U.S. Poised to Connect Hotspot Permian Basin to World Markets

With the growth of production and pipeline infrastructure to and from the Permian Basin, the prolific drilling field stretching from West Texas into New Mexico, the Port of Corpus Christi may be the first American port to host a supertanker.

According to EIA in a report published this week, crude oil production in the Permian grew from 886,430 barrels per day (b/d) in January 2010 to nearly 1.5 million b/d in January 2014, and this production level was more than could be accommodated by in-region refining capacity and pipeline capacity. This situation resulted in large price discounts at the crude oil gathering and transportation hub in Midland, Texas, compared with Cushing, Oklahoma, indicating that pipeline capacity was becoming constrained and crude oil was likely moving out of the region by more expensive methods, such as rail or truck.

More recently, with the rise in oil prices from their low point in early 2016, EIA expects crude oil production growth in the Permian to accelerate. EIA estimates crude oil production in the Permian at 2.3 million b/d as of April 2017, or almost 300,000 b/d higher than the same month in 2016. As a result, the Permian region is poised to be ground zero for the rebirth of the U.S. shale industry following the worst oil bust in a generation.

As crude oil production in the Permian Basin of western Texas has increased, pipeline infrastructure has also increased to deliver this crude oil to demand centers on the U.S. Gulf Coast. Several pipelines came online to accommodate rising Permian production in recent years (including Plains All American’s Cactus pipeline) and several more are undergoing expansions and are set to come online later this year, adding approximately 340,000 b/d of capacity. After 2017, several more new pipelines and expansions are planned, or are in the planning stages, that could carry any additional increases in Permian production. These pipelines will allow Permian crude oil to be sent to refining centers such as Corpus Christi. With these pipeline additions and expansions and the lifting of export restrictions on domestically produced crude oil in December 2015, Permian oil will also have greater access to international markets through the Gulf Coast’s crude oil export infrastructure.

With this new growth in mind, Occidental Petroleum Corp. announced that it is investigating whether a supertanker, known as very large crude carriers, or VLCCs, which can hold more than 2 million barrels, can dock at its oil terminal along Texas’ Corpus Christi Bay. If it works, the company plans to turn its onshore terminal into the first in the U.S. to receive vessels that size to export U.S. crude. Its cargo would then travel to markets as far-flung as Asia—the latest example of how companies are moving to cash in on the flood of oil coming out of the Permian Basin. While supertankers have been used to carry U.S. crude before, they have been loaded offshore, not docked at facilities on the coast to pickup that crude for export to Asia and Europe. Globally, few ports are deep enough to handle such a ship, which need at least 66 feet of clearance in the water when fully loaded. The Port of Corpus Christi is currently about 45 feet deep, though officials hope to deepen the port to 52 feet within 2 to 3 years. Occidental estimates its ability to berth supertankers for partial loading—rather than having to ferry multiple loads of oil to the ship offshore—will save approximately 75 cents per barrel on transportation costs.

According to the Port of Corpus Christi, whose dock is built to accommodate an aircraft carrier, it may now be used to receive a VLCC supertanker. This development would be another momentous step for the U.S. in locking in its leadership and leverage in global oil markets.


 ENERGY TRANSPORTATION NEWS


 

ENVIRONMENTAL NEWS


     

    ENERGY REGULATORY NEWS


    STATE ENERGY NEWS


     

     

    ENERGY POLICY NEWS


           

          ENERGY MARKET NEWS


           

          GLOBAL ENERGY NEWS


          TRANSITION NEWS


           

          ENERGY TAX NEWS


           

          RENWEABLE ENERGY NEWS


           

          FROM THE CHART ROOM

          New Pipeline Infrastructure Being Built To Meet Increased Permian Basin Production 

          pipeline-infrastructure

          As crude oil production in the Permian Basin of western Texas and eastern New Mexico has increased, pipeline infrastructure has also increased to deliver this crude oil to demand centers on the U.S. Gulf Coast. One indicator of a potential shortfall in available takeaway capacity in the Permian is a negative spread between the price of West Texas Intermediate (WTI) crude oil at Midland, Texas, and the price of WTI at Cushing, Oklahoma. Going forward, the Midland versus Cushing discount, which recently widened to more than $1 per barrel (b), is unlikely to be either as large or as persistent as it was following the rapid increase in Permian production from 2010 to 2014. At points in both late 2012 and mid-2014, WTI-Midland was priced at least $15/b lower than WTI-Cushing. Pipeline capacity expansions and other market changes are now underway to deliver more Permian crude oil to demand centers. Compared with other oil producing regions, the Permian has a large number of productive geological formations stacked in the same area. The Permian’s in-region refining capacity, close proximity to large refining centers on the Gulf Coast, and existing pipeline infrastructure also make the Permian attractive to oil producers. Crude oil production in the Permian grew from 886,430 barrels per day (b/d) in January 2010 to nearly 1.5 million b/d in January 2014, and this production level was more than could be accommodated by in-region refining capacity and pipeline capacity. This situation resulted in large price discounts at the crude oil gathering and transportation hub in Midland, Texas, compared with Cushing, Oklahoma, indicating that pipeline capacity was becoming constrained and crude oil was likely moving out of the region by more expensive methods, such as rail or truck. In 2014, WTI-Midland averaged a $6.94/b discount to WTI-Cushing, compared with a $1.68/b average discount during 2013. However, as new and expanded pipeline capacity was added, WTI-Midland’s discount to WTI-Cushing narrowed, falling to an average of $0.18/b in 2015 and $0.07/b in 2016. With the rise in oil prices from their low point in early 2016, EIA’s April Short-Term Energy Outlook (STEO) expects crude oil production growth in the Permian to accelerate. EIA’s April Drilling Productivity Report (DPR) indicates a total of 310 oil-directed rigs active in the Permian, 158 more than at the same time last year. The DPR also estimates crude oil production in the Permian at 2.3 million b/d as of April 2017, or almost 300,000 b/d higher than the same month in 2016.

          Pipeline infrastructure in the Permian is now better equipped to handle new production than it was in 2014. Several pipelines that came online to accommodate rising Permian production in recent years, such as Magellan’s BridgeTex pipeline, Sunoco Logistics’ Permian Express pipeline, and Plains All American’s Cactus pipeline, are undergoing expansions that are set to come online later this year, adding approximately 340,000 b/d of capacity. In addition to expansions of existing pipelines, Enterprise Product Partners is building a new Midland-to-Houston pipeline with a capacity of 450,000 b/d, expected to come online later this year. Other pipeline expansions are planned for gathering systems and intra-Permian pipeline infrastructure to bring increasing volumes of oil to the larger pipeline origin points like Midland. After 2017, several more new pipelines and expansions are planned, or are in the planning stages, that could carry any additional increases in Permian production. Other pipeline project developments recently completed in the Gulf Coast will allow Permian crude oil to be sent to refining centers in Corpus Christi and Houston in Texas, St. James in Louisiana, and points in between. With these pipeline additions and expansions and the lifting of export restrictions on domestically produced crude oil in December 2015, Permian oil will also have greater access to international markets through the Gulf Coast’s crude oil export infrastructure. Read more on EIA.


           

           

          Michael Best Strategies’ Energy Team

          About Michael Best Strategies

          Michael Best Strategies focuses on achieving clients’ objectives through unparalleled strategy development and deployment for implementation, pragmatic guidance on public policy development, and government relations. The Strategies team specializes in a full range of services, including government relations, public policy consulting, grassroots advocacy, public affairs, conference planning, and strategic political relationships. For more information, visit michaelbeststrategies.com.