Competition heats up with more capacity in Permian

Five new oil pipelines are set to open in the Permian Basin through 2021, expanding a gap between production and takeaway capacity that’s already spurring midstream rate cuts and could mean cutthroat competition ahead.

Producers in the West Texas and New Mexico oil field are pumping about 4.72 million barrels a day, according to Rystad Energy. That compares with nearly 6 million barrels of pipeline capacity that could rise by about 3.5 million barrels in the next two years as planned new conduits come online.

Most of those planned projects were announced when the Permian was posting annual growth rates in excess of 1 million barrels a day. Now, some analysts see yearly growth slowing to as little as 650,000 barrels a day, with older wells producing less and oil companies preparing to curb spending this year to boost investor returns.

Competition will heat up particularly among pipeline companies seeking to renew long-term shipper contracts that are set to expire, including those seeking to proceed with new pipeline projects, said Sandy Fielden, director of research for Morningstar Inc.

“There is a chance that some of the projects would get canceled or consolidated and that would depend on shipper commitment,” Fielden said.

Operators of legacy pipes in the oil patch already started cutting tariffs last year to retain or lure shippers to keep their systems fully loaded. In August, Energy Transfer Partners cut rates for users on portions of their Permian Express system, while Magellan Midstream issued incentive rates for large-volume shippers on its Bridgetex pipeline. Epic Pipeline Co halved its transportation rate prior to the line coming into service.

Oil producers are warning that they are preparing to curb spending this year to boost investor returns.

“The Permian is definitely slowing down,” said Elisabeth Murphy, an analyst at ESAI Energy. Declines from legacy wells are outstripping the new wells, and there aren’t enough rigs to offset the decline in the legacy wells, she said.

For pipes still at proposal stage, it doesn’t help that the spread between Midland and Houston, which has access to export markets, has narrowed from over $10 a barrel a year ago to around $2.50. This would mean transportation costs from the Permian bound for the Gulf would have to be even cheaper, straining profit margins.

Ultimately, only projects initiated by companies with well established infrastructure will stand a chance to succeed, Fielden said. Connectivity on their existing systems would be plus points that will usher their projects through to completion, he added.