Pipeline “takeaway capacity” remains one of the most critical issues facing Permian Basin oil and gas interests.
Is the Permian Basin oil and gas industry about to be a victim of its own success? We are seeing $20+/bbl price differentials between WTI Cushing and Brent crude prices and recently $8-10/bbl additional differential between Midland and Cushing. What are the causes of these high differentials and are there any solutions in sight?
The Permian Basin production peaked in the 1970s at approximately 2.1 MMBbl/d and steadily declined until about 2009 to below 1 MMBbl/d. Production has since increased to the current rate of 1.32 MMBbl/d as a result of successful growth from unconventional resource development in the Wolfberry, Wolfbone, horizontal Wolfcamp, Cline, Bone Springs, and other plays. Historically, the majority of the Permian Basin oil production has been transported by pipeline to Cushing, Okla., and then to Midwest refiners. However, with the large increases in Bakken and Canadian crudes, the need for Permian oil in the Midwest has declined while an oversupply situation exists at the NYMEX WTI market hub of Cushing. This has created the large differentials between WTI Cushing and international Brent crude prices.
There are a number of projects underway to relieve this oversupply at Cushing. The first is the Seaway pipeline that runs from Cushing to Houston. Initially it will carry 150 MBbl/d and expand to 400 MBbl/d in early 2013 and 850 MBbl/d by mid-2014. In addition, the Keystone Gulf Coast project is expected to add 700 MBbl/d in mid-2013. These pipelines should help bring the WTI to Brent differentials lower. How long will this take? As I write this, current futures forward curves are projecting the WTI to Brent differential to decrease to $11.71/bbl by January 2014 and to $8.05 by January 2016.
In addition to the WTI to Brent differentials, we are seeing large differentials between Cushing and Midland crude prices. As previously stated, current Permian Basin production is estimated at 1.32 MMBbl/d. RBN Energy LLC is estimating current takeaway capacity as 1.285 MMBbl/d resulting in production exceeding current takeaway capacity. Therefore, pipeline space is at a premium and creating inflated price differentials. There are four major projects in the works to relieve the oversupply over the next two years by moving crude directly from the Permian Basin to the Gulf Coast. The first is the West Texas Gulf Expansion by Sunoco/Energy Transfer that will add 110 MBbl/d in four phases starting in the first quarter of 2013. In addition, Sunoco/Energy Transfer has the two-phase Permian Express pipeline project that is scheduled to add 90 MBbl/d in the first quarter of 2013 and an additional 200 MBbl/d in the second quarter of 2014. Magellan Midstream Partners is reversing the Longhorn Pipeline that will deliver crude from Crane to Houston in two phases. The first phase will add 135 MBbl/d in early 2013 and an additional 90 MBbl/d uptick comes in the third quarter of 2013. Magellan/Occidental have announced the Bridge Tex Pipeline will begin construction in the first quarter 2013 and will add 300 MBbl/d by mid-2014 from Colorado City to Houston. These projects in total will add 925 MBbl/d if all are completed and would result in a total 2.2 MMBbl/d takeaway capacity from the Permian Basin.
Upon completion, these projects should significantly relieve these large differentials between Midland WTI and international Brent pricing. However, some of these projects are waiting on regulatory approvals and have other potential delays. In the meantime, the Permian Basin may see even larger differentials. Some analysts are predicting local wellhead prices as low as $50 per Bbl. This would be detrimental to the current activity and the overall Permian Basin economy. Our industry and our trade associations need to work together to help expedite these projects. These pipelines are the lifeblood of our industry and local economy.