Houston — Production from the US' fastest growing oil play continues to rise, but infrastructure has lagged the surging output leading to steep discounts at the region's pricing hub. New pipelines in development should alleviate the regional bottleneck and support further production growth, particularly with the backdrop of a firmer global market.
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The Midland WTI discount to Cushing WTI averaged $10.26/b in May, widening from a $5.96/b discount in April, S&P Global Platts data shows. The Midland discount to Houston averaged $14.28/b, nearly doubling the $7.79/b average discount in April. In May 2017, the discount was just $2.28/b.
While Midland WTI prices have been pressured lower because takeaway capacity is lagging production growth, crude prices on the Gulf Coast have been lifted by strong export demand for US crudes. Weekly US crude exports hit a record high 2.57 million b/d the week ending May 11, according to the US Energy Information Administration.
Current pipeline takeaway capacity out of the Permian is roughly 3.1 million b/d, which combined with local refinery demand for Permian crude at just under 300,000 b/d falls short of production.
Current price discounts have made moving crude by rail economical, although there is limited rail capacity. There is roughly 315,000 b/d of Permian Basin rail capacity, but much of that is now being used to move other commodities like frac sands.
Plains All American, which is already trucking volumes from the Permian, said it sees limited opportunities for offering CBR services from its McCamey, Texas terminal, which can move up to 15,000 b/d as transloading facilities in the basin are geared more towards handling frac sand.
Murex, along with Cetane Energy, said it will expand Cetane's transloading facility at Carlsbad, New Mexico, boosting its CBR capacity by 40,000 b/d to 75,000 b/d in the third quarter.
To meet the growing output, two waves of pipelines are being planned across Texas, offering a total of 3.1 million b/d of new takeaway capacity by mid-2020.
**Gray Oak (Q3 2019 completion): Phillips 66 (75%) owner and Andeavor (25%) said in late April it has received shipper support to move ahead with the 700,000 b/d pipeline, and also launched an open season that could increase throughput on the line to 1 million b/d. The pipeline will move crude to Corpus Christi and to Sweeny/Freeport along the Houston Ship Channel and is targeted for start up in third quarter 2019. Part of Gray Oak's development will be a connection to a 3.4 million barrel marine terminal under development by Buckeye Partners at Corpus Christi for exports. Nearly 50% of throughput on Gray Oak will be targeted for exports, while Phillips 66's Sweeney refinery near Freeport could utilize 60,000 b/d to 70,000 b/d as feedstock, the company said.
**EPIC Midstream (Q3 2019): The San Antonio-based company is working to bring on more shippers on its Eagle Ford Permian Ingleside and Corpus Christi pipeline for which it secured 75,000 b/d and 100,000 b/d of firm capacity, respectively, from Apache and Noble Energy. The pipeline is due for start up by the third quarter of 2019 and has increased capacity in the line to 675,000 b/d from 590,000 b/d. That figure may increase further to 825,000 b/d.
**Cactus II (Q3 2019): Plains All American is moving ahead with the permitting, right of way and procurement process for the 650,000 b/d pipeline that it plans to bring into service in third quarter 2019. Cactus II will ship barrels from the Delaware Basin to the Port of Corpus Christi, and the adjacent Ingleside Terminal on the Texas Gulf Coast, with Trafigura coming on board as anchor shipper, committing to 300,000 b/d. Plains is adding storage tanks and augmenting its gathering system at Wink and McCamey that will add 220,000 b/d of new capacity this summer from the basin to its crude terminal in Southwest Texas.
**Midland to Nederland (2020): Energy Transfer Partners, which is in talks with shippers, said mid-May it will announce "very soon" strategic partners for the 600,000 b/d pipeline that will ship crude from Midland to Nederland on the USGC. The facility will be built in 2020 and industry officials indicate Permian producer ExxonMobil is widely expected to sign in as a joint venture partner as it plans to increase crude output from the basin to 600,000 b/d by 2025, compared with some 200,000 b/d now.
**Jupiter (2020): An open season will be launched late summer by Dallas-based Jupiter Midstream for the pipeline, which will have a capacity of up to 500,000 b/d and will move barrels from the Permian to Brownsville on the southernmost tip of the Texas Gulf Coast. The pipeline will serve crude export plans that Jupiter has at Brownsville which includes two new docks to load Panamax and an offshore facility to load VLCCs. The pipeline is targeted to be built by 2020 and Jupiter is seeking a JV partner. For the planned VLCC loading facility that will be built six miles off the coast of Brownsville, China Harbor Engineering Company is acting as consultant on the construction, Jupiter said. CHEC, with its parent China Communication Construction Company, is the builder of VLCC-capable oil terminal at the Zhanjian Port in South China.
Output is expected to grow to 3.6 million b/d by the end of 2018 and 4.3 million b/d by the end of 2019, according to S&P Global Platts Analytics. That's up from 2.8 million b/d in January. Higher-intensity fracking has improved IP (initial production) rates of wells, with average frac sand pumping rates near 2,000 lb/foot, nearly double rates just a few years ago. Platts Analytics has said that average IP rates are currently around 650 b/d-720 b/d, up from 221 b/d-444 b/d from 2012 to 2016 in the Midland and from 345 b/d-585 b/d in Delaware.
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