Bottleneck keeps Permian oil far below benchmark
Lack of infrastructure helps send prices down as companies have difficulties shipping their crude out
Five years into an oil production revival in the Permian Basin, producers tapping the West Texas formation are selling their oil for $21 below the benchmark U.S. price because it’s difficult to get the crude to market.
The price was $73.48 per barrel in Midland on Tuesday. In Cushing, Okla., the benchmark pricing point for U.S. crude contracts, the price fell $1.93 to $94.48. The $21 Permian discount was the widest since at least 1991, when regular tracking of the price differential began.
Oil company executives acknowledged concerns about the situation in the Permian during a series of earnings conference calls in late July and early August.
Besides headaches arising from the lack of transportation infrastructure to take oil and gas out of the region to distant ports and refiners, the Permian shale boom has created shortages of the water and sand that producers use in the hydraulic fracturing process that helped drive the production surge.
The U.S. Energy Information Administration expects the basin’s total output to reach 1.6 million barrels a day in August, an increase of more than twothirds since 2007.
Other analysts project a lower production figure but still assess the oncefading Permian as a major player in the soaring U.S. oil output arising from fracturing and other technological advances that made production possible in once-inaccessible shale.
In the second quarter of 2014, for example, Houston-based Occidental Petroleum Corp. pumped 150,000 barrels of oil a day from Permian wells. During the company’s most recent earnings call, executives assured investors they have a plan in place to deal with the region’s infrastructure shortage.
The No. 1 problem is the mismatch between the amount of oil being produced and the ability to move it, which leads to the price differential with oil from other fields.
Occidental said two new pipelines connecting the
Permian to the Gulf Coast, the BridgeTexas and Cactus, will help relieve the price gap, adding 500,000 barrels a day of transportation capacity to the area. Both are expected to be completed by early 2015.
Willie Chiang, executive vice president of operations at Occidental, told investors that the pipelines were key initiatives. Occidental is a part owner in the BridgeTexas project.
“If these new pipelines were not sanctioned, the entire basin would suffer continued, significant discounts to market due to infrastructure constraints,” he said.
Officials of Irving-based Pioneer Natural Resources, however, said that even the additional pipelines won’t be enough for the region in the long term.
Scott Sheffield, the company’s CEO, said that daily production in the Permian is growing by about 250,000 barrels per year, and the region will need another 1 million barrels per day of transportation capacity by 2018.
“We are in discussions with a couple of other companies about lines going straight from the Permian Basin to the Gulf Coast,” he said. “Hopefully, those projects will be announced by the end of the year.”
Analyst Tony Scott, a principal with Colorado-based BTU Analytics, said that the completion of the BridgeTexas and Cactus pipelines probably will relieve the Permian bottleneck in the short-term, but may just transfer the excess of oil and low prices from the Permian to the Gulf Coast.
Already, low prices have proved a problem for producers and a windfall for Gulf Coast refiners.
Scott said producers are turning to rail to get their crude from the Permian to the coast, but it’s a costly option — about $10 a barrel, against about $3 for pipeline transportation.
But even if the transportation problems ease, producers in the Permian are facing rising costs for the supplies they need to keep bringing wells online.
Midland-based Diamondback Energy has plans to add acreage and production in the Permian Basin.
In the company’s secondquarter recap, CEO Travis Stice told analysts and investors that two potential impediments to increasing production will be ac- quiring enough water and sand to keep drilling and fracturing.
Stice said that Diamondback will pursue all sources of water — fresh, brackish and recycled — and carefully will manage the sand needed to bring additional wells online.
Pioneer’s Sheffield painted a rosier picture, but acknowledged the issue.
“We’re glad we own our own sand,” he told investors on the earnings call. “Sand prices are going up significantly as more and more people go up to increasing the size of the frac jobs.”
Pioneer also reported that it recently made deals with the cities of Midland and Odessa to buy 360,000 barrels of water per day and sustain its fracturing.
But while sand and water issues might cause costs to rise and investors to miss out on some profits, drilling in the Permian isn’t about to slow down, said Jerry Eumont, a managing director with Englewood, Colo.-based energy consulting firm IHS.
“The oil and gas industry has always been quite good about dealing with whatever comes up,” he said.