tiers

Even with crude oil prices down $1.67/bbl yesterday, the wide differential between Permian prices and those in destination markets held up, with WTI Midland trading at $15.60/bbl below the same quality of oil on the Gulf Coast. This has become a red-hot topic for all Permian-watchers. For example, in first quarter earnings calls, a number of producers not only reported their Permian well productivity and drilling plans, they also reviewed how much firm pipeline space they have signed up for in the Permian and how they plan (or hope) to avoid negative financial consequences from the differential blowout. With so much demand for new pipeline space, shouldn’t it be easy to get a bunch of shippers signed up for long-term commitments to fund a new project? Today, we’ll look at what it takes for commitments to pay off massive pipeline projects, the hurdles midstream companies go through to achieve it, and the possibility of new pipeline projects getting added to the development schedule.

Large-scale and well-funded producers in the Permian have built dedicated gathering systems and signed up for pipeline-takeaway options to keep their barrels moving to markets at the Gulf Coast and Cushing. For the most part, smaller producers don’t have the same options, for a variety of reasons. More and more, barrels from outside the core areas of the Permian are competing for the last bits of pipeline space and producers are being forced to rely more heavily on Permian trucking companies to help keep their crude flowing. Truckers are being asked to make less desirable, less economical and longer hauls, and are passing those costs back to the producer. With pipeline takeaway capacity maxed out, trucking capacity is being pushed to the limit too, with several potential upstream impacts. Today, we look at trucking options for smaller producers in second-tier production areas, the impact of boom-bust cycles on trucking companies and what tight trucking capacity means for the basin as a whole.

If you’ve been watching market prices over the last week, you’ll have noticed that Permian differentials have tightened a bit. With the capacity of the new Midland-to-Sealy pipeline ratcheting up and the 146-Mb/d Borger refinery near Amarillo coming back online, there has been a brief respite for crude oil prices in West Texas. But soon, continued growth in crude production will again max out pipeline capacity out of the Permian until one of the major new pipes starts operating in 2019. In the interim, producers and traders without firm pipeline space will be taking deep price discounts, all the while attempting to maintain their revenue streams by sticking to their development plans or, at the very least, avoiding the specter of well shut-ins. Today, we dive into the current state of affairs regarding Permian pipeline allocations, the impact on producer logistics, and what it all means for price differentials.

As Permian crude differentials continue to widen, trading at a $8.45/bbl discount to Magellan East Houston this week, a lot of people are pointing fingers at midstream companies for not completing new takeaway pipeline projects quickly enough. But even in the oil patch, it takes two to tango and producers can also share some of the blame. Historically, the focus in the Permian has been on larger producers, with their sprawling acreage positions and their focus on creating long-term competitive advantages through efficient drilling programs. Many of the smaller, private equity-backed producers adopted more short-term strategies.  Their game has been to prove undervalued acreage and then flip those assets to more substantial players. But these strategies are beginning to change. Today, we continue our series on Permian differentials with a look at how the recent ramp-up in the development of second- and third-tier production areas is affecting the region’s crude oil output, pipeline takeaway constraints and price differentials.