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The New Adventures of Good ‘Ole Boy Permian – Routes to Market

The Permian Basin has been producing oil in West Texas since the 1920’s. The principal route to market for Permian crude has been via Cushing, OK to Midwest refineries. After declining in the 1980’s Permian production is increasing again – reaching an estimated 1.3 MMB/d (September 2012 Bentek). The existing pipeline infrastructure means the majority of that crude still finds its way to Cushing and the Midwest. There Permian producers face the same congestion and price discounts that Canadian and Bakken producers have suffered. Today we review current Permian Basin routes to market.

In Part I of our Permian Basin series (see a copy here) we looked at the renaissance of Permian production in the past three years using a combination of new horizontal drilling and conventional vertical drilling techniques as well as new technologies to recover oil from older wells. Early indications are that using horizontal drilling and hydraulic fracturing in emerging shale plays will result in the same dramatic production increases already seen in the Bakken and Eagle Ford plays. This blog series on Permian Basin crude oil is a follow up to earlier series on the Bakken and the Eagle Ford.

Unlike the Bakken but similar to the Eagle Ford, the Permian basin has considerable existing pipeline infrastructure in place that can be used by producers to get their crude to market. As we pointed out above, the traditional route to market for Permian crude was by pipeline to Cushing, OK and on to Midwestern refineries. However, when Permian production fell off in the 1980’s and 1990’s, the Cushing hub began instead to be fed by pipelines running north from the Gulf Coast, carrying imported crudes into the Midwest.

New and growing shale production in the Bakken together with higher Canadian imports have sharply increased crude deliveries into the Midwest from the north. These new supplies have now exceeded Midwest refining capacity and effectively backed out crude moving north from the Gulf into Cushing. Cushing stockpiles are at record levels and this excess supply has disrupted crude pricing dynamics. The Cushing benchmark West Texas Intermediate (WTI) crude price is trading at discounts upwards of $20/Bbl to crudes marketed at the Gulf Coast that are priced against Light Louisiana Sweet (LLS) that is in turn linked to international Brent crude prices.

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