It Won't Be Like This For Long - Will New Crude Export Terminals Spur Another Permian Pipeline? by Sheela Tobben
For a few years now, crude oil shippers out of the Permian have enjoyed surplus in pipeline capacity thanks to a slew of new pipes that came online just as COVID crushed demand, prices and production
It Won't Be Like This For Long - Will New Crude Export Terminals Spur Another Permian Pipeline?
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Tuesday, 07/16/2024Published by: Sheela Tobben
For a few years now, crude oil shippers out of the Permian have enjoyed a surplus in pipeline takeaway capacity thanks to a slew of new pipes that came online just as COVID crushed demand, prices and production. But Permian production has recovered, and the takeaway situation is changing for some routes. For example, the pipelines from West Texas to Corpus Christi are running close to full, and if a new offshore export terminal gets built, Permian-to-Gulf-Coast takeaway dynamics would get far more complicated — and fast. In today’s RBN blog, we discuss highlights from our new Drill Down Report, which examines Permian crude flows to existing export terminals and the potential impacts of a new deepwater facility.Â
As we discussed recently in Never Been Any Reason, U.S. crude oil production growth has largely steered pipeline development. Initially, new takeaway capacity out of the Permian — the nation’s leading crude oil play — targeted Gulf Coast refinery demand, but once that demand got saturated, attention turned to exports. Since the crude export ban to countries other than Canada was lifted in December 2015, shipments from Texas and Louisiana terminals have soared, averaging just under 4 MMb/d in the first half of this year. That boom was made possible by the massive (not to mention expensive) infrastructure buildout from the Permian and across the Gulf Coast — pipelines, storage and export facilities — and some upgrades to existing assets too.
With business, cost efficiency is king, and the winners (so far) in crude exports have been facilities like the Enbridge Ingleside Energy Center (EIEC) and Gibson Energy’s South Texas Gateway (STG; also in Ingleside, TX) that can dock and partially load 2-MMbbl Very Large Crude Carriers (VLCCs), which enable huge quantities of crude to be shipped over long distances at the lowest cost per barrel. The two-thirds-full VLCCs out of EIEC and STG are then topped off with only a single round of reverse lightering in the Gulf of Mexico (GOM).
To draw incremental export barrels — and get a leg up on EIEC and STG — some of the biggest names in the oil industry have been working to advance their proposals for deepwater export terminals off the Texas coast that could fully load VLCCs at their facilities. That means no reverse lightering. Currently, only one facility — the Louisiana Offshore Oil Port (LOOP), an oil import terminal revamped a few years ago to handle crude exports as well — can fully load a VLCC, but its access to the light-sweet Permian barrels that drive the export market is limited (see Keep On Loving You, for more on LOOP).Â
The four deepwater single-point mooring (SPM) projects under development are: Enterprise Products Partners’ Sea Port Oil Terminal (SPOT); Energy Transfer’s (ET) Blue Marlin; Sentinel Midstream’s Texas GulfLink; and Phillips 66 (P66) and Trafigura’s Bluewater Texas. The most advanced of them is SPOT, which received its deepwater port license from the U.S. Department of Transportation’s Maritime Administration (MARAD) on April 9.
If one or more of the offshore export proposals crosses the finish line there would be major shifts in pipeline flows between West Texas and the Gulf Coast, and identifying and understanding the various scenarios is critically important for a wide range of industry players, including producers, shippers, midstream companies and exporters.
Our new Drill Down Report gives shape to the major issues at hand. In Section 2, we explain that the Permian has a history of having either too much or too little crude oil takeaway capacity, especially to the Gulf Coast, the preferred outlet for shippers. For example, in 2018-19, a sharp run-up in crude production left shippers scrambling to find pipeline space. That problem was largely solved by the addition of three new Permian-to-Corpus pipes in the second half of  2019 (EPIC Crude, with a 900-Mb/d nameplate capacity but initially configured to move 400 Mb/d and then 600 Mb/d; the 670-Mb/d Cactus II, which started at 585 Mb/d; and the 900-Mb/d Gray Oak). The subsequent completion of the 1.5-MMb/d Wink-to-Webster (W2W) combo pipeline added capacity to the Houston area. Then COVID hit, demand cratered, and what had been needed Permian takeaway capacity quickly became excess.
Permian crude oil production rebounded as the pandemic abated, of course, and that has driven up pipeline utilization. But the relative pull from the Gulf Coast’s major oil hubs — Corpus Christi, Houston and Nederland/Beaumont — varies, and that’s largely tied to their unique dynamics. Generally speaking, Corpus’s focus is on crude exports, while Houston has substantial refining capacity as well as exports. Nederland/Beaumont, in turn, is mostly a refining center with some crude exports.
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In Section 3, the report explains that pipelines that deliver Permian oil to the crude-export-oriented Corpus Christi/Ingleside market now run almost at capacity. Enbridge plans to add 120 Mb/d to its Gray Oak system, but that won’t be fully available until early 2026. Unlike Corpus, there is still room on Permian pipes bound for the Houston and Nederland/Beaumont regions, which host far more refining capacity than export capacity. In Section 4, we examine how volumes on Houston-bound pipes have increased over the last few months. Some may still have space but that depends on which network, as the biggest pull comes from refining and exports via Enterprise’s Hydrocarbon Terminal (EHT). Permian pipes connected to the ET-dominated Nederland/Beaumont hub, the focus of Section 5 of the report, currently have the most room for additional oil volume compared to other Gulf Coast hubs, and utilization appears to be ramping up.
