The Atlanta Journal-Constitution

How pipelines saved oil basin

New lines provided oil producers with outlet to Gulf Coast refineries.

- By Dan Murtaugh Bloomberg

HOUSTON — To understand why U.S. oil production is so resilient, it helps to consider the maze of pipelines running out of Midland, Texas.

New lines have relieved a chokepoint in America’s biggest oil-producing area. A massive supply glut had forced producers to offer discounts of more than $20 a barrel below the U.S. benchmark last year. This month, prices have been at an average premium of 78 cents, the most in records going back to 1991.

Magellan Midstream Partners, Plains All American Pipeline and Sunoco Logistics Partners finished work in the past year that added more than 750,000 barrels a day of capacity, while output grew by only 400,000. With an outlet to Gulf Coast refineries, the Permian has been the only major U.S. shale region to keep growing as prices dropped by more than half to less than $50.

“Putting in those pipelines and connecting the Permian to the Gulf directly allowed that premium to develop,” John Auers, Dallas-based executive vice president at Turner Mason & Co., an energy consulting firm, said by phone on July 27. “When you talk about these price levels, $5 to $10 is the difference between putting rigs back to work or shutting down.”

The Permian is a vast expanse of arid territory in West Texas and New Mexico, stretching over 75,000 square miles, or about the size of South Dakota. It’s been producing energy commercial­ly since the 1920s after ranchers and farmers struck oil while drilling for water.

After peaking at more than 2 million barrels a day in 1973, basin production slid to less than half that by the turn of the century. That changed in 2010, when companies starting using horizontal drilling and hydraulic fracturing, the techniques employed elsewhere for shale drilling. Output has doubled since then, back to more than 2 million barrels daily.

But the infrastruc­ture didn’t keep up. There was only about 1.6 million barrels a day of refinery and pipeline capacity last summer. Storage tanks filled and producers had to offer discounts to buyers willing to ship on more expensive trucks and trains. West Texas oil sold at an average discount to crude in Cushing, Oklahoma, of $12.42 a barrel in August 2014 and dipped as low as $21. That’s changed.

“Now there simply isn’t enough crude to satisfy regional refinery demand,” said Dominic Haywood, an analyst for Energy Aspects Ltd. in London.

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