MIDLAND, Texas—With capacity hitting a wall and U.S. oil exports soaring, the midstream sector should expect production to flatline, according to Ken Snyder, chief commercial officer of Frontier Energy Services LLC.
Snyder told attendees at Hart Energy’s Midstream Texas Conference and Exhibition on June 6 that the upside of completions, rising exports, recovering world oil prices and technology like longer laterals took the industry by surprise. Output has outpaced pipelines—producing too much, too fast—making bottlenecks inevitable. Moving crude by trucks and rails, he said, won’t be enough.
“All of a sudden we had more production then we thought we were going to get…producers were way out-stripping their expectations,” he said. “Things were clicking in our direction [then] all of a sudden we got tight.”
He said that the Permian Basin’s production will rise by 70,000 barrels a day (bbl/d) per month between May 2018 and September 2019, which would require 400 to 500 trucks and drivers to commute 40,000 bbl/d of that crude to market.
“If we sent that many drivers out of the basin, it’s going to cause a bigger domino problem in the basin and at some point, it’s going to cost more than $20 for the truck. So it’ll go up exponentially if we pull on it too hard,” he explained.
The capacity shortfall, he said, will result in the delay of more than 200 million barrels of crude—equal to about $10 billion in revenue. However, he said that the crude would not be lost, but deferred since it will take a little longer to get it out of the ground.
“In the meantime production will probably have to flatten out. It’ll grow a little bit more through some of those other tricks of the trade and a few other pipeline expansions,” he added.
Unfortunately, he said, producers will have to fight for the last barrel of capacity, choke back wells which will create drilled but uncompleted wells, and reallocate capital.
But Snyder assured attendees that the sector would be OK and that this was a part of the cycle in which capacity has been scarce before. The challenge this time, he specified, was getting by from now until early 2020 without self-destructing but making the right adjustments.
Blake Trahan, vice president of SemGroup Corp.’s (NYSE: SEMG) Houston Fuel Oil Terminal Co. (pictured to the right), joined Snyder on the panel and said his company saw the need to change after realizing the export market was emerging.
“We saw an increase in product exports … and we were at the tail end of this tsunami crude oil boom that was happening domestically that was looking for distribution and access to water on the Gulf Coast,” he said.
Trahan said the company would continue to provide fuel oil storage but planned to incorporate and expand the business’ crude oil tankage capacity while repurposing its large, less desirable tanks for new services.
“We still wanted to be the premier heated storage terminal in the Gulf Coast, but we were oversized for that [and] wanted to diversify and grow into crude oil,” Trahan said. “[But] this was going to take significant change, require us to make investments and get everybody on board at the terminal from the operators all the way up to our owners.”
After transforming its focus from fuel oil to crude oil, along with other adaptations like building new pipelines and adding marine vapor recovery, he said SemGroup has experienced significant growth and success.
“We’ve had some great success with the changes that we’ve undertaken and we’re prepared for the next wave of changes [pipeline projects],” Trahan said.
With more pipelines coming online and the Permian’s allure—a lot of basin to drill, good connectivity and ample runway for drilling—Snyder said the sector will ramp up again in 2020, when another Permian capacity cycle starts.
“In 2020, it’ll probably ramp up again pretty hard and the differentials will probably stay at $20 or even $30. You’ll probably see a $30 spread before it’s done,” Snyder said.
By fourth-quarter 2019, Phillips 66 Co.’s (NYSE: PSX) Gray Oak pipeline is expected to carry over 700,000 bbl/d, the Cactus ll pipeline from Plains All American Pipeline LP will carry over 670,000 bbl/d and EPIC Midstream Holdings LP’s crude oil pipeline will carry more than 590,000 bbl/d.
Also, Energy Transfer Partners LP’s (NYSE: ETP) said it is planning to construct a crude oil pipeline from the Permian to Nederland, Texas, which is expected to come online in first-quarter 2020 and transport about 600,000 bbl/d.
“It’ll do good once we rebuild like we typically do, and we have to in the pipeline business because pipelines come in lumpy and production comes in smooth,” he said.
Snyder urged those in the midstream community to help the producers in the meantime and continue building pipelines.
“There will be that period of over-build and there’ll be a battle for barrels again,” he said. “It’s going to be fun and I think we will recover quite well.”
Mary Holcomb can be reached at mholcomb@hartenergy.com.
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