Texas' Permian Crude Transport Backlog Should Subside

Texas' Permian Crude Transport Backlog Should Subside
Despite a cautious First Quarter start for some Permian Basin operators, there's still oil in the pipeline and work to get it to the Gulf Coast.

West Texas' economy has been based on oil and gas for nearly a century. Because the Permian Basin is invested so heavily in the oil and gas industry, the region's businesses are used to its ups and downs.

The Permian Basin area has helped Texas become one of the United States' leaders in oil production, most recently during the oil boom that began within the past decade. Rig counts began building up in 2011 and have grown steadily until very recently. They reached their yearly high of 568 rigs in Fourth Quarter 2014. However, as oil prices fluctuate so do and the numbers of rigs and the jobs that they support; nowadays, rigs are being idled and their crews are being laid off. Baker Hughes reported that Permian Basin rig counts as of Feb. 27, 2015, have dropped 28 percent since February 2014 and 38 percent since the beginning of the First Quarter 2015.

The Permian Basin has shed 209 rigs in the first eight weeks of 2015, which averages to 26 rigs per week. The drop in rig numbers corresponds to the drop in oil prices, and both declines are starting to have an effect on the local economy. Even though most Basin residents are keeping quiet and upbeat about how the reduction in oil prices are affecting the economy, a hushed sense of slowdown and cautiousness is starting to creep in.

"Businesses are being optimistically cautious about the future," said Permian Basin landman Kimberly Smith. Nevertheless, at least one economic prognosticator gives reason for some cautious optimism. Noted economic analyst M. Ray Perryman projected in a recent report that job growth in the West Texas region will grow at least 11 percent from 2014 to 2019, despite the downturn in oil and gas jobs.

More oil in the pipeline

The Energy Information Administration (EIA) Permian Region Drilling Productivity Report for February 2015, which shows drilling data through January and projected through March, projected an average of 200 barrels per day (bpd) would be produced per each average rig in the Basin. Production from legacy wells is declining at a rate of 69,000 bpd; however, new wells coming online in the Permian Basin have increased production, translating into an extra net 30,000 bpd of crude oil entering the pipeline system.

"In the short term production will continue to increase as producers complete existing wells and move rigs to more highly productive 'sweet spots' that produce more oil," Sandy Fielden, RBN Energy's analytics director, said in a recent interview. "In the longer term," he cautioned, "the level of new drilling will be determined by the price environment – so production will either start to decline in response to prices below breakeven or recover if prices rise again."

Railroad Commission of Texas (RRC) construction reports show several key crude pipeline projects in the Permian. Both Magellan Midstream Partners LP's Bridge Tex Pipeline and Sunoco Logistics Partners LP's Permian Express II will carry crude from Colorado City, Texas, to the Gulf Coast. Several feeder lines are under construction to push crude from the field into these major line. Centurion is completing its Midkiff to Midland 12-inch diameter pipeline during the first quarter and will bring it online shortly. During a recent investor relations update conference call, DCP stated: "DCP's owners, Phillips 66 and Spectra Energy, are evaluating various structural options around DCP Enterprise to resolve near-term challenges and set us up to be a stronger company in the future."

A slow start for 2015

Crude currently travels from the Permian Basin to refineries via truck, rail and pipeline. Several pipeline transportation projects are in the works, even if they are at a slow start for 2015. RRC construction filings show Plains Pipeline LP is planning several projects for a May 2015 start date, including expanding its 16-inch Sunrise Pipeline System as well as continuing work on its Midland-to-Colorado City line. Two major projects that are getting plenty of attention, Magellan's BridgeTex and Sunoco Logistics' Permian Express II, will alleviate some of the backlog felt in Colorado City.

Plains is doing its best to remain the pipeline leader in the area. In early February 2015 the company announced two big Delaware Basin pipeline expansions: the 32-mile, 12-inch Avalon Extension pipeline from Avalon to Blacktip with expected completion in September 2015 and the 60-mile, 16-inch State Line pipeline to connect Culberson County to Wink, Texas, to be completed by mid-2016. Plains also announced gathering system expansions at Blacktip station that it expects to complete in August 2015.

"The Blacktip station expansion and pipeline loop will include building 200,000 barrels of new operational tankage and associated pumping to provide an additional 200,000 bpd of pipeline capacity from the Blacktip station to Wink," stated Plains in a Feb. 5, 2015, press release . The expansions show that even though pipeline companies are cautious, they are still moving forward with projects.

"Most pipeline projects already planned are based on shipper commitment of expected production volumes so will likely get built," said Fielden. "Longer-term, new projects (on the drawing board today) will sink or swim based on production/price environment."

Commercial crude oil inventories in the Petroleum Administration for Defense District (PADD) 3 (Gulf Coast) totaled just under 220 million barrels as of Feb. 27, 2015, according to EIA figures.

Playing catch-up

While bottlenecks will likely continue for the next few months in the Permian as major drilling projects are put on hold awaiting price stabilization, the transportation backlog should begin to subside as rigs are idled and new upstream projects are postponed. This combination of factors will likely give operators a chance to catch up with infrastructure needs. 

Recently minted Railroad Commissioner Ryan Sitton believes that pipeline projects will continue to flourish throughout Texas, including those in the Permian. He advised that while crude supplies grew 200 percent from 2008 to 2014, pipeline infrastructure only grew 30 percent.

"Even as production slows, you may see some projects postponed, but we will continue to have transport needs into the future," he told DownstreamToday. Sitton also urged operators to "stay the course" even though benefits might not be felt for 18 to 24 months.

Fielden is less optimistic. "At this point the market is oversupplied with crude, storage is filling up and there is no sign of new demand," he said. "Unless something changes on the demand side, oil prices will fall again and then producers will be faced with tougher decisions."

Bigger companies like DCP Midstream, Plains and Energy Transfer Partners seem to be positioning themselves for whatever the volatile market brings. The Permian Basin has sustained boom-bust cycles in the past and the energy industry is still projecting a sense of strength in the area, despite local layoffs.

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