Mid-Cush

Battered by a flood of new supply and limited pipeline takeaway capacity, prices for Permian natural gas and crude oil have spent a lot of time in the valley over the past 18 months. West Texas Intermediate (WTI) crude oil prices at the Permian’s Midland Hub traded as much as $20/bbl less than similar quality crude in Houston last year. That’s a big oil-price haircut that producers have had to absorb while ramping up production. However, the collapse in the Permian crude oil differential was tame compared to what happened with Permian natural gas prices. Prices at the Waha Hub in West Texas traded as low as negative $5/MMBtu, a gaping $8/MMBtu discount to benchmark Henry Hub in Louisiana. As bad as that all was, new pipeline takeaway capacity has arrived, and Permian prices are beginning to claw their way out of the depths. Today, we look at how new pipelines are impacting the prices received for Permian natural gas and oil.

Only a few months after major crude oil takeaway constraints out of the Permian Basin caused price spreads to widen, the pipeline network serving the U.S.’s most prolific shale play may be on the brink of becoming overbuilt. We’ve already seen a number of new expansions and pipeline conversions completed in the past six months, and construction is underway on another 2 MMb/d of new pipeline capacity scheduled to come online between now and the first quarter of 2020. Beyond that, a few remaining projects have been proposed but have not yet reached final investment decisions. No midstream group wants to build a pipeline that will be half full, and no producer wants to make a 10-year commitment to a pipeline if there are going to be plenty of other options available. So who blinks first? In today’s blog, we review the Permian pipeline projects that are still on the fence and examine what factors will determine whether they end up being a “go” or a “no.”

Crude differentials in the Permian are getting squeezed. The spread between Midland and WTI at Cushing widened out to near $18/bbl at one point in 2018, when pipeline capacity was scarce. But that same spread averaged a discount of only $0.25/bbl in March 2019. Differentials between Midland and the more desired sales destination at the Gulf Coast are also in a vise. What gives? Production in the Permian continues to climb, but the rapid pace of growth we saw in 2018 has slowed down a bit lately, with fewer rigs in service and fewer new wells being brought on each month. More importantly, we’ve seen several new pipeline expansions and pipeline conversions come online in bits and bursts — in some cases, ahead of schedule — and this new chunk of pipeline space has compressed Midland pricing. In today’s blog, we begin a series on Permian crude takeaway capacity and differentials, with a look at the handful of new projects that have come online in the past few months and what has happened to Permian prices as a result.