From Reuters
The operators of two new pipelines in West Texas shale fields are offering discounted prices to attract shippers accustomed to high fees to move oil to export hubs, according to the pipeline companies and federal filings.
These bargain rates, in one case half the initial published rate, will aid strapped oil producers that once had to sell their oil for about $10 less per barrel because of transport constraints to move their oil from the largest shale oil field in the country.
But pipeline companies, which have in the past year raced to add new capacity to flow oil from the Permian Basin to the refining and export hub on U.S. Gulf Coast, will face pressure to cut rates in coming weeks, said oil traders and analysts.
The two operators – EPIC Midstream and Plains All American (PAA.N) – are opening lines that combined will in coming months be able to carry about 1.6 million barrels of oil per day (bpd) from West Texas to the Gulf Coast.
A third line, the 900,000 bpd line being developed by Phillips 66 (PSX.N), will open later this year that will boost total capacity to flow oil from the region by two-thirds.
“There’s no way another 2.5 million bpd are waiting to get sent to Corpus Christi (Texas),” said Sandy Fielden, an analyst at Morningstar. “Clearly, there’s going to be too much capacity … There will be buying up of barrels in Midland like it’s going out of style.”
Rates for most Permian pipelines have ranged between $4 a barrel and $7 a barrel for the past year because of soaring shale production and a lack of pipeline space. Some companies have turned to railcars for transport, which can cost $6 to $8 a barrel.
EPIC halved its spot rate to $2.50 a barrel on a pipeline from the Permian, prior to even beginning to load oil onto the 400,000 bpd line. The rate was “more in line with market conditions,” and will let the company achieve volumes “at a level we’re happy with,” said President Brian Freed.
Around the end of 2019, EPIC plans to flow its crude volumes on a larger, permanent line that can carry around 900,000 bpd.
Plains All American LP, which begins operations on its 670,000 bpd Cactus II pipeline next week, set contract rates between $1.05 and $3.20 a barrel, below what analysts and traders anticipated. It posted spot rates of $4.75 to $5.60 a barrel, but analysts said most of its capacity is under contract.
Plains did not reply to requests for comment.
Permian over-piped
Companies have raced to build the new Permian lines to accommodate the shale boom which has helped the United States become the world’s biggest oil producer, overtaking Saudi Arabia and Russia.
Permian oil production is set to reach 4.21 million bpd this month, according to the latest government forecasts, more than double the same month in 2016.
But the basin already has 3.9 million bpd of existing outbound pipeline capacity, according to energy investment bank Tudor, Pickering, Holt & Co.
“We see the Permian as over-piped,” said Matthew Blair, an analyst at Tudor Pickering. “Spot rates are going to be pretty cutthroat, with really low tariffs, given all this extra capacity.”
[contextly_sidebar id=”KOi4ZBreW2gi7QtmloHA2hHmcejHCFuX”]
As service startup nears, oil priced in Midland, the heart of the Permian, dropped this week to an about $3.50 a barrel discount to Houston prices, the narrowest since March 2018, traders said.
If the low prices remain, existing Permian pipeline operators Magellan Midstream Partners LP (MMP.N) and Enterprise Products Partners LP (EPD.N) may have to choose between lowering tariffs or sacrificing volumes, traders said.
Magellan, which operates two existing long-haul pipelines that ship about 700,000 bpd out of the Permian, does not anticipate spot shipments on either line beyond the third quarter, Chief Financial Officer Jeff Holman said on a conference call last week.
“We expect differentials to narrow as additional takeaway capacity out of the Permian comes on line,” Holman said. One of the two pipelines charge spot rates ranging from $4 and $5 per barrel, Magellan said.
Spot rates on Enterprise’s Midland-to-ECHO line, which transports 575,000 bpd of crude from Midland to the Houston area, average above $7 a barrel, filings showed. It did not respond to requests for comment.
“Pipelines are going to have to charge lower and lower fees,” said John Zanner, an analyst at consultancy RBN Energy. “You’re going to see them really narrow their margins in order to attract those barrels.”
