The rapid growth of oil development in the Delaware Basin has brought with it headaches ranging from chronic labor shortages to terrific traffic jams on crumbling highways, to long lines at the lunch counter and astronomical hotel tabs.
Another indication of the success, and productivity, of Permian oil producers can be seen in the price differentials between oil originating in west Texas and southeast New Mexico and barrels sold elsewhere in the U.S or overseas. Reports from oil market analysts attribute these differentials to too many Permian barrels trying to squeeze into too few pipelines.
At several points this summer, Midland WTI was reported at a $12 discount to Cushing and a $20 discount to Brent, making the takeaway “bottleneck” a hot topic across the Permian. As a result, some producers “tapped the brakes” on new drilling, or increased the number of drilled uncompleted (DUC) wells on their books, or they turned to hedging as an insurance policy.
In the meantime, at least a half dozen major new pipeline projects were announced this year, all looking to add takeaway capacity for Permian oil.
At this year’s annual meeting of the New Mexico Oil and Gas Association, Willie Chiang, chief executive officer at Plains All American Pipeline, discussed the intent of expansion projects his company has launched this year.
Projected growth of Permian oil means the additional barrels “must find a way to the Gulf Coast for export,” Chiang said.
In October, Plains powered up the extension of its Sunrise pipeline with initial capacity of 230,000 b/d. It now connects Midland to Colorado City and Wichita Falls, Texas. Sunrise is designed to carry 1 million b/d from the Permian to Cushing when at full capacity, Chiang noted.
Within one year, Plains’ Cactus II pipeline will commence operations at partial capacity and transport Permian barrels to Corpus Christi. By April 2020, the line is expected to reach full 670,000 b/d capacity, he said.
Also this summer, Plains and ExxonMobil agreed to expand existing and construct new pipelines to move 1 million b/d or more of Permian oil to Exxon facilities in Houston and for export at the Gulf.
“These pipelines will provide a buffer for takeaway capacity through 2020,” Chiang said.
Additional export capacity is vital if America’s unconventional plays expect to continue growing, Chiang observed.
“The downturn forced producers to cut their breakeven costs, improve netbacks and optimize their best wells,” Chiang concluded. “Now, as refiners refuse to take additional light barrels, the answer is for those new barrels to head to the Gulf for export.”
In October, another major pipeline project took a big step toward first-fill with an announcement from JupiterMLP that it secured private equity funding to build the 1 million b/d Jupiter Pipeline connecting the Permian with the Port of Brownsville, Texas.
Jupiter, based in Houston, said the pipeline will originate at points near Midland, Pecos and Crane, Texas, and deliver to offtake points near Three Rivers, with connections to the deepwater ports at Houston, Corpus Christi and Brownsville, Texas. Pipeline operations are expected to commence in October 2020.
A privately held midstream company, Jupiter has also secured permits and initial financing to construct oil storage facilities of 2.8 MMbbl at Brownsville and is finalizing plans to build a 170,000 b/d oil processing facility to process light shale crude into gasoline and ultralow sulfur diesel.
The 680-mile Jupiter pipeline is a key part of the company’s “long-term global strategy of connecting the wellhead to the world,” said Tom Ramsey, chief executive officer at Jupiter.
Other midstream companies, including Enterprise Products Partners, Phillips 66 and Magellan Midstream have also announced new or expanded pipelines to increase connections between west Texas production and the Gulf Coast. Those projects are reported to come online within the next 18 months.