U.S. Oil Pipeline Operators Prepare for Increased Shale Production By Reuters

By Arathy Somasekhar

HOUSTON – Analysts project that the volume of crude oil transported via pipelines from the leading U.S. shale region to export terminals along the Gulf Coast could reach pre-pandemic levels by October, marking a positive turn for some Texas oil pipeline operators.

The pandemic interrupted a construction surge in shale-oil pipelines that had added 2.5 million barrels per day of export capacity from West Texas to Gulf Coast hubs. As oil prices plummeted in early 2020, this surplus capacity forced pipeline companies to offer discounted rates and more favorable terms.

Oil production in the Permian Basin, which spans West Texas and New Mexico, is anticipated to rise, potentially hitting 5.7 million barrels per day next year, with prices hovering around $100 a barrel.

Despite this increase, production would still fall short of the pipelines’ capacity of approximately 6.6 million barrels per day, as reported by East Daley Capital, an energy research firm.

However, the arbitrage, or price differential between the Gulf Coast and Midland, Texas, is widening again after a contraction that began in March 2020, suggesting a potential rise in shipping costs. U.S. crude at Magellan Midstream’s terminal in East Houston for January 2023 delivery is trading at an 80-cent-per-barrel premium to Midland for the same month and $1 higher than Midland by December 2023, compared to a spread of about half that a few days prior.

With the increase in Permian output, "spare capacity will begin tightening and tariffs to the water should return to a more normalized level," said Willie Chiang, CEO of Plains All American, during a recent investor call.

Magellan Midstream Partners, which operates the Longhorn pipeline and holds interests in several other pipelines to the coast, indicated that as Permian oil output grows, it may reconsider plans to convert its pipeline from the Permian to transport oil or products to the Gulf Coast.

Utilization of the pipelines connecting the Permian to the Gulf Coast is expected to rebound to pre-pandemic levels of around 77% by October and rise to 80% by the end of the year, according to estimates from East Daley Capital, up from approximately 70% in April.

Pipeline companies typically generate revenue from long-term contracts with producers and refiners that guarantee payment regardless of actual oil shipments. During the pandemic, firms like Magellan, Enterprise Product Partners, and Energy Transfer offered more favorable terms to customers and agreed to reduce rates upon contract renegotiation, aiming to maintain strong relationships with producers during a market downturn.

Operators mentioned that they are currently entering shorter-term contracts due to low spreads but plan to shift to longer-term agreements once price differentials improve.

Oil rig counts in the Permian, a key indicator of future production, have risen by 14% this year, according to data from Baker Hughes. Additionally, more energy companies are expressing intentions to increase capital expenditures for the second consecutive year in order to add rigs and enhance production.

"This is a favorable scenario for midstream operators, as they are facing significantly less risk compared to a year or two ago when conditions were quite challenging," remarked AJ O’Donnell, a director at East Daley Capital.