Oil and Gas

Permian Basin Oil Production Highlights Need for Pipelines and Storage

Up until about five years ago, the Texas economy suffered from the roller-coaster, boom-and-bust nature of the oil sector. When crude prices were high, everything was good. But when crude tanked, Texas practically shut down.

When oil prices crashed five years ago, more than 100 exploration and production (E&P) companies went belly up. The world was awash in crude. Prices were stuck between $40 and $50.

But there was one basin in the U.S. that kept pumping out oil: the Permian.

New technology, combined with an oil formation unlike any other, assured Texans they wouldn’t suffer any more difficult times. And today the Permian Basin is the world’s largest producing oil field.

Now Texans have a new problem: There’s simply not enough pipeline takeaway and storage capacity.

Thankfully there are a number of new pipeline and storage projects underway to support this increased production.

Coming Down the Pipeline

New fracking technology combined with enhanced oil recovery techniques means more oil is coming out of the Permian every day.

E&P companies are producing oil and natural gas from well depths ranging from a few hundred feet to 5 miles.

Exxon Mobil Corporation (NYSE: XOM) plans to increase its Permian production to more than 1 million barrels per day (bpd) by 2024. That’s an 80% increase from what it’s producing now.

And Chevron Corporation (NYSE: CVX) expects to hit 900,000 bpd by 2023.

But where is it all going? That’s where pipeline companies come in…

Plains All American Pipeline LP (NYSE: PAA) is building the Cactus II System. In fact, its initial 585,000 bpd capacity is already spoken for.

The Epic Crude Oil Pipeline will service the Permian and Eagle Ford formations. Its initial capacity will be 590,000 bpd when it’s up and running between now and the end of the year.

Phillips 66 Partners LP (NYSE: PSXP) is building the 900,000 bpd Gray Oak Pipeline. It will run 850 miles when it’s finished this year, connecting the Permian with Gulf Coast refineries.

And those are just a few off the list.

The Other Part of the Puzzle

Cushing, Oklahoma, is the oil storage capital of North America. Through various pipelines, Cushing receives millions of barrels of crude from E&P companies every day.

And it sends millions of barrels to refiners every day as well. Its overall storage capacity is 94 million barrels… and counting.

That’s roughly enough capacity to supply global demand for one day. But with Permian production on the rise for the foreseeable future, 94 million barrels won’t be enough.

The aforementioned pipelines will bring another 2 million bpd of crude from the Permian to Gulf Coast export terminals and Cushing storage facilities.

That creates a problem for Permian Basin oil.

Oil companies, in their rush to build new Permian pipeline takeaway capacity, forgot about adding more storage in Cushing and more export docks in Corpus Christi, Texas.

As a result, the spread between Permian (also known as Midland) crude and Brent crude could hit between $9 and $14 next year.

That’d be good news for pipeline companies.

They get paid on volume, regardless of oil prices. So I think it’d be smart for investors to have some pipeline operators in their energy portfolios.

Good investing,

Dave