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What happens in the Permian Basin of West Texas and New Mexico
reverberates through oil markets around the world-even all the way
to the region's namesake, Perm, Russia. The new IHS Markit outlook
for the Permian to 2023 projects crude oil production could reach
5.4 million barrels per day (MMb/d) in 2023-up 2.9 MMb/d from 2017.
This increment of growth is higher than the current entire output
of Kuwait.
But such growth is not guaranteed. The Permian's reach may have
gone global, but local factors will still determine the score as to
whether it meets its full potential.
In this case, the urgent challenge is the need for more pipeline
takeaway capacity. An indicator of this need is the price
differential between WTI at Midland, Texas-the heart of the Permian
oil business-and other light sweet crudes. For example: Light
Louisiana Sweet (LLS), which is priced at the St. James, LA trading
hub. Since late May, WTI crude oil at Midland has been priced $17
to $20 per barrel less than LLS. As recently as March the price
difference had been just $3 per barrel. So, why the drastic change?
Pipeline capacity for transporting Permian crude has become very
tight and more expensive alternative means of transport were needed
to pick up the slack. Higher transportation costs mean that WTI at
Midland needs to be priced lower to compete with other crudes on
the coast.
During the past several years, the Permian Basin has required
regular infrastructure investments-most notably additions to
pipeline takeaway-to keep up with its prolific crude oil supply
growth. Although the region has several refineries, total capacity
is limited to about 600,000 b/d. The rest must be shipped to
various end markets.
Since 2013 the focus has been on adding new large diameter
pipeline capacity to ship Permian crude to various Gulf Coast
terminals. About 1.8 MMb/d of takeaway capacity has been added
during that time through a combination of expansions of legacy
systems and new-build lines (most recently including Enterprise
Products Partners' [EPD] 585,000 b/d pipeline from Midland to
Houston, which began operations in late 2017). However, production
has been rising so rapidly that output is again nearing the limits
of existing pipeline capacity. The result is a predictable one-i.e.
price discounts.
There is also a larger dynamic at play. The current
infrastructure squeeze in the Permian illustrates the mismatch
between upstream oil producers seeking fast growth and midstream
players that need sustained high utilization of infrastructure over
decades. This is not the first time such a dynamic has led to price
discounts. The same has occurred at times in other areas, such as
the Bakken in North Dakota and Appalachian gas.
Indeed, even Midland price dislocations are nothing new. From
2011 to 2014, Midland prices regularly fell anywhere from $15/bbl
to as much as $40/bb below Gulf Coast prices as incremental
pipeline capacity lagged.
This latest period of very tight or insufficient pipeline
takeaway capacity and Permian pricing weakness looks like it could
be especially lengthy, potentially lasting the better part of a
year. Four large new pipeline projects are under way, with a
combined capacity out of the Permian of 2.4 MMb/d. However, the
first of these to market will not stream until second half 2019.
Adding this takeaway capacity (including more gas pipelines) is key
to the Permian realizing its growth potential-and adding the
equivalent of "Kuwait" to the US oil production system.
Jim Burkhard is Vice President of Research at IHS
Markit.
