American Oil and Gas Reporter - PBIOS 2014 Official Program Guide - 150

Permian Basin Reports
big price discounts in Midland are expected
to continue until more pipeline capacity
from the Permian to the Gulf Coast comes
on line.
The fine balance between Permian
crude production and take-away capacity,
which is causing price discounts, is shown
in Figure 2. The pipeline "stack" provides
a visual depiction of crude production
(the green line) versus pipeline take-away
capacity (the shaded color areas). The
stack starts at the bottom with local
refinery demand (about 400,000 bbl/d)
and then shows the Plains All American
Basin (450,000 bbl/d) and Occidental
Centurion (100,000 bbl/d) pipelines, which
ship crude to Cushing.
Existing pipelines also include the new
Magellan Longhorn pipeline (275,000
bbl/d) and the Sunoco Logistics (a subsidiary of Energy Transfer Partners) West
Texas Gulf pipeline, which ships 340,000
bbl/d of Permian crude to the Midwest
and Houston.
Then come the yet-to-be built pipelines,
headed by the 300,000 bbl/d BridgeTex
system, which is coming on line this fall.
In the second quarter of 2015, the Plains
Cactus pipeline is expected online to provide 200,000 bbl/d of take-away capacity

south to Corpus Christi, Tx., or west to
Houston. Last but not least is the 200,000
bbl/d Sunoco Logistics Permian Express
II pipeline due on line in mid-2015. On
top of the pipeline capacity is about
80,000 bbl/d of rail crude loading takeaway capacity.
The big red arrow in Figure 2 indicates
the "gap" between current production of
about 1.7 MMbbl/d and take-away capacity
of 1.6 MMbbl/d, which is causing the
crude price discounts. As soon as BridgeTex opens, these discounts should narrow, although analysts expect some price
volatility to continue into 2015 because
of congestion in the gathering system
pipelines that deliver crude to the Colorado
City origin of the BridgeTex pipeline.
Rail, Gathering Options
One way to relieve that take-away gap
would be to expand the movement of
crude by rail while waiting for pipeline
capacity to be built. Building a rail-loading
terminal is considerably less expensive
than a pipeline and only takes months to
complete versus years. Once loaded onto
rail cars, crude can travel to most U.S.
destinations on existing rail lines. The
drawback is that the cost of rail transport

FIGURE 2
Permian Crude Oil Production versus Take-Away Capacity
3,000

July
2014

2,500
Take-Away
"Gap"
2,000

Rail
Mb/d

Cactus
Permian Express II

1,500

BridgeTex
WTG
Longhorn
Centurian

1,000

Basin
Refinery Consumption
Production Forecast

500

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Sources: RBN Energy, BENTEK Energy and company presentations

150 THE AMERICAN OIL & GAS REPORTER

is far higher than pipeline. The rail solution
has proved instrumental in solving pipeline
congestion in North Dakota.
To that end, a number of rail-loading
terminals have been built in West Texas
that can ship Permian crude directly to
Gulf Coast markets. But rail is only economic if the higher shipping costs are
offset by better crude prices at destination
markets. The crude price spread between
Midland and the Gulf Coast has averaged
about $10/bbl so far this year, which is
not high enough to justify the average
$12/bbl cost of rail transport from West
Texas to Gulf Coast refineries. As a result,
rail take-away capacity is not being used
for significant shipments out of the Permian.
Once the BridgeTex pipeline opens
later this year, the price spread between
Midland and the Gulf Coast is expected
to narrow considerably, which would
make rail options less favorable. In the
meantime, higher crude prices at Cushing
and continued congestion on pipelines
between Midland to Cushing could encourage rail shipments to Cushing from
the Permian, and rail movements to the
West Coast also could happen if price
spreads allow.
A more immediate challenge for Permian producers in the new production
boom centers, particularly those located
in the Delaware Basin, is getting their
crude from the wellhead to the origin of
the mainline pipelines to Cushing or the
Gulf Coast. Although, as we have seen,
pipelines out of the region are full at the
moment, new capacity will relieve that
congestion, so it makes sense to build
gathering systems to get crude to the
origin points of the big take-away pipes
in the meantime.
Since the start of 2013 at least 10 producers and midstream companies have
made plans to build gathering systems to
link areas of new production to three
pipeline hubs at Crane, Midland and Colorado City, Tx., as well as the emerging
crude gathering hub at McCamey, Tx.,
which is the origin point for the Plains
All American Cactus pipeline. These new
gathering systems are crucial to give producers reasonably priced routes to the
pipeline hubs so they can avoid the alternative of costly long-distance truck journeys.

American Oil and Gas Reporter - PBIOS 2014 Official Program Guide

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