Recent additions help Basin’s oil, gas, and NGL transportation supply catch up with demand–for now.
Just as the Permian Basin’s oil boom has created a series of traffic jams on the roadways, the increase in production of crude oil, natural gas, and NGLs has brought about a jam-up on the midstream highways. Companies such as Magellan Midstream Partners, LLC, DCP Midstream, and many others have constructed new pipelines, have boosted capacity of existing pipelines, and, in at least one case, have reversed a refined product pipeline to make it a crude carrier.
Approximately two years ago Magellan decided that it could take an existing pipeline that brought gasoline from refineries in Houston to El Paso and reverse it, re-engineering it to collect crude oil from that region and transport it to Houston and on to Texas City. The pipeline re-opened in April of 2013 with a terminal in Crane.
Magellan’s Director of Government and Media Affairs, Bruce Heine, reported that the pipeline’s current capacity is 225,000 bbl/day and that the company is working toward getting regulatory approval to increase the pipeline’s capacity by 50,000 bbl/day in the near future. Capacity would be increased by introducing additional drag-reducing agents to speed the flow, along with other modifications.
Under way now is the BridgeTex pipeline, a 50-50 joint venture between Magellan and Occidental Petroleum that will stretch 440 miles from Colorado City to Houston and Texas City. “That system is under construction,” Heine said. “We still expect it to be complete in mid-2014 and that it will have a capacity of 300,000 bbl/day. Oil in the pipeline will be a mix of Domestic Sweet and West Texas Sour.”
Heine hinted that other projects may be in the works but are not far enough along to be announced at this time. “We’re excited about the prospects in Permian Basin and the access that we have in place and… we see the increasing production forecast that may create future opportunities and we’ll be considering other options that we have to continue to provide for the needs of our customers.”
NGL production has also skyrocketed during the boom, and DCP Midstream is one of the companies expanding to handle that increased flow. The Sandhills pipeline—running from several DCP processing plants in West Texas, passing through the Eagle Ford Shale, then depositing its output in Mont Belvieu—opened its Permian Basin link in July. The Eagle Ford section opened in the fourth quarter of 2012.
Its current capacity is 200,000 bbl/day, and it has an upside capability of as much as 350,000 bbl/day. Since it picks up product as it goes along, an obvious question would be this: How much of its takeaway capacity can be allocated to the Permian Basin? David Stone, vice president for the Southeast New Mexico region of DCP Midstream, LLC, based in Midland, said the answer will vary depending on how much demand there is between the two regions. The pipeline is a joint venture between DCP, Phillips 66, and Spectra Energy, with each assuming one-third ownership.
Even with expectations that growth in both the Basin and Eagle Ford will continue to increase, Stone said DCP feels they have enough residue capacity in the Sandhills pipeline to handle the near future.
Because pipelines are years in the making, between planning, open seasons to determine demand, regulatory issues, right-of-way issues, not to mention construction issues, midstream companies should stop and ponder their prospects before they launch into a new project, Stone said. By the time a two- to four-year project is completed, is it likely that transportation demands will be at least as high as when the planning started? No one wants to spend millions on a project that is not needed by the time it is completed. This prospect accounts for the occasional lag time between the need for pipelines and the completion of pipelines.
Pipeline expert Dan Lippe agrees that NGL pipelines are currently adequate in the Basin. Lippe founded Petral Consulting Company, which presents analyses and reports and forecasts on the NGL industry, in 1988.
“There is no indication, from the monthly production statistics for natural gas liquids, that anyone is unable to ship their product to the Gulf Coast,” he said. With the addition of DCP’s Sandhills pipeline and capacity from Energy Transfer Partners in West Texas and the Texas Express pipeline (a joint venture between Enterprise Products Partners, L. C., Enbridge, Anadarko, and DCP midstream) opening soon from the Panhandle, NGL producers should be able to breathe a sigh of relief for the next few years.
But if production increases continue at their current rate, Lippe sees new pipeline planning sessions starting by 2017 or 2018.
“I would not be surprised if, in the 2020-2025 time frame, there is another round of pipeline expansion. Everything now depends on what the crude oil producers do, and how successful they are at continuing to increase production at the very prodigious rates that they have been over the last 18 months,” he said. Lippe added that the unprecedented growth rate “puts us in a whole new ball game” in regard to determining how to plan and to stay ahead of the demand curve.
Transportation is still not all of the “getting to market” equation. The capacity of processing plants to receive and deal with product must also keep up, and Lippe sees about a 4-5 year window there as well. “The companies that do fractionation have been building fractionation facilities faster than pipeline companies can build pipelines. It takes enterprise companies, apparently, about 12-15 months to build a new facility—it takes pipeline companies longer than that to build a new pipeline” due to the previously mentioned regulatory and right-of-way considerations.
On the oil side, Lippe feels “nobody is building oil pipelines fast enough. If they were, we wouldn’t be shipping 500,000 barrels per day of crude oil by rail.”
In fact, he sees railroads as a major competitor for pipelines in the future, noting that there is a historical perspective there because railroads were the first means of transporting oil 100 or so years ago. He said that it was only because the railroads began price gouging John. D. Rockfeller’s Standard Oil that Rockefeller decided to build and use pipelines in the first place. A hundred years later, Lippe says the railroads have learned their lesson and are now pricing their services much more competitively.
In fact, Lippe believes this will have a deleterious effect on building of pipelines at all. “Oil people like pipelines more than they do rail,” he explained. “But the railroads know that if they price their transportation service just below the tariff that a new pipeline would have to charge, then they get all the business.”
Lippe continued, “So it will be interesting to see if the railroads learned anything from their mistakes of a hundred years ago.”
He pointed out that it is much easier to add to the rail system, particularly in places where capacity can be boosted by adding a track parallel to an existing one, than it is to build new pipelines.
For at least the next 5-6 years he sees approximately equal construction of pipelines and rail loading facilities. But the longer the government delays approving the Keystone XL pipeline from the northern United States to the Cushing hub, the less likely it is to ever be built because that oil is being produced already, and it will go to railroads under long-term contracts that are unlikely to be broken to switch to pipeline mode, Lippe believes.
Even though the Permian Basin is not primarily a gas producer, some gas is produced with every oil well, and, he pointed out, that gas has to go somewhere, even if it’s not worth much on the market. The fact that gas is produced whether anyone likes it or not keeps the price down, in Lippe’s view, and makes expansion of gas processing necessary.
Keeping all the components—upstream, midstream, and downstream—flowing at the same rate, or at least compatible rates, is becoming ever more challenging. But so far companies in the Permian Basin are keeping the curve at least at a manageable rate.