The Permania, as someone called the oil industry and private equity rush to West Texas and New Mexico, has begun to take its toll on all those investors that saw it as the next huge thing. With production booming, pipeline capacity has become tight, and producers are forced to sell their crude at a painful discount to benchmarks. They are also losing billions in market capitalization.
A recent story from Bloomberg estimated that over the last two weeks, eight of the biggest oil producers with a presence in the Permian have shed a collective US$15.6 billion in market value, or over US$1 billion per day, with some of the shares booking double-digit drops.
It is an impressive turning of the tables. Just a year ago, everyone who had acreage in the Permian was a magnet for investors. The U.S. Geological Survey had upgraded the reserve estimates for the basin, especially thanks to a major upward revision of the Wolfcamp area. Producers boasted of being able to produce crude at ridiculously low production cost levels. And produce it they did, at a fast-increasing pace, which eventually clogged the pipes.
The current pipeline capacity in the Permian is 3.1 million barrels daily. Railway capacity, according to S&P Platts, is around 315,000 bpd. However, the railway is mostly used to supply frac sand for the ever-hungrier wells. Production, as estimated by the Energy Information Administration, should this month reach 3.277 million bpd. And it will continue to rise. No wonder investors are worried.
Some are so worried, in fact, that they are dropping their holdings in Permian players, even big names such as Concho Resources and Pioneer Resources. They are moving to producers with more diverse asset portfolios, Bloomberg reports, citing analysts. Pure-play Permian is no longer a stamp of guaranteed success.
There is, of course, a solution to this problem, which has seen Midland crude trade at a discount of US$19 a barrel to international Brent. The solution is more pipeline capacity, and although it has been slow in coming, it is coming.
Earlier his year, Enterprise Products Partners completed a 416-mile pipeline with a capacity of 575,000 bpd from Midland to the Texas coast. All American Pipeline plans to launch its Cactus II pipeline, with a capacity of 585,000 bpd, in the third quarter of 2019. The company in February announced that its open season for the project had ended with long-term commitments of 525,000 bpd.
There’s more: a JV between Phillips 66 and Andeavor could make its Gray Oak pipeline ship up to 1 million bpd of crude if it gets sufficient commitments from producers. For now, plans are for a capacity of 700,000 bpd, based on the outcome of a second open season, yet to be announced. Whatever the capacity, the pipeline should be operational by the end of next year.
The EPIC pipeline, capable of shipping 590,000 bpd should also be operational by the end of 2019. Two large Permian players—Apache Corp. and Noble Energy—have already committed future flows taking up 30 percent of the pipeline.
So, that’s 2.45 million bpd in new pipeline capacity coming by the end of 2019. That’s not too bad for producers: it means they will not have to suffer more. And then there is more coming, so by the middle of 2020, there will be as much as 3.1 million bpd of new pipeline capacity in the star of the shale patch. The only potential problem with all this would be if for some reason oil prices plunge deep, leaving this capacity stranded. For now, there is no sign this could happen, so it’s all good news for the Permian drillers.