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Increased capacity in the Permian pipeline

Using drilling and completion techniques honed over the past decade, operators are significantly increasing oil and gas production in the Permian basin. The increased volumes are challenging the area’s carrying capacity and spurring a minor infrastructure building boom.

After nearly a century of exploration and production, the US Permian basin still holds technically recoverable reserves of 20 billion barrels of oil, 16 trillion cubic feet of natural gas and 1.6 billion barrels of hydrocarbon gas liquids according to a 2016 report from the US Geological Survey.

That is largely due to horizontal drilling and hydraulic fracturing technology, which increased output from the basin before a levelling off in the face of lower oil prices in 2015.

In 2016, when prices experienced a slight uptick, operators chose to invest in the high-quality reservoirs of the Permian rather than in other holdings.

By April 2017, the US Energy Information Administration (EIA) reported that 340, or 40% of the 857 rigs operating in the US, were working in the Permian basin.

RVF Map: RBN Energy

RVF Map: RBN Energy
 

Earlier this year, the agency said heightened activity led to a 5% increase in Permian production from 2015 to 2016 to an average 2 million barrels per day of oil.

The same report said the agency expected the basin to produce an average 2.5 million barrels per day in 2018.

Production and drilling activity levels in the Permian, as elsewhere, have historically tracked oil prices.

However, say analysts, activity levels in the giant field straddling the border of Texas and New Mexico may be curtailed not by low prices but by production levels that may soon outstrip the carrying capacity of existing infrastructure.

Network expansion

Midstream companies are clearly aware of pending bottlenecks and are investing heavily in new pipeline construction to expand Permian area carrying capacity.

Currently, a half-dozen giant pipeline projects designed to transport oil, gas and natural gas liquids (NGLs) from the Midland, Texas, area directly to refineries on the Texas and Louisiana Gulf coast are under way or in the planning stages.

Traditionally, Permian oil has first travelled north from the Permian to Cushing, Oklahoma, before being sent south via pipelines to the Gulf coast refineries.

When volumes pressure pipeline capacity, operators are forced to turn to less efficient methods, such as trucking, to move production from the Permian basin to Cushing, which has a direct impact on the value of the product.

Dorrowcrop.jpg Photo: TexStar

"It takes a year to a year-and-a-half to construct these (pipelines). We need to start now to meet upcoming production."
Jeff Dorrow, TexStar Midstream Logistics
 

West Texas Intermediate “for many years has been its own price marker, but there is also a price differential to transport production from Midland to Cushing”, explains Jeff Dorrow, TexStar Midstream Logistics’ vice president of business development.

“If the takeaway capacity in the basin begins to get tight, the Midland to Cushing differential begins to expand because barrels are stranded and producers have to work by truck or other means to get the barrels to Cushing.”       

TexStar has entered a joint venture with Castleton Commodities International and Ironwood Midstream Energy Partners to construct a 730-mile pipeline, dubbed the EPIC pipeline, that will carry crude and condensate directly to Corpus Christi, on the Texas coast.

The partners recently conducted a 45-day open season — a period during which those interested in contracting the transport of oil or gas are notified about a potential pipeline project and allowed to bid for capacity — for the EPIC pipeline.

“We had a successful non-binding open season and are close to enough volume [committed] to kick the project off,” says Dorrow.  “We are now working on the binding portion.”

Plains All American Pipeline announced in January that it was expanding the capacity of its Cactus pipeline to 390,000 barrels per day.

The 310-mile, 20-inch pipeline carries crude oil from the Permian and the Eagle Ford shales to the Eagle Ford Joint Venture pipeline that Plains operates with Enterprise Products Partners. The 600,000 bpd line carries oil to Corpus Christi.

Enterprise said in April that it will install a 571-mile NGL pipeline, called Shin Oak, from the Permian to the Houston area, and Magellan Midstream Partners and PAA are expanding the capacity of their direct Permian-to-Houston BridgeTex pipeline from 300,000 to 400,000 barrels per day.

Mearscrop.jpg Photo: Magellan
 

"We have already received committed volumes within the open season process and are optimistic that additional commitments will be secured before the open season closes. "
Mike Mears, Magellan Midstream Partners, on the BridgeTex pipeline expansion

Like TexStar, Magellan has been encouraged by the response to its open season.

“BridgeTex currently has open season in process to solicit binding commitments to utilise the incremental 100,000 bpd of new pipeline capacity,” said Magellan Midstream chief executive Mike Mears in an email.

“The open season has not yet closed, but we have already received committed volumes within the open season process and are optimistic that additional commitments will be secured before the open season closes.”

Based on those results, the partners are now evaluating future capacity expansion of the BridgeTex system.

Bruce Heine, vice president, government and media affairs for Magellan, says the company may expand the capacity of the pipeline up to the line’s estimated maximum carrying capacity of about 440,000 bpd.

Time crunch

Currently midstream companies, often in conjunction with operators, are building networks of local gathering lines designed to carry production from the field to nearby storage facilities.

These projects can be completed in relatively short order to accommodate new production. But major long distance, high volume pipelines between the Permian and the US Gulf coast require significantly more time to plan and execute and it is shaping up to be a close race between the growths of capacity demand and supply.

“As production continues to grow, depending on the reports you see, the basin begins to get restricted in late 2018 or early 2019,” says TexStar’s Dorrow.

“We are one of five or six projects to be announced that have the potential to transport the next tranche of oil to be taken from the Permian. But it takes a year to a year-and-a-half to construct these. We need to start now to meet upcoming production.”    

 

Only the Magellan-PAA Cactus pipeline, because it is an expansion as opposed to new build, promises to offer immediate relief.

The other major lines will not be operational until about 2019—the year many analysts expect production to exceed Permian area carry away capacity.

In August, Houston-based Permico Energia announced plans to build a 510-mile, 24-inch line to transport NGLs from the Permian to service its planned 300,000 barrels per day-fractionator near Corpus Christi.

The company says it plans to begin construction of the system in the second quarter of 2018 and be operational by the final quarter of 2020.

The Enterprise pipeline, scheduled for completion in 2019, will initially transport 250,000 barrels of liquid but could be expanded to 600,000 barrels per day. TexStar and its partners say they also expect the EPIC pipeline to be operational in 2019.

Which means, if production in the Permian basin grows at the rate predicted by the EIA and others, new carrying capacity may arrive just in time to prevent pipelines from becoming choke points.

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