Don't Leave Me This Way - Prepping Crude for Pipelines, and a Mini-Crisis in the Permian

It hasn’t been widely reported, but during cold snaps in late fall and early winter, a number of crude oil producers in the Permian Basin have faced a “perfect storm” of events that made it challenging to meet crude pipelines’ vapor pressure standards. At first glance, this may seem like a problem for “the technical folks” to deal with, but in fact the issue has been affecting the ability to move crude to market, and the price of oil at Midland, TX versus the crude hub at Cushing, OK. It has even forced Permian producers to “shut in” some crude production—at least for a time—along several major pipelines in the region because they’ve been unable to adequately prepare their crude for piping or trucking. Today we examine an under-the-radar problem that’s been vexing producers in the U.S.’s leading crude oil play, and affecting oil prices and markets.

The Permian Basin has proven to be one of the wonders of the hydrocarbon world. Falling crude oil prices may have sucker-punched most crude-focused plays in the U.S., but production in the Permian in West Texas and southeastern New Mexico have continued rising. Output there now averages ~2.2 million barrels per day (MMb/d), according to RBN production estimates, up from ~1.6 MMb/d in mid-2014, when crude prices started their long decline. This production gain 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. But the Permian’s good times have come with occasional challenges, including the need to quickly develop gathering system capacity—and, during periods of very cold weather so far this fall and early winter, difficulties in meeting the vapor pressure standards of the pipelines that deliver crude from the Permian to the Gulf Coast, the Cushing hub and other markets. As we’ll get to, in a way this problem is the result of E&Ps’ success in significantly increasing the volumes of crude produced for each well or pads with several wells.

When oil emerges from the well (as “wellhead crude”), it generally is part of a mix that also includes water, natural gas liquids (NGLs), and natural gas, as well as a number of impurities. As a first step toward preparing crude for delivery to market, this mix is run through a specialized piece of equipment, which in the Permian usually is what is known as a heater/treater unit, which (as its name suggests), flashes off the gas and heats the mix to “boil off” most of the more volatile elements such as NGLs - ethane, propane and normal butane.  Doing so not only begins the multi-stage process of separating and preparing crude, NGLs and natural gas for their various end-users, it enables producers to meet the vapor pressure standards of the crude oil pipelines and storage facilities that will be moving crude to market and of refineries, which also store crude and which want the physical characteristics of the crude they receive to fall within certain parameters. These attributes typically include the crude’s API (American Petroleum Institute) gravity, a measure of how “light” or “heavy” the crude is (for more on this, see Don’t Let Your Crude Oils Grow Up to Be Condensates); and the crude’s Reid Vapor Pressure, or RVP. RVP is the vapor pressure of crude oil (or any liquid, for that matter) at 100 degrees Fahrenheit (a July afternoon in West Texas!), and is a measure of how quickly the crude (or gasoline) evaporates—or, to put it another way, how stable and free of volatile, flammable elements it is. Interest in crude-oil RVP grew in the wake of rail accidents that occurred during the growth of crude-by-rail (CBR) out of the Bakken, whose crude has a relatively high RVP of about 11, and especially after the CBR disaster in Lac-Mégatic, QB in July 2013.  For more on RVP as it applies to gasoline blending see Regulatory Gas Pressure Party and You’re A Stabilizer Baby for RVP as it applies to Eagle Ford crude.