Cowboys and NGLs - Rising NGL Production in the Permian's Delaware Basin Drives Need for New Pipes

Production of natural gas liquids in the Permian has been increasing rapidly, especially in the Delaware Basin, challenging the region’s existing NGL pipelines and other infrastructure and accelerating the development of new capacity. The Permian already had a substantial amount of NGL pipeline capacity in place before the region’s production of crude oil and associated gas took off, and more has been added since. But a number of the NGL pipes out of the Permian also move barrels from other basins, either inbound flows from the Rockies or volumes added downstream of the Permian in the Eagle Ford and Barnett shales. In addition, the vast majority of the Permian’s incremental NGL production is occurring in the Delaware, which had only a limited number of pipes and suddenly needs more. And one more thing: fast-rising ethane demand from new petrochemical plants along the Gulf Coast will reduce the share of ethane that is “rejected” into Permian natural gas. In today’s blog we discuss the NGL takeaway challenges facing producers and processors in cowboy country.

This spring, all eyes have been on the wide and volatile price spreads for energy commodities produced in the Permian. Pipeline takeaway constraints have caused the crude oil price differential between Midland and MEH on the Gulf Coast to blow out. (See our All Dressed Up With Nowhere to Go series and No Time blog for more on this.) Meanwhile, along with all that oil production has come huge volumes of associated gas (packed with a lot of NGLs) that also needs to be processed and moved to market. One result — the Permian gas market (e.g., Waha basis) has also blown out this year. (See our Blame It on Texas  series and Help Is on the Way blogs.) In addition to oil and gas, we’ve also looked at Permian NGL infrastructure needs (most recently in our With a Permian Well, They Cried More, More, More Drill Down Report), but it’s been a while since then and things are changing fast, so an update is warranted.

Since that Drill Down Report was released last September, Permian NGL production (including ethane that is rejected into natural gas; see Ethane Asylum Revisited for more on ethane rejection) has increased from about 800 Mb/d to about 1 MMb/d, a 25% gain in only eight months, and RBN’s Mid-Curve Forecast Scenario (blue area in Figure 1, based on crude and gas prices similar to current forward curves) projects that Permian NGL output will be more than 1.1 MMb/d by the end of 2018, 1.3 MMb/d a year later and 1.6 MMb/d by the early 2020s. It’s important to point out that while about 100 Mb/d of the ethane emerging from Permian wells with other NGLs is currently being rejected into natural gas, in 2019 ethane rejection is likely to  fall to zero due to increasing demand from new, ethane-consuming steam crackers coming online along the Gulf Coast (see Whole Lotta Ethane Rejection Goin’ On) — and from the ethane export market. The effective end of ethane rejection in the Permian will goose the NGL volumes that need to flow out of the play (mostly to the NGL fractionation and storage hub in Mont Belvieu, TX), putting additional pressure on pipeline takeaway capacity between the Permian and the Gulf Coast.