7.7 mmb/d of new crude to the Gulf Coast, the majority of which would be light shale crude looking for a home in the export market."
That 7.7 MMbbl/d, if it is all built, would more than double the estimated amount of pipeline capacity already carrying crude to the Gulf Coast. Morningstar estimated that a total of 6.3 million bbl/d exists to carry oil to the Gulf.
An additional piece of evidence supporting the idea that the crude is bound for overseas is the fact that refineries on the Gulf Coast are already operating at or near capacity, and no new increases to capacity have been announced.
The lure of the Gulf Coast is obvious: once the oil leaves Texas or elsewhere and reaches ships bound for overseas, it is no longer is subject to West Texas Intermediate crude prices, which have been trading at a significant discount. Instead, they are linked to Brent crude prices, which have run approximately $10/bbl higher than WTI prices recently. Permian producers, especially, see offshore pricing as a way to minimize the losses caused by price reductions in Midland, Texas, due to the pipeline shortfall.
"Traders would prefer to price these transactions based on crude delivered free on board, or f.o.b., onto tankers provided by the buyer at a given location. That's how most major equity producers and national oil companies transact their international sales," Morningstar Inc. analyst Sandy Fielden said in October.
Pioneer Natural Resources Co., one of the largest Permian oil producers, said in August that it was already shipping 165,000 bbl/d to the Gulf Coast, with 103,000 bbl/d of that amount sold for export.
"Beginning in September 2018, Pioneer will have no exposure to Midland oil pricing through 2020," CEO Timothy Dove said.
A new hub
The expectation that the amount of U.S. crude, particularly from Texas, intended for export will continue to grow has led to the creation of a Houston price hub, which came online in October. Intercontinental Exchange Inc. said the Gulf Coast had become "the central delivery point for U.S. crude" due to the desire to ship it overseas.
"When we were designing the Permian WTI futures, customers consistently told us that it was critical to offer a high-quality, well-known crude oil spec deliverable in Houston, and available for the waterborne export market," said Jeff Barbuto, Intercontinental Exchange's vice president of oil markets. "Over time, [the Houston hub is] one that we think could develop into a benchmark for other grades to price around."
By the end of 2019, the concern surrounding U.S. oil exports may not be the lack of pipeline capacity, but the lack of dock space for tankers. Morningstar said that not only is space in demand, but U.S. ports are also attempting to find ways to accommodate supertankers that cannot approach shallower ports like Houston. In the meantime, oil waiting for those vessels will continue to arrive.
"If you're a producer and can get to the Gulf Coast instead of Cushing, you're going to do it," Rice University professor Ken Medlock said.