While most pipeline capacity is committed under long-term contracts, a small percentage of capacity is left available for ad hoc shipments at generally higher rates. Permian takeaway capacity is likely sufficient for the next few years, and competition has increased. In a recent presentation highlighting its fundamental outlook, Enterprise Products Partners (EPD) projects Permian crude and condensate production will rise to 7.3 MMBpd in 2025, representing growth of 2.6 MMBpd over the EIA's production data for December. However, as new pipeline capacity has come on-line, the Midland-Houston crude price differential has tightened and eliminated upside from spot shipments. Disclosure: © Alerian 2020. Today's Insights piece provides an update on the buildout of Permian crude pipelines and analyzes the impact of a more competitive environment on pipeline tariffs. With more pipelines still to come, the Permian should have more than ample crude takeaway capacity for the next few years. Wide Permian crude price differentials provided a boost to midstream earnings in 2019 as companies exploited arbitrage opportunities.
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Employees of Alerian are prohibited from owning individual MLPs. The Wink to Webster Pipeline is currently the largest Permian crude pipeline under development through a joint venture including Exxon Mobil (XOM), PAA, EPD, MPLX (MPLX), Delek US Holdings (DK), Rattler Midstream (RTLR), and Lotus Midstream. Master limited partnerships, Oil & Gas, energy, natural resources. The 650-mile Wink to Webster Pipeline System will transport more than 1 million barrels per day of crude oil and condensate from the Permian Basin to the Gulf Coast. On its 4Q19 earnings call, Magellan recently noted it was seeing lower contracted rates in the range of $1.10-1.50 per barrel available in the market as it worked to recontract the 275-MBpd Longhorn Pipeline.
Marketing in this case involves purchasing crude at the origin of a pipeline and reselling the crude at the destination, making a margin on the price difference that is offset by transportation and logistics costs. Wink to Webster Pipeline System. Similarly, EPD suggested less favorable spreads across their assets - among them Permian crude pipelines - could reduce marketing earnings by $500 million in 2020. Phillips 66 Partners (PSXP) reported that the Gray Oak Pipeline is progressing toward full service in 2Q20, while the EPIC Crude Pipeline is expected to begin service this quarter. Spot tariffs were cut by about half on Energy Transfer's (ET) Permian Express 2 and 3 crude pipelines and the EPIC Crude Oil Pipeline in 3Q19, while PSXP proposed lower tariffs on both spot and committed rates on its Gray Oak Pipeline in November. Production growth is expected to continue in 2020 and 2021 - albeit at a slightly slower pace - with the Energy Information Administration (EIA) projecting that Permian production will grow by 800 thousand barrels per day (MBpd) on average in 2020 and by 400 MBpd in 2021.
Pipeline operators were able to temporarily benefit both in 2019 and over the last few years from wide crude price differentials by exploiting arbitrage opportunities on spot shipments or through marketing businesses (termed Supply and Logistics or S&L by some companies). As volumes ramp on new pipelines, companies involved will realize a corresponding increase in steady cash flows that could offset a decrease in variable S&L or marketing revenue. With new pipelines in operation, narrowed differentials seem here to stay, which is impactful for spot shipments and rates. The difference in the two rates demonstrates the supplemental revenues generated by spot nominations; spot volumes are proportionally smaller given that most capacity - as much as 90% or more - is committed. During its 4Q19 earnings call, Plains All American Pipeline (PAA) management said it expects 400 MBpd exit-to-exit growth in 2020 based on producers budgeting for WTI crude prices between $50 and $55 per barrel this year. Similar commentary has been provided by other MLPs with pipelines out of the Permian. The pipeline will transport crude to the Houston area and is projected to come on-line in the first half of 2021. The Wink to Webster Pipeline is currently the largest Permian crude pipeline under development through a joint venture including Exxon Mobil ... What do additional pipelines mean for tariff rates? However, given narrower Permian differentials, Plains is guiding to S&L segment earnings of $75 million in 2020, a decline of more than 90%. Despite the competitive environment for crude pipelines, MMP CEO Mike Mears highlighted the MLP's new 10-year take-or-pay agreement with a quality counterparty, with more than 80% of Longhorn's capacity contracted for 2020. The narrowing Midland-Houston spread has largely eliminated the temporary earnings boost for MLPs with spot pipeline capacity, so now the focus shifts back to the bread and butter of the midstream space - fee-based cash flows from pipelines. Overview; Bravo Pipeline; Canyon Reef Carriers Pipeline To use an example, Magellan Midstream Partners (MMP) charges over $4 per barrel for spot capacity on its Permian pipelines. In the third quarter of 2020, Midland‐to‐ECHO 3 crude pipeline, which will be a part of the Wink-to-Webster system, is expected to be in service.
Wink CO 2 Tariffs. These additions should accommodate the projected production growth over the next five years based on EPD's forecast (see chart below). While increased S&L earnings were a nice boost for companies that were able to take advantage, they were not expected to last and are not the basis for building budgets. There are not enough superlatives to describe the growth of Permian crude production over the last decade, which has grown by nearly four million barrels per day (MMBpd) since 2010. New pipelines continue to transport increasing amounts of crude from the Permian to the Gulf Coast, and more takeaway capacity is on the way. Midstream companies have been constructing new energy infrastructure to facilitate production growth and have effectively eliminated the past crude pipeline constraints in the Permian. Note that a $4 spot tariff, while useful for the purposes of this example, could change over time given narrower differentials. The large spread between Permian and Houston crude prices seen during most of 2019 allowed midstream companies to take advantage through uncommitted shipments at advantageous rates. The Permian is also expected to represent most of the production growth for the lower 48 states over the next two years.
Here are the types of service providers we are looking for: All rights reserved. If additional information is needed, please contact the Pipeline Permitting Section by phone at 512- 1701 NORTH CONGRESS AVENUE POST OFFICE BOX 12967 AUSTIN, TEXAS 78711-2967 PHONE: 512/463-7058 FAX: 512/463-7319 Midland crude traded at an average discount of nearly $9 per barrel relative to crude in Houston in 2Q19, reflecting pipeline capacity constraints out of the Permian and stranded barrels.
This material is reproduced with the prior consent of Alerian. Despite narrowing differentials, companies involved in constructing new pipelines will see an increase in steady cash flows that could offset a decrease in revenue from spot shipments.