Flick of the Switch - Crude Oil/NGL Pipeline Conversions Help Save the Day

Crude oil takeaway constraints out of the Permian are a fresh reminder that, in the Shale Era, production gains can far outpace the ability of the midstream sector to build new pipelines. Similarly, an increasing share of the rising volumes of crude flowing through the Cushing, OK, hub wants to move to the Gulf Coast, but the existing Cushing-to-coast pipeline systems are full and midstreamers are scrambling to add more capacity. Pipeline constraints aren’t limited to crude, of course. In the Niobrara’s Denver-Julesburg Basin, rapid gains in NGL production threaten to overwhelm the pipelines carrying mixed NGLs to fractionation hubs. What can be done? In at least some cases — including all of those mentioned above — there are opportunities to convert NGL pipelines to crude service, or vice versa. Today, we look at efforts under way to repurpose existing pipes to add needed takeaway capacity pronto.

It's not surprising that the output of any hydrocarbon — crude, natural gas or NGLs — in any given production area is very seldom (if ever) in perfect balance with the pipeline capacity to move that commodity to market. For one thing, production volumes fluctuate — either on the rise or falling but not static. For another, the addition of new pipeline capacity is generally “lumpy” — that is, for the most part, it comes in relatively big, discreet increments (a new, 600-Mb/d liquids pipeline, for instance, or a new 2-Bcf/d gas pipe), while production rises more incrementally. Also, as we said in Do You Want to Know a Secret?, there is usually at least some overbuilding of pipeline capacity in the boom part of every boom-and-bust cycle.

Perhaps the biggest challenge producers and midstream companies face is that production — like a Tesla Model S or a Porsche 911 GT2 RS — can go from zero to 60 in no time, but the addition of new pipeline capacity takes considerably longer. Take the Permian, where crude production has increased by 1.5 MMb/d, or about 60%, in the past 18 months, filling any remaining available takeaway pipeline space and spurring widening differentials between crude prices in West Texas and those in either Cushing or along the Gulf Coast. The combination of those two factors has caused a scramble to develop new crude pipeline capacity. Further, with all of that oil has come huge quantities of associated gas and natural gas liquids (NGLs), resulting in a similar race to build new pipelines to haul away those products also. What’s notable, though, is that while new NGL pipeline capacity out of West Texas is imperative — as evidenced by the planned EPIC, Shin Oak and Grand Prix NGL pipelines, among others — that need does not appear as imminent as the need for new crude takeaway.