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Permian Tracker: Production growth slowing as pipeline race still on

Houston — Midstream companies are planning to construct additional pipelinetakeaway capacity out of the US' Permian Basin, but crude productiongrowth is likely slowing as the new infrastructure is not due onlineuntil late in 2019.

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Final investment decisions have been taken for new long-haul pipelinesfrom the Midland and Delaware areas of the Permian to the US Gulf Coast,offering a total of roughly 2.6 million b/d of new takeaway capacitystarting in the third quarter 2019.

But with little spare capacity available until then and limited solutionsbeing offered by railroads and trucks, drilling and completion activityappears to be slowing.

Halcon Resources' recent decision to drop one rig in the Permian may notsound like much on the surface - major producers can easily fill that gap- but it could be the start of a trend, at least for smaller players.

Also, C&J Energy Services said it would defer to a later date three wellfracturing fleets that were to be in place by October 2018.

The Permian currently produces 3.5 million b/d of crude oil, and shouldstay fairly flat for the rest of 2018, according to S&P Global PlattsAnalytics, with production growing to around 4.5 million b/d by the endof 2019.

Podcast: Signs afoot that producers beginning to respond to developingcrunch in Permian takeaway capacity

CURRENT PRICES

The Midland WTI discount to Cushing WTI averaged $8.85/b in June,narrowing from a $10.26/b discount in May, but widening from a $1.08/bdiscount in June 2017, S&P Global Platts data shows. The Midland discountto Houston WTI averaged $14.90/b in June, widening from a $14.28/bdiscount in May, and a $2.43/b discount in June 2017.

While Midland WTI prices have been pressured because takeaway capacity islagging production growth, crude prices on the Gulf Coast have beenlifted by strong export demand for US crudes. Weekly US crude exports hita record high 3 million b/d the week ending June 22, according to the USEnergy Information Administration.

Permian Basin

TAKEAWAY OPTIONS

Current pipeline takeaway capacity out of the Permian is roughly 3.1million b/d, which combined with local refinery demand for Permian crudeat 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 ofPermian Basin rail capacity, but much of that is now being used to moveother commodities like frac sands.

Murex, along with Cetane Energy, said it will expand Cetane'stransloading facility at Carlsbad, New Mexico, boosting its CBR capacityby 40,000 b/d, to 75,000 b/d, in the third quarter.

Current CBR volumes out of West Texas will likely be capped at about50,000 b/d as the bulk of the existing loading terminals have yet to beretrofitted to handle crude, according Jenna Delaney, senior oil analystwith Platts Analytics. But those volumes are anticipated to rise to100,000 b/d in the second half of 2018, she added.

Roughly 10,000 b/d of crude is currently moving by truck out of thePermian, and this will not grow beyond 40,000 b/d due to a shortage ofdrivers.

NEW PIPELINES

To meet the growing output, two waves of pipelines are being plannedacross Texas, offering a total of at least 4.1 million b/d of newtakeaway capacity by mid-2020 and beyond.

* Gray Oak (Q3 2019 completion): Phillips 66 (75%) owner and Andeavor(25%) said in April it has received shipper support to move ahead withthe 700,000 b/d pipeline, and also launched an open season that couldincrease throughput on the line to 1 million b/d. The pipeline willmove crude to Corpus Christi and to Sweeny/Freeport along the HoustonShip Channel and is targeted for startup in the third quarter of 2019.Part of Gray Oak's development will be a connection to a3.4-million-barrel marine terminal under development by BuckeyePartners at Corpus Christi for exports. Nearly 50% of throughput onGray Oak will be targeted for exports, while Phillips 66's Sweeneyrefinery near Freeport could utilize 60,000 b/d to 70,000 b/d asfeedstock, the company said.

* EPIC Midstream (Q3 2019): The San Antonio-based company is working tobring on more shippers on its Eagle Ford Permian Ingleside and CorpusChristi pipeline, for which it secured 75,000 b/d and 100,000 b/d offirm capacity, respectively, from Apache and Noble Energy. The pipelineis due for startup by the third quarter of 2019 and has increasedcapacity in the line to 675,000 b/d from 590,000 b/d. That figure mayincrease further to 825,000 b/d.

* Cactus II (Q3 2019): Plains All American is moving ahead with thepermitting, right of way and procurement process for the 650,000 b/dpipeline it plans to bring into service in Q3 2019. Cactus II will shipbarrels from the Delaware Basin to the Port of Corpus Christi, and theadjacent Ingleside Terminal on the Texas Gulf Coast, with Trafiguracoming on board as anchor shipper, committing to 300,000 b/d. Plains isadding storage tanks and augmenting its gathering system at Wink andMcCamey that will add 220,000 b/d of new capacity this summer from thebasin to its crude terminal in Southwest Texas.

* Midland to Nederland (2020): Energy Transfer Partners, which is intalks with shippers, said it will announce strategic partners for the600,000 b/d pipeline that will ship crude from Midland to Nederland onthe USGC. The facility will be built in 2020. Energy Transfer has yetto announce a partner for this planned pipeline, but fellow midstreamplayer Magellan said at an analyst event in mid-June it was consideringa joint venture with Energy Transfer for a long-haul Midland to USGCpipeline.

* Jupiter (2020): An open season will be launched in the third quarter byDallas-based Jupiter Midstream for the pipeline, which will have acapacity of up to 500,000 b/d and will move barrels from the Permian toBrownsville on the southernmost tip of the Texas Gulf Coast. Detailedengineering studies are underway for the line, which will define itsfinal capacity and cost. The pipeline will serve crude export plansthat Jupiter has at Brownsville, which includes two new docks to loadPanamax and an offshore facility to load VLCCs. The pipeline istargeted to be built by 2020 and Jupiter is seeking a JV partner.

* ExxonMobil/Plains (2020): ExxonMobil, which plans to increase itsPermian production to 600,000 b/d over the medium term from 200,000 b/dcurrently, unveiled in mid-June what will likely be the single-largestPermian crude pipeline. With a capacity of 1 million b/d, Exxon willpartner with Plains and has signed a letter of intent to set up a JV.The long-haul line will run from Wink and Midland to Baytown, Beaumontand Webster, Plains said. The companies did not indicate a specifictimeline for startup, but industry sources expect the line would bebuilt no sooner than the fourth quarter of 2020.

--James Bambino, james.bambino@spglobal.com

--Ashok Dutta, ashok.dutta@spglobal.com

--Starr Spencer, starr.spencer@spglobal.com

--Edited by Kevin Saville, newsdesk@spglobal.com