Most important, in each of the hub-focused sections in the Drill Down Report we also discuss how their export facilities — and the pipelines flowing into them — would likely be impacted if one or more of the proposed deepwater export terminals are completed. To state the obvious, any one of these projects would be a magnet for incremental Permian production and redirect flows between West Texas and the Gulf Coast. Also, participants in any successful export project would need to ensure there would be adequate incremental pipeline capacity from the Permian to meet their needs. But would it be enough to justify a new crude oil pipeline from the Permian?
There are reasons to be skeptical. The extent of future Permian output growth has recently come into question. And new pipeline projects have historically needed hard-won take-or-pay commitments from producers seeking a way to send their barrels out of the basin to underwrite their costs.
Figure 1. Permian Production, In-Basin Demand, and Pipeline Takeaway Capacity. Source: RBN
Let’s look at some numbers. In recent months, Permian production has been averaging about 6.2 MMb/d (right end of black line in Figure 1). Of that, about 400 Mb/d is fed to nearby refineries in West Texas and New Mexico (black layer). Another 5.5 MMb/d or so is shipped to the Gulf Coast using 6.3 MMb/d of existing pipeline capacity to Corpus (gold layer), Houston (blue layer) and Nederland/Beaumont (orange layer). The remaining ~370 Mb/d is piped to the inland hub in Cushing, OK, where WTI typically trades at a discount to Corpus and other Gulf Coast locations. (We described the reasons and mechanics in Trading In the USA.) Much of the ~1.9 MMb/d in pipeline capacity from the Permian to Cushing (and other destinations to the north; green layer) is currently unused. But while it may be a less-attractive outlet compared to coastal markets, Cushing could be a viable option for producers or shippers that want to avoid the long-term commitment necessary to anchor new exit capacity to the more lucrative Gulf Coast market.
All told, there’s currently a little less than 1 MMb/d of Permian-to-Gulf-Coast pipe space available to meet additional shipper demand. And there’s just over 800 Mb/d of excess capacity on the pipelines from the Permian to Cushing.
That’s not all. Enbridge’s Gray Oak could be up for another 180 Mb/d capacity expansion (horizontally striped gold layer) once its 120-Mb/d addition is completed (left-slanted striped gold layer). EPIC Midstream could add 200-300 Mb/d of capacity to its namesake system that delivers into Corpus Christi (right-slanted striped gold layer). And Enterprise has stated it expects to convert its Seminole pipeline — currently in NGL service — back to crude once its 600-Mb/d Bahia NGL pipeline comes online in 2025, thereby adding back 220 Mb/d of crude capacity (included in blue area).
Beyond those, savvy operators would likely seek other brownfield expansions of networks already in operation rather than pursue greenfield projects. Where possible, they may use more drag-reducing agents (DRAs; see Kind of a Drag) or add pumps, thereby expanding capacity relatively quickly and cheaply. Given all that, who would sign up for additional capacity and when?
As we discuss in the new report, the impact of a new deepwater export terminal on crude oil flows out of the Permian will depend not only on which terminal project (or projects) are constructed but also on Permian production growth.
RBN estimates production by looking at three oil-price scenarios (dashed yellow, blue and red lines in upper-right quadrant of Figure 1 above). In all three scenarios, long-term production forecasts point to slowing Permian growth as prime acreage gets exhausted, which calls into question whether a new pipeline connecting output to the Gulf Coast will be deemed necessary, much less built. In our low-price scenario (dashed yellow line), Permian oil output expands to 6.5 MMb/d by 2026 but then starts dropping, reaching current levels again by 2032 as benchmark crude oil prices trend lower. If this scenario were to play out, there would be no need for a large new pipeline from the Permian nor any real need for new export terminal capacity.
On the other hand, under our high-price scenario, which would push Permian production to near 9 MMb/d (dashed red line), producers could pursue new Gulf-bound exit capacity and new export capacity in addition to the potential additions mentioned above. The most interesting is our mid-price scenario (dashed blue line). Here, supply growth would propel output to just under 7.5 MMb/d by 2032 and then moderate, allowing shippers to optimize existing egress and maybe support some expansions.
Under either a mid- or high-price scenario, the construction and startup of a new deepwater export terminal would significantly impact flows but the question of whether and where a new Permian-to-Gulf-Coast pipeline might be built depends in large part on which terminal project advances. Producers love premium export-linked prices for their output, but they may not be eager to sign up for more pipeline capacity until the pain of discounted prices — or worse, production cuts — starts to sting and raises concerns about retreating revenues. Instead, they will likely first exhaust their most cost-effective alternatives to making the long-term commitments needed to underwrite new pipelines, such as supporting expansions to existing pipes or even sending more of their oil to Cushing, despite the price penalty.
So, even the prospect of one or more new offshore crude export terminals may not spark sufficient producer enthusiasm to sign long-term commitments to a new artery. That said, the export terminal proposals appear to be pressing forward, and they’re backed by some of the biggest and most sophisticated midstreamers around, including Enterprise, ET and P66. If one happens, it will undoubtedly spell big changes and an evolution in the way crude gets from the Permian to the Gulf Coast. It may or may not mean a new pipeline, but that doesn’t mean investment in Permian midstream is going away, it will just evolve differently than some envisage. For more about the prospects for Permian production growth, prospective deepwater export terminals and their effects on pipeline flows — and the possible need for new pipeline capacity — see our new report.