Continued growth signals high resilience
Written by Keith Kohl
Posted July 31, 2015
When the shale boom took off, several U.S. shale plays were producing at levels never seen before. Since then, driven by OPEC’s claim on market shares and the global oil glut, wells have been shut down in the hundreds and production is slipping.
According to estimates from the Energy Information Administration, production in the Eagle Ford in South Texas will slow by 10% from March to August this year. North Dakota’s Bakken shale will lose about 5%.
Permian Basin CountiesThe Permian Basin, which stretches over 75,000 square miles between West Texas and Southeast New Mexico, has thus far been immune to such production cuts.
Of course, the shale play’s biggest asset is its pipeline system, which offers direct contact with Gulf Coast refineries. In the past year, these pipelines have added 750,000 barrels a day of capacity between companies like Magellan Midstream Partners, Plains All American Pipeline, and Sunoco Logistics Partners.
How Pipelines Saved America’s Biggest Oil Basin From Shale Bust
Wednesday, July 29, 2015
How Pipelines Saved America‘s Biggest Oil Basin From Shale Bust
To understand why US oil production is so resilient, it helps to consider the maze of pipelines running out of Midland, Texas.
(Bloomberg) — To understand why U.S. oil production is so resilient, it helps to consider the maze of pipelines running out of Midland, Texas.
New lines have relieved a chokepoint in America’s biggest oil-producing area. A massive supply glut had forced producers to offer discounts of more than $20 a barrel below the U.S. benchmark last year. This month, prices have been at an average premium of 78 cents, the most in records going back to 1991.
Magellan Midstream Partners LP, Plains All American Pipeline LP and Sunoco Logistics Partners LP finished work in the past year that added more than 750,000 barrels a day of capacity, while output grew by only 400,000. With an outlet to Gulf Coast refineries, the Permian has been the only major U.S. shale region to keep growing as prices dropped by more than half to less than $50.
“Putting in those pipelines and connecting the Permian to the Gulf directly allowed that premium to develop,” John Auers, Dallas-based executive vice president at Turner Mason & Co., an energy consulting firm, said by phone on July 27. “When you talk about these price levels, $5 to $10 is the difference between putting rigs back to work or shutting down.”
The Permian is a vast expanse of arid territory in West Texas and New Mexico, stretching over 75,000 square miles, or about the size of South Dakota. It’s been producing energy commercially since the 1920s after ranchers and farmers struck oil while drilling for water.
After peaking at more than 2 million barrels a day in 1973, basin production slid to less than half that by the turn of the century. That changed in 2010, when companies starting using horizontal drilling and hydraulic fracturing, the techniques employed elsewhere for shale drilling. Output has doubled since then, back to more than 2 million barrels daily.
But the infrastructure didn’t keep up. There was only about 1.6 million barrels a day of refinery and pipeline capacity last summer. Storage tanks filled and producers had to offer discounts to buyers willing to ship on more expensive trucks and trains. West Texas oil sold at an average discount to crude in Cushing, Oklahoma, of $12.42 a barrel in August 2014 and dipped as low as $21. That’s changed.
“Now there simply isn’t enough crude to supply all of the pipes out of the Permian and to satisfy regional refinery demand,” said Dominic Haywood, an analyst for Energy Aspects Ltd. in London.
Producers are shipping their crude out of the basin to coastal refineries where prices are higher. Crude inventories in Midland have fallen about 40 percent in the past five weeks to less than 3.5 million barrels as of July 17, according to Genscape Inc., a Louisville, Kentucky-based energy information provider.
Prices in Midland were above those in Cushing, the delivery point for futures on the New York Mercantile Exchange, on Tuesday. West Texas Intermediate oil fell 22 cents to $47.76 a barrel in electronic trading at 6:43 a.m. New York time on Wednesday.
“Had these pipelines not existed, you’d see Midland differentials at an $8-to-$10 discount to WTI,” Andy Lipow, president of Lipow Oil Associates LP in Houston, said by phone.