(Bloomberg) – It has gone from a shortage to an oversupply of oil pipeline projects that are competing to slow production growth in the Permian basin.
Five new oil pipelines are to be opened in the Permian basin by 2021. This closes a gap between production and take-away capacity, which is already forcing companies to cut fees and could lead to lower profits and a competitive displacement competition.
According to Rystad Energy AS, producers in the oil field in West Texas and New Mexico produce around 4.72 million barrels a day. This contrasts with a pipeline capacity of almost 6 million barrels, which could increase by around 3.5 million barrels in the next two years if planned new lines go online.
Most of these planned projects were announced when the Permian saw annual growth rates in excess of 1 million barrels a day. Some analysts expect annual growth to slow to just 650,000 barrels a day. Older sources are producing less and oil companies are preparing to cut spending this year to boost investor returns.
Competition will intensify particularly among pipeline companies that want to extend long-term transportation contracts, including those who want to implement new pipeline projects, said Sandy Fielden, research director at Morningstar Inc. "There is a possibility that some of the projects would be canceled or consolidated, and that would depend on the commitment of the shipper. "
In addition, the difference between the price of crude oil on the coast and the price of Midland in Perm has decreased over the past year, making it difficult for shippers to make money after paying the pipeline fees.
Last year, operators of old pipes in the oil field started lowering tariffs in order to bind or entice shippers so that their systems remain fully utilized. In August, Energy Transfer Partners LP cut tariffs for users of parts of its Permian Express system, while Magellan Midstream LP issued incentive rates for large-volume shippers on its Bridgetex pipeline. Epic Pipeline Co LP halved its transport rate before the line went into operation.
Oil producers warn against cutting spending this year to boost investor returns. "The perm is definitely slowing down," said Elisabeth Murphy, an analyst at ESAI Energy Llc. Declines in older holes exceed the new holes, and there are not enough drilling rigs to compensate for the decline in older holes, she said.
"New pipe startups like Cactus II and Epic in the summer exceeded our capacity utilization," said John Auers, executive vice president of energy consultant Turner Mason & Co. Permian. "
For pipes still in the supply phase, it does not help that the spread between Midland, Texas and Houston, which has access to export markets, has narrowed from over $ 10 a barrel a year ago to around $ 2.50 , This would have the consequence that the transport costs from the Permian destined for the Gulf would be even cheaper and the profit margins would have to burden.
Ultimately, only projects initiated by companies with well-established infrastructure have a chance of success, said Fielden. The connectivity of the existing systems was a plus that would bring their projects to a conclusion, he added.
However, some companies are pushing ahead with pipeline expansion due to industry support. According to Tony Chovanec, Senior Vice President for Fundamentals and Commodity Risk Assessment, Enterprise Products Partners LP plans to equip its ECHO terminal in southeastern Texas with a new connectivity of almost 1 million barrels per day by 2021.
"It is no surprise to anyone that it will be very competitive in the next year, and probably in the next few years, which will result in volatile earnings," said Magellan CEO Mike Mears in the company's earnings release in October.
– With the support of Rachel Adams-Heard.
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