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Permian Rebound Generating Midstream Revival

Midstream players have allocated a lot of capital to boost crude takeaway and/or natural gas processing capacity in the renewed Permian Basin, and if production continues to accelerate, several billion more could be directed to the region to meet the growing needs of producers, according to an analysis by Raymond James & Associates Inc.

Analyst Darren Horowitz said in a report Monday the region potentially has $4-9 billion in additional growth capital required through the end of the decade composed of:

  • $2.5-$5 billion in crude oil transportation/storage/gathering;
  • $1.5-$2.5 billion in additional gas processing/gathering; and
  • $500 million-$1 billion in natural gas liquids (NGL) takeaway capacity.

"In sum, while we would not categorize the Permian as being in the early stages of a midstream build-out cycle, we believe returns within the region are still attractive enough for midstream operators to continue to invest in the region," Horowitz noted. "With that said, we believe operators with greater economies of scale and a vertically integrated value chain are best positioned to benefit from continued demand for midstream infrastructure."

The "value uplift" created from associated gas rich in NGLs will keep demand for additional gas processing facilities at high levels within the Permian, Horowitz wrote. "We estimate that between 2012 and 2016, associated gas production will increase from 4.0-4.2 Bcf/d to 6.5 Bcf/d by the end of 2016. "

Gas production in the Permian in its heyday peaked at 9.0-9.5 Bcf/d, which means enough natural gas pipeline infrastructure already is in place, he noted. However, the biggest constraint for the region is having enough efficient capacity to maximize NGL extraction -- many legacy plants aren't state of the art.

"Based on the amount of current and announced gas processing facilities in place for the region, we believe the region will have adequate amount of processing capacity through 2016," the analyst said. If production were to continue at the rate that Raymond James currently forecasts, "we anticipate a number of midstream companies will announce additional gas processing capacity expansions beyond 2016/17."

Based on the amount of associated gas production, there appears to be sufficient Y-grade pipeline takeaway capacity for the region, said Horowitz.

"In terms of NGL production, the gallons per Mcf content for the Permian ranges between 4 and 8, we believe total NGL production out of the Permian could potentially reach 600,000-700,000 b/d by 2016."

One question is whether new crude pipeline capacity infrastructure will keep up with accelerating output. Based on Raymond James forecasts, crude output has increased to 1.5 million b/d from 400,000 b/d at the beginning of 2012, mostly because of horizontal drilling techniques. A lack of enough takeaway capacity resulted in considerable volatility in regional crude prices lately, namely the Midland-Cushing differential, Horowitz said.

"The completion of new pipelines that provided an outlet for Permian barrels into the Gulf Coast refining market served to alleviate this bottleneck in early 2013, which led to a marked improvement in Midland pricing. However, in recent months this Midland-Cushing differential has begun to widen out once again (currently at $5.00/bbl) as Permian supply growth continues to eat away at the pipeline takeaway capacity from the region."

Refinery turnarounds in early 2014 should keep the pressure on differentials, and could even cause another blowout, he said. However, based on capacity announcements, he thinks the Permian should have sufficient pipelines in place to mitigate pricing volatility. By 2017/2018, though, Raymond James supply model indicates that "another round" of investments would be needed to avoid another crude glut.

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