Hot Legs! Permian Crude Oil Shuttle Pipelines & Gathering Systems Provide Destination Flexibility

Wide swings in the value of Permian crude oil in Midland, TX, the storage and distribution hub in Cushing, OK, and Gulf Coast points like Houston in recent months have only reinforced the importance of destination flexibility. The ability of Permian producers and shippers to access multiple takeaway pipelines and, with that, the market that will give them the highest possible price for their product, is being enhanced by the addition of new intra-basin shuttle pipelines, gathering systems and hybrid gather-and-shuttle networks. These new pipes are designed to help connect new wellheads across the Permian’s Midland and Delaware basins with two, three or even more takeaway pipelines, adding new robustness to the region’s infrastructure and enabling crude to flow to where it is most valued at any given time. Today, we discuss highlights from our new Drill Down Report on Permian crude oil shuttle pipelines and gathering systems.

Permian crude oil production continues to rise, new production areas are coming online and producers and shippers know this: the surest way to get the top price for their crude is to be able to deliver their barrels to the market that’s paying the top price. That’s logical, of course, but it’s not always possible — a significant portion of Permian production can only flow to one takeaway pipeline and therefore only to wherever that pipe is headed.

As values across the Permian, U.S. oil hubs, and the global crude landscape continue to shift, destination optionality — the ability to access multiple takeaway pipelines and markets — has become a must-have for producers and shippers. Let’s consider current Permian crude market conditions. So far in November 2017, Permian producers who can access Gulf Coast crude oil markets have been able to realize $61/bbl, while those forced to sell into the local Midland market have been stuck with little better than $56.50/bbl. Even if it costs $4.00/bbl to transport crude from Midland to the Gulf Coast (a full-cost committed-shipper rate), the producer is still $0.50/bbl better off moving barrels directly to Houston. And either local sales or transport to the Gulf Coast is a better alternative than paying $0.75/bbl to get to the crude oil storage and distribution hub in Cushing and selling for the current Cushing price: only $56/bbl, or $1.25/bbl lower than Midland on a netback basis.

But while price differentials favor selling on the Gulf Coast today, things were very different not so long ago. For example, in January 2017, after adjusting for transportation costs, selling on the Gulf Coast was $4.00/bbl worse than selling in Midland, and $3.00/bbl worse than selling in Cushing.

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