The Permian Basin continues to be the most prolific oil field in the United States and, without much surprise, the lack of infrastructure to get more of the production to market has left the basin congested.
But with more big pipeline projects set to come online later this year and into 2021, the latest Drillinginfo report, Permian to Gulf Coast Midstream, presents a rosier outlook for long-haul takeaway capacity for crude oil, gas and natural gas liquids (NGL) coming out of West Texas.
That will be a huge relief after the Permian has suffered from lack of adequate takeaway capacity in 2018 and 2019, which sometimes pressured Midland differentials to large discounts versus Cushing. Now with new long-haul capacity being added in the coming months, Midland differentials are likely to gain support.
“Yes we will have enough takeaway capacity and yes it is going to happen very soon,” said Drillinginfo analyst Jesse Mercer, who was a former crude oil trading strategist for Phillips 66. “We will see some relief in the second half of 2019 and 2020.”
In the report, Drillinginfo said one of the greatest reasons for optimism is the sizeable projects that are set to come online. Between now and the end of the year, there are three pipelines coming which includes Plains All-American's Cactus II—set to start commercial service next week—and Phillips 66’s Gray Oak.
These three pipelines combined will be able to move an additional nearly 2 million barrels per day (MMbbl/d) of production from the Permian to market.
“That is more than offsetting the increase in production over that time period,” Mercer said. “Capacity on those three pipelines alone they are more or less enough to offset all of 2020 production growth from beginning to year end.”
The Permian started the year with crude oil production at 3.9 million barrels per day (MMbbl/d) in January, and in June the estimate was 3.4 MMbbl/d. By the end of the year, it’s going to be about 4.9 MMbbl/d. The outbound capacity combined with local refining is only about 4.2 MMbbl/d.
While the Permian is oil focused, the continued increase in NGL production and gas to a lesser degree have made the bottlenecks worst in recent years as midstream infrastructure has struggled to keep up. The continued growth of NGL production and gas made the need for more infrastructure even more pressing.
If the infrastructure isn’t in place to take the three hydrocarbons away then the only other option is to flare them and there are limits to flaring.
“It’s been a pretty big game changer in NGL production and with crude being the main target there, NGL and gas are byproducts but you have to get them out,” said Drillinginfo analyst Ashton Dirks, who focuses primarily on natural gas and NGL economics and fundamentals. “It is incentivizing more infrastructure as more wells get drilled, oil has to go somewhere and the gas has to go somewhere and the NGL has to go somewhere. With people focusing so much on crude down there that is what is really incentivizing NGL infrastructure development.”
With more production leaving the area and much of it headed to the coast to be exported, there will be increased pressure on the infrastructure in the Gulf Coast as more volume is taken away from Cushing, according to the report. More export capacity will be required, which means there will be an acute need for new export facilities capable of fully loading VLCCs.
That has created a race to the finish with several onshore and at least seven offshore currently in the proposal or development stages.
Terrance Harris can be contacted at firstname.lastname@example.org.
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