A year-old bottleneck of crude in West Texas is shifting east as new pipelines prepare to begin operations without enough connections or storage for the smooth movement of shale oil to a U.S. Gulf Coast export hub, according to traders and analysts.
The U.S. exported a record 3.8 million barrels per day (MMbbl/d) of crude in late June after Congress lifted a 40-year export ban in late 2015. Soaring Permian crude output last year exceeded available pipeline space, creating a West Texas glut that knocked regional prices to the lowest levels in four years and helped spur a pipeline construction boom.
The start-up of three new pipelines by year-end from the Permian Basin was expected to bring about 2 MMbbl/d to export terminals around Corpus Christi. The prospect has narrowed the discount for Permian Basin oil compared with Brent to about $5.50 a bbl, down from about $8.50 in March.
But the rush to build pipelines largely outpaced construction of crude export docks and storage tanks in Corpus Christi, a timing mismatch that could create bottlenecks through the end of 2019, Barclays analysts said. They forecast the discount for Midland crude to Brent could widen again, to between $9 and $14 a bbl next year.
New oil pipelines typically are quick to fill as producer commitments and connections allow. However, at least one of the new lines, owned by EPIC Crude Pipeline LP, does not yet have all the connections and storage to handle the full 400,000 bbl/d capacity, sources said and regulatory filings released on July 1 show.
EPIC's line, which was converted to transport crude from natural gas liquids temporarily, has only filled about half of its initial capacity, and will move smaller-than-expected volumes when it begins service next month because of the lack of connections, according to nearly a dozen traders, brokers and others familiar with the company's operations.
EPIC declined to comment but in a regulatory filing on July 1 acknowledged it will provide only "minimal working tankage for storage" needed to move the oil. Some access and unloading points are either not yet in service or expected to be in service only by Aug. 15, the filing said.
The pipeline operator is in talks with NuStar Energy, which has a terminal at Corpus Christi, a NuStar spokesman confirmed. A deal could help address EPIC's storage shortfall as it works to construct its own terminal, traders said.
A second Permian oil pipeline that is expected to start operations late this year, Phillips 66's Gray Oak, also faces limited dock capacity in Corpus Christi, market sources said. Phillips 66 declined to comment other than to say it anticipates beginning service by year-end with connections to Corpus Christi refineries and export facilities.
EPIC, Phillips 66 and a third impending pipeline, Plains All American Pipeline LP's Cactus II, will be able use the largest export terminal near Corpus Christi, Moda Midstream LLC's Ingleside terminal. Moda has completed some of the tanks as part of the process of expanding storage to 12 MMbbl, with the full completion expected in 2020, a spokesman told Reuters.
The parties must now renegotiate a deal that would transfer Breitburn's Permian reserves to investors including Elliott and WL Ross through their participation in a $775 million rights offering.
Sustained lower oil prices may lead to Permian consolidation, the return of tough times to other shale plays and U.S. E&Ps helping rebalance global inventories.
A big crowd turned out for an afternoon honoring industry leaders representing all facets of the energy sector.