Takeaway, Part 2 - Plains All American's Cactus II Ramps Up Corpus Deliveries

It’s safe to say that Permian producers had a good Christmas. Sure, their stock prices may be off a bit and their rig counts are down. But the absolute prices they are paid for their crude oil are up by almost $20/bbl versus this time in December 2018, and the price spreads between the Permian and neighboring markets have significantly narrowed as a result. What’s driving this change? There are a variety of factors at play, but chief among them is the new pipeline infrastructure that has helped lift Permian producers’ oil price realizations. Today, we check in on the status of one of the major new pipelines that have contributed to the seismic shift in the Permian oil market this year.

Much of what you may have read lately regarding the Permian hasn’t been very positive, to say the least. Producers within the basin, and across most domestic shale plays, have been under intense pressure to scale back production growth plans and focus on capital discipline. With stock prices for most Permian producers mostly lower than they were this time last year, one might expect oil prices within the basin would reflect the same negativity, but that simply isn’t the case. In fact, Permian oil prices are significantly stronger than they were at the end of 2018, averaging more than $60/bbl over the past week, compared to around $40/bbl this time last year. Some of that gain has been driven by an overall increase in world oil prices, a topic we will reserve for another time. However, much of the strength has been the result of Permian oil no longer needing to carry a huge discount to other domestic hubs as shippers compete for super-scarce pipeline space. For example, in December 2018, prices for West Texas Intermediate (WTI) at the Midland trading hub in the Permian were more than $12/bbl lower than the price of similar quality crude oil at the Magellan East Houston (MEH) hub along the Texas Gulf Coast. This year, that spread has narrowed to just over $2.00/bbl, while absolute prices on the coast are up almost $10/bbl. In Part 1 of this series, we discussed the prospective market impacts of one of the capacity additions: Plains All American’s new Cactus II Pipeline. Here, we provide an update on Cactus II, take a look at its most recent flow data, and begin to explore how its operation is affecting crude oil flows from the Permian.

First, a quick review on the pipeline we will be discussing today. Cactus II (dark green line in Figure 1) consists of 575 miles of new 26-inch-diameter pipeline and extends from McCamey, TX, in the southern Midland Basin to delivery points near Corpus Christi. Note that Cactus II can also access the oil hub at Wink, TX, in the Delaware Basin via a capacity lease on another Plains-operated pipeline (segment under the dashed black oval). Cactus II can also source barrels from across the extensive Plains pipeline system in the Permian, although we have left those pipelines off Figure 1. Cactus II closely follows the route of Plains’ original Cactus Pipeline (light green line), and runs to Ingleside, TX, which is just across the bay from Corpus Christi. A final segment of Cactus II (dashed lime green line between Taft and Corpus) is expected to be completed to the Corpus Christi Ship Channel by the end of the first quarter of 2020.