What will it take to move 5.4 million barrels per day out of the Permian | OutPut by Rig Lynx – OutPut
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What will it take to move 5.4 million barrels per day out of the Permian | OutPut by Rig Lynx

The pipeline crunch threatening the world’s hottest shale play won’t be solved until at least the back half of next year. But then, the floodgates will open.

Pipelines serving the Permian Basin in Texas and New Mexico were able to carry 2.9 million barrels of oil a day in the second quarter, according to analysts at Bloomberg NEF, and pretty much every line from Midland to the Gulf Coast is full. That’ll change in late 2019 as three major projects are slated to open, potentially adding more than 2 million barrels a day of capacity.

Fixing the pipeline conundrum is key for a shale play where researcher IHS Markit expects output to more than double by 2023 to 5.4 million barrels a day, eclipsing every OPEC nation beyond Saudi Arabia. Pipeline builders are pouring billions of dollars into the basin, but delays are a concern as developers compete for everything from labor to steel.

“They want to move heaven and Earth to get these projects done,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC. “In a situation like this, the economics just make it so compelling that they rush resources into the area, and that’s what you’re seeing.”

Growing Pains

Permian will produce almost 1 million barrels a day more than its pipes can handle in 2019

The bottlenecks are reverberating through global energy markets. Combined with disruptions in Iran, Venezuela, Libya and Canada, stranded oil in the Permian has helped push up benchmark U.S. crude prices by roughly 20 percent this year. With gasoline also rising and congressional elections looming in November, President Donald Trump took to Twitter last week demanding OPEC lower prices.

In the meantime, producers are moving cautiously, with the number of wells left deliberately uncompleted on the rise. Permian wells that were drilled but not taken through the final stage of hydraulic fracturing surged to 3,203 in May, a 90 percent increase from a year earlier and the highest since the Energy Department began tracking in 2013.

Pipeline woes are moving some companies to rethink their strategy. ConocoPhillips Chief Executive Officer Ryan Lance told Bloomberg TV last month that the world’s biggest independent oil explorer will likely move some rigs from the Permian to the less crowded Eagle Ford shale in South Texas to avoid the constraints. “Why would I drill into that headwind if I can reallocate that capital somewhere else?” Lance said.

The shortage has forced some producers to sell locally at a steep discount to Gulf Coast prices, or to pay extra to ship barrels hundreds of miles by truck or rail. Crude sold in Midland, in the heart of the Permian, for $15.35 a barrel less than in Houston on Monday, after starting the year at a $4 discount.

That makes the new proposals critical to the U.S. shale boom’s future.

The projects include Plains All American Pipeline LP’s Cactus II, running from Midland to Corpus Christi on the Gulf Coast and slated to carry as much as 670,000 barrels a day. Also expected in late 2019 are Phillips 66 Partners’ and Andeavor’s Gray Oak pipeline, proposed for 700,000 to 1 million barrels, and the private equity-backed EPIC pipeline, which could carry as much as 675,000 barrels. (continued on page 2)

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