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Reduced Permian E&P Activity Could Impact Crude Takeaway Plans

With wishy washy oil prices slip sliding and some onshore producers trimming their capital spending for 2019, concern is rising that some of the planned crude takeaway projects in the Permian Basin could be shaky.

Fourth quarter earnings season is getting underway, and several exploration and production companies are already guiding for lower activity in 2019 in the Permian, the No. 1 prospect in the country. Pure-plays Ring Energy Inc., Parsley Energy Inc. and Diamondback Energy Inc. have cut their plans for the year, and others may follow.

“Over the past three months, we also witnessed a steep drop in oil prices after West Texas Intermediate (WTI) Cushing touched its four-year high of $75/bbl in early October,” Rystad Energy analysts said. “While prices have recovered some since hovering around $45/bbl around Christmas, we have already seen operators starting to guide down activity for 2019 compared to their initial plans ramp up activity even further.”

Because of the reductions in planned spend, Rystad reduced its outlook for oil production growth by 500,000 b/d for 2020 and 2021, “which translates as less need for future takeaway capacity. Given our current production outlook, we see marginal need for the pipelines that have not been approved yet...This equates to about 2.7 million b/d capacity over six pipelines.”

Permian capacity overall is estimated today at around 3.4 million b/d.

Before the sharp decline in crude prices last fall, Raymond James & Associates Inc. in September had estimated there would be a shortfall of around 60,000 b/d of Permian takeaway capacity in the second half of 2018, growing to a “touch above” 60,000 b/d in 1Q2019. The shortfall was seen peaking in 2Q2019 at 150,000 b/d before declining to 90,000 b/d in 3Q2019 and returning to spare capacity in 4Q2019.

Earlier this month the Raymond James team reduced the WTI average to $62/bbl this year, with oil markets indicating “minimal upside from current levels over the next five years.” A “back-end-loaded rally” could lead to higher 2020 oil price averages around 90% above strip prices. Brent could average $100/bbl “or better” beyond then.

Goldman Sachs analysts expect the oil market to rebalance at a lower marginal cost in 2019 given the higher inventory levels to start the year, but there was a “persistent beat in 2018 shale production growth with little observed cost inflation, weaker-than-expected demand growth and increased low-cost production capacity.”

Where does that put the new oil takeaway now planned in the Permian? It’s uncertain.

Energy Transfer Partners LP’s Permian Express 3 ramped in September to full capacity of 140,000 b/d. Plains All American Pipeline LP’s Sunrise Extension began service in 4Q2018 and has had throughput of 350,000 b/d, outperforming expectations of 200,000-250,000 b/d.

The extension “played a major role in the debottlenecking of the physical crude market in the Permian,” and was one of the drivers behind improved Midland-Cushing differentials, Rystad analysts noted.

Recent data for Gulf Coast railway receipts, i.e. Petroleum Administration for Defense District 3, or PADD 3, had another consecutive increase in October. If railway receipts were to continue to increase, “it could also contribute to dampening the effect on the bottlenecks” in the Permian that are expected in the second and third quarters.

Six pipelines now are on the drawing board to carry more crude from the Permian include Jupiter Energy Group’s system to move up to 1 million b/d via a 36-inch diameter pipe to the tip of Texas in Brownsville. An open season was launched in late November; operations could begin in late 2020.

It “will be interesting to see if it is able to secure enough volumes to move forward,” Rystad analysts said of the privately held company’s plans.

Another open season for Permian takeaway is the proposed expansion of Gray Oak Pipeline LLC now under construction to move crude to South Texas. Sponsor Phillips 66 Partners LP began an additional open season in early November to test support for an expansion, with in-service scheduled in late 2020.

“This expansion was previously communicated to raise capacity by 200,000 b/d from its already announced capacity of 800,000 b/d,” Rystad analysts said. “Phillips 66 now communicates that the capacity addition will depend on the outcome of the open season.”

There’s “a likelihood” that sufficient commitments for 200,000 b/d more “won’t be reached at this time.”

In addition, Enterprise Product Partners LP this year will begin moving about 200,000 b/d of Permian crude via its natural gas liquids-crude conversion. The expected in-service date was moved to the middle of this year from the first half of 2020.

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