Crude oil pipeline shippers across the U.S., and especially in the Permian, are about to experience something they haven’t seen in a few years: a bunch of new crude takeaway capacity with lower-cost tariffs coming online, and the sudden need among committed shippers to fill their pipe space. This also affects some folks committed to space on older pipelines, whose higher-cost tariffs could leave them out of the money. The start-up of pipelines like Plains All American’s Cactus II, with a super-low $1.05/bbl tariff — and several pipelines in other basins lowering tariffs — has traders with pipeline commitments old and new re-running their economics and trying to determine their best strategy moving forward. Some may be forced to move volume at a loss. Today, we analyze the recent trend in tariff compression and how traders deal with uneconomical take-or-pay contracts.
We are witnessing a dramatic change in the cost to ship crude oil across the U.S. — particularly between West Texas and the Gulf Coast. Previously, pipelines in the area were charging committed shippers well over $2/bbl to transport crude from key Permian hubs like Midland, Crane or Colorado City, TX, to the coast (think the BridgeTex or Longhorn pipelines, among others). Uncommitted rates were north of $4-$5/bbl. Those rates had seemed reasonable, especially when takeaway capacity was constrained and spreads between West Texas and the Gulf Coast or Cushing were far higher — in some cases $15-$20/bbl or more. But as new pipeline capacity out of the Permian has been built out, operators have been offering lower tariff rates in an effort to entice new shippers to (a) commit to their pipeline, and (b) gobble up any uncommitted capacity that may be left unused.
Specifically, new Permian-to-Gulf Coast pipelines in the area, like Plains' Cactus II (dashed red line in Figure 1) and the EPIC system (dashed purple line) have set much lower tariffs for committed shippers, and those are setting a new precedent for how much folks are willing to pay to ship crude in the basin. Plains recently unveiled its A-level committed shipper rate, a pricing category for those shipping 300 Mb/d or more on the system, at only $1.05/bbl. Now we know in this specific case that the $1.05/bbl rate is unique to trading giant Trafigura, which anchored the pipeline project with a 300-Mb/d commitment. But Trafigura aside, other shippers on the pipe that have committed more than 25 Mb/d (and, in some cases, acreage dedications) are receiving tariff rates between $1.15/bbl and $1.75/bbl. Those rates seriously undercut any committed tariffs we have seen in the past for Permian pipelines.