Per­mian to face pipe­line short­age

Houston Chronicle - - BUSINESS - By Rye Druzin STAFF WRITER

Pipe­line con­straints out of West Texas will slow oil and gas pro­duc­tion growth in the Per­mian Basin oil field for at least an­other next year, ac­cord­ing to new re­port.

The re­port, by bond rat­ing firm Moody’s In­vest­ment Ser­vices, fore­casts that pipe­line short­ages will per­sist into late 2019, when the first of sev­eral new pipe­lines is ex­pected to go into op­er­a­tion. Three of the big­gest projects are ex­pected to be com­pleted by early 2020 to move oil from the re­gion to Gulf Coast mar­kets.

Pro­duc­tion in the West Texas shale play has reached 3.4 mil­lion bar­rels a day, bump­ing up against the pipe­line ca­pac­ity out of the re­gion. Crude oil pro­duc­tion in the Per­mian is ex­pected to grow an­other 31,000 bar­rels a day this month, ac­cord­ing to the Depart­ment of En­ergy, fur­ther strain­ing pipe­lines.

The lack of avail­able pipe­line ca­pac­ity out of the Per­mian Basin — which Moody’s es­ti­mates to be fewer than 4 mil­lion bar­rels of crude a day — has widened the dis­count of oil sold in Mid­land com­pared to other mar­kets be-

The lack of avail­able pipe­line ca­pac­ity out of the Per­mian Basin has in­creased the dis­count of oil sold in Mid­land.

cause of un­cer­tainty over the abil­ity to de­liver. Oil in Mid­land is selling for $14 a bar­rel less that in the stor­age and pipe­line hub in Cush­ing, Okla., and $23 a bar­rel less than along the Gulf Coast, ac­cord­ing to Moody’s.

As re­sult, the growth of the Per­mian’s out­put is slow­ing. The anal­y­sis doesn’t ex­pect oil pro­duc­tion in the Per­mian to break the 4 mil­lion bar­rel a day mark un­til the third quar­ter of 2019.

The anal­y­sis says some com­pa­nies, such as Pioneer Nat­u­ral Re­sources of Irv­ing and Con­cho Re­sources and Di­a­mond­back En­ergy, both of Mid­land, have con­tracted pipe­line space for most of their oil pro­duc­tion growth through 2019. But smaller op­er­a­tions have more lim­ited trans­porta­tion op­tions that may leave them vul­ner­a­ble to the pipe­line short­age and buy­ers de­mand­ing steep dis­counts, ac­cord­ing to Moody’s.

One pipe­line com­pany, EPIC Mid­stream of San An­to­nio, has said it will tem­po­rar­ily con­vert a nat­u­ral gas liq­uids pipe­line from the Per­mian to the Cor­pus Christi re­gion to oil when it comes on­line in the third quar­ter of 2019. That pipe­line will re­vert back to car­ry­ing nat­u­ral gas liq­uids when EPIC com­pletes a crude in early 2020.

The pipe­line ca­pac­ity short­fall is ex­pected to ease sig­nif­i­cantly by the fourth quar­ter of 2019, and pipe­line ca­pac­ity out of the Per­mian Basin is ex­pected to grow to around 8 mil­lion bar­rels a day by the third quar­ter of 2020 — plenty to ac­com­mo­date fu­ture pro­duc­tion, which could grow by 1 mil­lion bar­rels a day each year, ac­cord­ing to Moody’s.

Sim­i­lar pipe­line con­straints are af­fect­ing nat­u­ral gas and nat­u­ral gas liq­uids, though Moody’s said nat­u­ral gas con­straints are less of an is­sue for ex­plo­ration and pro­duc­tion com­pa­nies.

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