More from Permian
The race of production and transport ‘is much closer this time around’
Crude pipelines are extending their reach to the prolific basin in West Texas.
The basin’s oil riches had been offset by a lack of pipelines and congestion that contributed to a drop in the oil’s value.
The number of pipelines bringing crude oil from West Texas’ Permian Basin is rising with the surging oil production there and driving up the value of the region’s oil, according to a U.S. Department of Energy report.
Since 2010, oil production in the Permian has jumped to 2.3 million barrels a day from less than 100,000. But the basin’s oil riches had been offset by a lack of pipelines and congestion that contributed to a drop in the oil’s value in Midland, where prices three years ago were at least $15 lower than oil shipped from Oklahoma because of difficulties getting it to market.
In West Texas, companies had to slash their prices as they opted for more railroads, trucks or other more expensive means to transport their oil to Gulf Coast refineries.
But in recent years, new extensions of existing pipelines and additions to a network extending from Midland to the Gulf Coast have made it easier to get Permian crude to coastal refineries. The price difference between Oklahoma and Midland-hub oil has fallen to a few cents per barrel, according to the Energy Department.
“The race between crude oil production and pipeline production is much closer this time around,” said Mason Hamilton, a petroleum market analyst for the U.S. Energy Information Administration.
As connections between Midland, the Gulf Coast and its ports expand, Permian oil will have greater access to international markets. Three pipeline companies, the Tulsa-based Magellan Midstream Partners, Sugar Land-based Sunoco Logistics and Houston’s Plains All American, are all expanding existing pipelines that will come online by the end of this year. The extensions will add around 340,000 barrels per day of capacity.
Houston-based Enterprise Product Partners is building a new pipeline from Midland to Houston. The pipeline, which will add capacity of about 450,000 barrels a day, is also scheduled to begin operating by the end of this year.
Several other pipelines and extensions are in the planning stages for years to come, according to the Energy Department.
Expansion will come not a moment too soon for operators in the basin, where the cost of services is expected to rise more than 15 percent this year. Oil prices rising from $26 a barrel early last year to around $50 a barrel has doubled the number of rigs in the Permian, meaning companies are competing for a variety of oil field services, from hydraulic fracturing to wastewater disposal, according to energy research firm IHS Markit.
Companies working in the Permian are still able to turn a profit below $55 per barrel oil, but that could change as the costs of field services rise, IHS Markit said. Higher services will make staying profitable at $50 a barrel much more challenging, the analysis said.
Paying off acreage in the Permian will become more challenging when oil hits $50 a barrel. The pressure of rising service costs seems to be unique to the Permian, at least for now. At what are still low prices, oil can’t be extracted as profitably in other oil and gas fields, such as Texas’ Eagle Ford, North Dakota’s Bakken and Colorado’s Wattenberg basins, and drilling activity is limited. As a result, demand for oil field services and pipeline transportation is still too low to drive up prices.