The
U.S. Faces A Pipeline Crisis, Nick Cunningham
The U.S. threatens to swamp the world
with oil in the next few years, although that will only be possible if there is
a commensurate construction boom for pipelines to move all of that oil to
market.
The Permian basin will account for the
bulk of the production growth going forward. The International Energy Agency
predicts that the U.S. will add about 3.7 million barrels per day (mb/d)
between now and 2023, and 2.7 mb/d – or more than 70 percent – of that new
supply will come from the Permian and the Eagle Ford.
But those two shale plays are a long way
from the Gulf Coast, where the oil can either be refined into fuels or exported
abroad. Thus, the oil industry needs a lot of pipeline capacity.
Already, there has been an enormous
buildout of pipelines in the last few years. Between 2012 and 2014, the surge
in output from the Permian was impressive, but it was also constrained by the
lack of pipeline capacity, which forced producers to sell their product at a
discount, which reached as high as $20 per barrel relative to WTI. However, new
pipelines smoothed out those price differentials, easing the bottleneck that
had cropped up when oil production skyrocketed.
The problem is that oil production is
set to double in West and South Texas over the next five years, which means
that another pipeline wave will be required if the U.S. is to actually expand
oil production by as much as everyone thinks it will. Related: $9.5B
Deal Creates Biggest Player In The Permian
In fact, the Permian is starting to bump
up against the limits of the region’s pipeline capabilities. The IEA said that
as of December 2017, there was only about 160,000 bpd of available space on the
region’s pipeline system, or about 4 percent of Texas’ output. A series of
pipeline projects are under construction, which, again, could relieve some
pressure. But because the oil industry is pouring mountains of cash into shale
drilling, the pipeline construction could struggle to keep up.
“This small capacity cushion is likely
to come under pressure this year, despite capacity expansions of the Midland to
Sealy, BridgeTex and Permian Express 3 pipelines,” IEA analyst Olivier
Lejeune wrote in
a March 28 commentary. “Ultimately, Permian and Eagle Ford takeaway capacity is
likely to become insufficient by mid-year, with a deficit possibly reaching as
much as 290,000 barrels a day during the first half of 2019.”
The pipeline deficit would necessarily
result in a pricing discount, which could weigh on shale drillers. Interestingly,
a pipeline shortage is already showing up in the Permian, although the capacity
problem is for natural gas. Gas is gushing out of West Texas, but largely as a
byproduct as companies are mainly targeting oil.
At this point, shale companies have more
gas on their hands than they know what to do with. Predictably, amid the glut,
natural gas prices have plunged by 30 percent in the Permian, and
Bloomberg notes that
Permian natural gas prices are the lowest in the country.
The gas glut has become such a problem
that some E&Ps are under pressure to cut back on oil production in order to
cut off the flow of gas. “The ultimate downside scenario is you have to
effectively slow down on your oil production because you can’t evacuate gas
from the basin,” Colton Bean, director of midstream research at Tudor Pickering
Holt & Co., told Bloomberg. Related: Barclays:
Expect $51 Oil This Year.
While some gas can be flared, there are
state regulations that limit that practice. Spring weather will also lead to a
drop off in demand, and so in the next few weeks “natural gas prices in the Permian
can go to zero because it’s literally a byproduct,” Kyle Cooper, a consultant
at ION Energy, said in a Bloomberg interview. “There’s so much gas coming the
system really pushes and fights to get it out.” There are gas pipelines in the
works, but it will take time.
The IEA says that the oil pipeline
bottleneck could be temporary, if the various projects on the drawing board
succeed in moving forward. “If all planned investments come to fruition,
Permian nameplate capacity will more than double from its current 2.8 mb/d to
5.8 mb/d by the end of 2020,” Lejeune wrote.
One potential hurdle for the pipeline
construction wave is the possibility of steel tariffs. Oil and gas pipelines in
the U.S. have depended on foreign suppliers for about three-quarters of the
steel needed in their projects. The Trump administration has published a
process by which certain industries can apply for exemptions, and under the
guidelines, it would seem that the Commerce Department would exempt pipeline
builders from the tariffs.
The bottom line is that the heady
projections for oil supply growth in the U.S. hinge on pipeline capacity
keeping pace.
Norb Leahy, Dunwoody
GA Tea Party Leader
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