All Dressed Up With Nowhere to Go, Part 3 - The Impact of Pipeline Constraints and Apportionment on Permian Producers and Differentials

If you’ve been watching market prices over the last week, you’ll have noticed that Permian differentials have tightened a bit. With the capacity of the new Midland-to-Sealy pipeline ratcheting up and the 146-Mb/d Borger refinery near Amarillo coming back online, there has been a brief respite for crude oil prices in West Texas. But soon, continued growth in crude production will again max out pipeline capacity out of the Permian until one of the major new pipes starts operating in 2019. In the interim, producers and traders without firm pipeline space will be taking deep price discounts, all the while attempting to maintain their revenue streams by sticking to their development plans or, at the very least, avoiding the specter of well shut-ins. Today, we dive into the current state of affairs regarding Permian pipeline allocations, the impact on producer logistics, and what it all means for price differentials.

In Part 1 of this series, we discussed the fact that by the tail end of 2017 Permian crude oil production had surpassed the combined capacity of in-region refineries and takeaway pipelines out of the play to deal with all that oil. That caused a large differential blowout between the price of crude at Midland and the prices at major trading hubs at Cushing and the Gulf Coast. Figure 1 below, which should be familiar to readers of this blog series, shows the recent timeline of these shifting differentials, including the recent rebound a topic we’ll discuss more today. In Part 2, we examined factors causing Permian production to grow so precipitously a key factor being ramped-up efforts by smaller exploration and production companies (E&Ps) to prove the value of their holdings to prospective acquirers by drilling and completing wells in Tier 2 acreage of the Permian. Incremental production from Tier 2 wells made an already challenging crude-takeaway situation worse, and E&Ps without firm pipeline space were left with no choice but to (1) truck their crude from the lease to faraway pipeline-injection points or (2) sell their crude at a steep discount.

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