Shuttle pipelines in the Permian provide high-volume, straight-shot links between crude oil gathering systems and multiple takeaway pipelines out of the play — giving producers and shippers critically important destination optionality. Assuming the shuttles are well-positioned and tied to increasing production on one end and multiple takeaway pipes on the other, existing intra-basin shuttles are highly valued and being gobbled up by major midstream players. And to keep pace with Permian production growth, existing shuttle systems are being expanded and new ones are being planned. Today, we continue our review of key crude-related infrastructure in the nation’s hottest oil production region.
As we said in Part 1, the build-out of Permian crude oil pipelines over the past several decades has occurred in fits and starts, always in response to the dual requirements to move increasing volumes out of the play and to help producers gain the highest possible price per barrel. During the Pre-Shale Era, most of the oil produced in the Permian flowed north (on either Plains All American’s Basin Pipeline or Occidental Petroleum’s Centurion Pipeline) to the crude storage and distribution hub in Cushing, OK. By 2011-12, though, surging crude production in the Bakken and western Canada exceeded Midwest refinery demand and because there was very little pipeline capacity from the Mid-Continent to the Gulf Coast (where half of all U.S. refining capacity resides) supplies started backing up in Cushing. The Cushing supply glut — exacerbated by rising shale production in the Permian itself — resulted in heavy discounting for benchmark West Texas Intermediate (WTI) versus Louisiana Light Sweet (LLS) and other crudes at the Gulf Coast, as well as the development of new pipeline takeaway capacity from the Permian and Cushing to Houston and other coastal destinations. For the most part, those takeaway pipelines and others out of Cushing resolved the wide Permian-to-Gulf Differential (except for a blip up of the LLS-WTI differential to nearly $7/bbl last week. That’s a topic for another blog.)
Takeaway pipelines are only part of the story, though. They take crude out of the Permian to various faraway destinations (mostly to the Gulf Coast or Cushing), but they only provide destination optionality to a specific producer or shipper if it can connect to them. That’s where shuttle pipelines come in, providing all-important intra-basin links between Permian production areas and multiple takeaway pipelines out of the play. One more thing: While most of the new takeaway capacity out of the Permian originates in Texas towns on the play’s eastern side — places like Midland, Big Spring, Crane, Colorado City, McCamey or Garden City — many of the multi-stacked, hydrocarbon-packed production areas that are the focus of drilling today are located scores of miles away to the west in the Delaware Basin.