Hello, Goodbye - Disappearing Arbs and Harder Times for Some Third-Party Oil Shippers

A little over a year ago, we discussed the rapidly expanding third-party shipper market for crude oil in West Texas. At the time, crude at Midland was trading at nearly a $15/bbl discount to Gulf Coast markets. Pipeline space out of the Permian was hard to come by and extremely valuable, and everybody and their brother — literally, in some cases — were forming a limited liability corporation and trying to secure space as a walk-up, “lottery” shipper. A lot of people made a lot of money, but now, just over a year later, much of that lottery opportunity has dried up. Nowadays, these same folks are looking for new opportunities, or going back to old strategies, only to find that being a third-party shipper today is more expensive and more burdensome. In today’s blog, we recap how lottery shippers made buckets of money in late 2018 and early 2019, only to see their target of opportunity dry up due to midstream investment.

Back in July 2018 (seems so far away right now doesn’t it?), we wrote a blog detailing how crude differentials in basins that were short on pipeline takeaway were often subject to big pricing shifts when pipeline space was allocated. The focus at the time was on the Permian, where robust production was meeting a brick wall of space constraints on area pipelines. There was simply too much crude being produced, and not enough capacity to move it to market — things got so bad that there was some talk that producers might have to shut in production or even stop drilling wells, as they were running out of ways to transport their oil. In the latter half of that blog, we touched on a subject that was overlooked by some, but had become a serious source of revenue for others: lottery shippers.

Lottery shippers are the folks who are nominating the 10% of shipper space on a pipeline that is mandated to be set aside by the Federal Energy Regulatory Commission (FERC) for walk-up customers. Most of the time, the majority of the other 90% of space on a pipe has been eaten up by committed shippers with term deals, so it’s unavailable to the common Joe. There are also regular shippers, often called historical shippers, who are treated differently by each pipeline. They exist in a limbo world between a committed shipper and a lottery shipper — essentially, they are lottery shippers that have won enough and shipped frequently and consistently enough (usually something like 10 to 12 months in the last 18 months) that if there is any piece of the 90% of pipeline space that isn’t committed to, they get first dibs at it. Lottery shippers are then left with their set-aside 10% space and anything else that isn’t being used by committed and historical shippers.