Texas' Permian Crude Transport Backlog Should Subside

Texas' Permian Crude Transport Backlog Should Subside
Despite a cautious 1Q 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."


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