HOUSTON—Crude producers struggling with takeaway constraints might need to get used to the pain.

Getting the oil out of the basins isn’t enough—it’s all about market access. The infrastructure must be in place to move oil out of basins to coastal terminals for export, a Wood Mackenzie analyst told executives at the recent NAPE business conference. Until that happens, both commodity prices and M&A deal economics will suffer.

“The U.S. is really focused on hydrocarbon exports in general, especially in the crude space,” said John Coleman, Wood Mac’s senior analyst for North American crude oil markets. “If you’re looking to purchase an asset … the thinking needs to be on a global basis, not a regional basis, as your crude is going to be placed likely into an export market and has to be priced accordingly.”

While NAPE markets itself as “where deals happen,” some of them simply won’t happen, at least for the moment, if the region in question lacks infrastructure support and market access doesn’t exist or comes up short. In 2018, takeaway constraints in the Permian Basin dealt a blow to Midland Basin prices.

“With intense growth comes intense growing pains,” Coleman said. “You saw that play out in the first level in the Permian Basin in 2018 without sufficient infrastructure to support some of that growth.”

Pipeline constraints in the Permian, he said, may be in the rear-view mirror but troubles are emerging in other regions. Production growth in areas such as the Powder River and Niobrara areas in the Rockies, the Bakken and the Scoop/Stack area in the Midcontinent are expected to put substantial pressure on regional infrastructure systems. As those systems fill up, transport slows and access to markets becomes more difficult. The Cushing, Okla., hub, for example, is beginning the feel the pressure of the increased volumes.

And shifting a constraint from one part of the system to a point further down the chain creates its own problems.

“It’s starting to show up in pricing distortions in Rockies markers, potentially Bakken markers and Cushing, the granddaddy of all pricing points for WTI, could start exhibiting these against Brent, as well,” Coleman said.

In a recent report, Alerian echoed those concerns.

“With Permian crude pipeline capacity set to increase significantly, the question is if midstream is fixing one bottleneck just to create another one on the Texas Gulf Coast,” wrote Michael Laitkep. “One potential destination for Permian crude is Texas refineries, but their complexity is a limiting factor in their ability to run light, sweet crude. In general, to balance crude supply and demand along the Gulf Coast, incremental barrels will need to be exported.” 

Permian producers struggled to move their crude to Gulf Coast export terminals in 2018, but once the oil made it to the coast, it had free-flowing access across the docks on its way to markets, Coleman said. That paradigm is changing.

Much of the newbuild capacity under construction targets Corpus Christi, Texas, Coleman said.

“This is somewhat of a problem because Corpus Christi has less-developed crude infrastructure relative to neighboring Houston and Beaumont, and also a smaller refining footprint, he said. “So, a lot of crude coming into a market that might or might not be able to handle all that is coming in.”

Wood Mac and Alerian agree that, over the long term, export capacity is unlikely to be constrained because of how quickly the midstream is responding to the infrastructure need. The South Texas Gateway Terminal in Corpus Christi, a JV including Buckeye Partners (NYSE: BPL), Phillips 66 Partners (NYSE: PSXP) and Marathon Petroleum (NYSE: MPC) is on track to start up at the end of 2019. Expansion of Magellan Midstream Partners’ (NYSE: MMP) Seabrook crude terminal is also scheduled for the end of this year.

Typically, the midstream part of the value stream follows upstream growth. Construction projects take time and many won’t be ready until late-2020 or 2021. During that lag time, a lot of crude will be looking for ways to export in 2019 and 2020, Coleman said.

Until takeaway improves, deals in some regions might have to wait.

“Any deals you might be evaluating in those parts of the world, you might need to have a plan in place for firm market access or a hedging plan to mitigate any type of potential infrastructure shortfalls,” Coleman said.

Or, learn to embrace the pain.

Onshore