Permian Basin crude price discounts will likely remain steep through the rest of the year as midstream projects are dwarfed by rising output, particularly in the prolific Delaware Basin.
In the past two weeks, crude-by-rail (CBR) service company Murex said it will more than double its capacity in New Mexico to move more Permian crude to market, while an intra-basin crude gathering company is now working to increase its crude takeaway capacity from the basin to storage tanks in West Texas.
But price discounts are expected to remain in double digits this summer as production will exceed takeaway capacity, industry officials said.
Midland WTI has averaged at a $14.35/b discount to Houston WTI in May, compared to a $7.79/b discount in April and a $2.28/b discount in May 2017, according to S&P Global Platts data.
A similar situation was seen in 2014, when the WTI outright price hit $100/b and “we were at the peak of the boom, with active drilling filling up the pipes,” said Campbell Faulkner, chief data analyst with OTC Global Holdings.
With drilling productivity now higher in the Permian, discounts could widen to $20/b, Faulkner said.
“Who would have thought a year ago differentials between Midland and the [US Gulf Coast] could climb to $12/b?” Marshall McCrae, Energy Transfer Partners’ chief operating officer, said last week during an earnings call. “Last year, the differentials were nil to very little, and we don’t know if that will narrow soon.”
Permian output will grow by 78,000 b/d this month and reach 3.277 million b/d in June as rig activity continues to rise and so-called DUC — drilled but uncompleted — wells get completed, the US Energy Information Administration said Monday in its latest Drilling Productivity Report.
S&P Global Platts Analytics expects Permian output to grow by another 483,000 b/d over the next six months to reach 3.760 million b/d by the end of 2018.
Rail option
Murex and Cetane Energy said they will expand transloading facilities at Carlsbad, New Mexico, paving the way for the loading of a unit train each day by the third quarter and boosting takeaway capacity by 40,000 b/d to 75,000 b/d.
Capital improvements for the project will include a 100,000-barrel storage tank, additional units for offloading trucks, an expansion of the existing railcar loading rack and road improvements, Murex said.
Murex and Cetane have worked closely with BNSF Railway and Southwest Railroad, Murex President Robert Wright said in a statement.
“We are moving 35,000 b/d now, and typically it takes about a day to haul a unit train of crude from Carlsbad to the Houston Ship Channel,” Jeremy Mall, Murex director of development, told S&P Global Platts on Wednesday.
As part of increasing its efficiency, Murex is also putting together an “aggregate entry” for trucks that offload crude at the transloading terminal, Mall said, so they do not have to line up at the transloading facility. Mall said Murex handles about 450 truckloads each day.
A truck can typically carry 150-180 barrels of crude at a cost estimated near $12/b for the 500-mile journey from the Permian to the USGC, Trip Rodgers of BP Capital Fund Advisors said Wednesday.
In comparison, the cost of shipping rail cars over the same distance is estimated to be $8/b, according to a presentation by Permian producer Occidental Petroleum.
The average cost of shipping a barrel through pipelines from the Permian to the USGC is $2.50/b, according to Platts Analytics estimates.
Plains All American is also preparing to roll out a CBR facility at McCamey in the Permian, with a capacity of 10,000 b/d to 15,000 b/d, Chief Operating Officer Willie Chiang said during an earnings call last week.
CBR, trucking bottlenecks
With no new long-haul pipelines to be built from the Permian to the USGC until the second half of 2019, the call on rail and truck will be to move from 300,000 b/d to 500,000 b/d by then, Rodgers said.
But there are existing bottlenecks that will result in crude remaining stranded in the Permian, resulting in further discounts for producers.
“There is an overall shortage of truck drivers due to the tight labor market, along with aging demographics and recruitment issues,” Rodgers said. “New entrants to the industry realize it’s not the most healthy thing to do.”
Increased frac sand shipments are also taking a toll on the total number of trucks available for hauling crude, Rodgers said.
An average well that consumes 10,000 mt of sand during the fracking period equates to 400 truckloads of sand that have to be delivered to the well site, Rodgers said.
“For the Permian Basin, we estimate about 5,000 trucking round trips a day, and this figure is expected to grow,” as output is projected to grow, Rodgers said.
Plains, which is already trucking volumes from the Permian, sees limited opportunities for offering CBR services.
“None of the facilities are geared toward moving large volumes from the Permian,” Chiang said last week.
“They are transloading facilities which handle frac sands, too, and unlike the Bakken, where it is a truck-in, rail-out situation, which helps when loading a unit train, in the Permian it is a materially different scenario,” Chiang said.
Intra-basin build up
Oryx Midstream, which focuses on building gathering systems in the Permian and Delaware and delivering it to long-haul pipeline hubs in Midland and Crane, Texas, is also expanding its system to increase takeaway capacity by 450,000 b/d.
The first phase of the new capacity will be operational by mid-July, CEO Brett Wiggs told Platts. The company is operating at maximum capacity of about 200,000 b/d, he said.
Work is underway to increase the company’s footprint and include producers in the northern Delaware Basin under the expansion, Wiggs said.
Also this summer, Plains will add 220,000 b/d of crude gathering at Wink, Texas, while Enterprise Products Partners will complete a 143-mile pipeline system to deliver 300,000 b/d of crude and condensate from the Delaware Basin to its Midland hub.