Leader of the Pack - An Analysis of Plains All American's Alpha Crude Connector Deal

Plains All American Pipeline announced on Tuesday that it has agreed to acquire Alpha Crude Connector (ACC), an extensive, FERC-regulated crude oil gathering system in the Permian’s super-hot Delaware Basin, for $1.215 billion. At first glance that might seem to be a lofty price, but the development of the ACC system appears to be a classic case of right-place/right-time because it addresses a fast-growing need for pipeline capacity across an under-served area. And, with its multiple connections, ACC is an attractive source of crude to fill currently underutilized downstream pipelines headed to Midland, the Gulf Coast to Cushing. Today we review Plains’ newly announced agreement to acquire the ACC pipeline system in southeastern New Mexico and West Texas.

Let’s begin our look at Plains’ new ACC deal with a review of Permian Basin production trends. The Permian has proven to be a hydrocarbon superstar. Falling crude oil prices may have hurt most crude-focused plays in the U.S., but Permian production has continued rising; output there now averages ~2.1 million barrels per day (MMb/d), according to our friends at PointLogic, up from ~1.6 MMb/d in mid-2014, when crude prices started their long decline. These production gains came as exploration and production companies (E&Ps) focused on their most prolific “sweet spots” and worked to further reduce their drilling and completion costs. The Permian’s 10,000-square-mile Delaware Basin sub-region, and particularly the northern Delaware, offers many of what seem to be the sweetest of the sweet spots. E&P companies have been perfecting their drilling and completion technologies and wringing remarkable volumes of crude from the area’s Bone Springs, Avalon, Leonard, and Wolfcamp formations. As a result, break-even costs in the area have dropped from $60/bbl in 2013 to as low as $30/bbl, ranking the area among the best return on investment anywhere in the U.S. These outstanding returns will drive continued increases in Delaware Basin production. That assumes, of course, that there are cost-effective means to transport those incremental crude volumes to market.  Historically, a significant portion of the oil produced in this area has been transported by truck to takeaway pipelines that began near the edges of the northern Delaware—a costly and cumbersome way to do business.

Enter ACC, whose planned development we first discussed in Part 5 of our Come Gather ‘Round Pipeline series on Permian crude gathering systems. As shown Figure 1, ACC (red line) runs through the heart of the northern Delaware in southeastern New Mexico and West Texas.  The vast majority of ACC’s pipe-mileage is in Lea and Eddy counties located in the southeastern corner of New Mexico; Alpha also includes gathering lines in northern Culberson County, TX, and a mainline from southwestern Lea County through northeastern Loving County (TX) to the Wink area in central Winkler County (TX). The various elements of ACC came online between late 2015 and late 2016.