American Oil and Gas Reporter - PBIOS 2014 Official Program Guide - 149

Permian Basin Reports
Upstream

Midstream

Downstream

Projects Expand Take-Away Capacity
HOUSTON-Even after nearly a century of oil and gas development, the Permian Basin remains the nation's most
prolific crude oil production region. As a
result of growing volumes from unconventional resource plays, Permian oil output has exceeded production from the
federal Gulf of Mexico region since early
2013, making the region once again the
U.S. crude oil king.
Today, the basin is producing more
than 1.7 million barrels of oil a day, accounting for nearly one-fifth of total domestic supply. Permian operators have
effectively doubled oil production since
it reached a historical low point of 850,000
barrels a day in 2007, and as horizontal
drilling in ultralow-permeability plays
continues to expand across the basin,
daily oil volumes are rising ever-closer
to the record output of 2.0 million bbl/d
reached in the 1970s.
However, the industry's runaway success
at developing substantial new oil production
capacity in the Permian is creating challenges farther downstream. In fact, 2014
has been a bit turbulent for producers in
the basin trying to get supplies to market
at Cushing, Ok., or on the Texas Gulf
Coast facing congested pipelines, which
has invariably led to price discounts.
The good news is that new take-away
capacity is imminent in the shape of the
300,000 bbl/d BridgeTex pipeline, the
result of a joint venture between Magellan
Midstream Partners and Occidental Petroleum Corp. With the final stage of
construction completed, the pipeline was
expected to begin delivering oil from
Colorado City, Tx., to the Houston refining
and processing complex in September.
At the same time, midstream operators
are busy building gathering systems to
connect new production to the big takeaway pipelines, and local refiners are
taking advantage of their proximity to
the action to build out their own gathering
systems.
Take-Away Crunch
Permian production is mostly made
up of one of two crude types: light sweet

West Texas Intermediate and West Texas
Sour. Both these crudes have been produced
in the Permian for decades. WTI is the
benchmark U.S. domestic crude, and WTI
prices set at the Cushing trading hub underpin the world's largest oil futures contract on the Chicago Mercantile Exchange.
In the Permian, prices for WTI and
WTS are established by assessing trades
at Midland before the crudes are shipped
to Cushing, where WTI prices are set by
traders worldwide. If there is enough
room for all the crude looking to ship out
of the Permian on pipelines from Midland
to Cushing, prices at the two trading hubs
differ only by the transportation cost of
about $0.70/bbl.
However, when there is not enough
room on the pipeline-as is the case today-the price for crude stranded at Midland is discounted heavily versus Cushing.
Figure 1 shows discounts over the past
year for WTI and WTS in Midland versus
WTI at Cushing. Since September 2013,
pipelines to Cushing have been congested
as booming Permian production has exceeded capacity. Occasional local refinery
outages or maintenance increase the vol-

ume of crude trying to get onto the
pipeline. The blue line in the chart is
WTI crude at Midland, while the orange
line is WTS at Midland. The discount
was minimal in September 2013, but has
ballooned since, reaching more than
$10/bbl in July 2014.
Two years ago, most (if not all) Permian
production not consumed by local refineries headed to Cushing on two major
outbound pipelines. However, the output
boom and a crunch at Cushing of competing supplies flowing into the Midwest
from North Dakota and Canada, have led
to a number of new pipeline projects to
deliver Permian crude directly to the Gulf
Coast instead of Cushing.
The Gulf Coast is, of course, home to
50 percent of the nation's refining capacity.
The first of those new projects, the Magellan
Partners Longhorn reversal, came on line
in 2013. Once built out, these new pipelines
should relieve the congestion on routes to
Cushing and allow Permian producers to
receive better prices for their crude.
But the Longhorn pipeline is already
full to capacity and has provided little
price relief for producers so far. And the

FIGURE 1
Midland WTI/WTS Discounts to Cushing WTI
2
Discount to WTI Cushing

-2

-4
$/bbl

By Sandy Fielden

-6

-8

WTI Midland Discount to Cushing
WTS Midland Discount to Cushing

-10

-12
Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Source: CME data from Morningstar Commodity Data

OCTOBER PBIOS 2014 149

American Oil and Gas Reporter - PBIOS 2014 Official Program Guide

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