A Glimpse of the Permian Midstream | RefinerLink

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A Glimpse of the Permian Midstream

By London Business Conferences Group

Jul 19, 2015

Brief discussion on Permian Basin future outlook.


The following is an interview of Carlton Dole, Director of Business Development for Green Lake Fuels. We cover Permian production quantities and other topics ahead of the Permian Midstream Conference.


As we all know, there is a huge surge taking place in high gravity crude and condensate production across the Permian. What final destinations, domestic or foreign, do you anticipate condensates making their way to?


Depending on the gravity of Permian condensate barrels, the product will journey different paths to market.  In my opinion, the lighter, greater than 68 API, barrels will be placed into the diluent markets of Midland & Cushing. 


Ten months ago and earlier, a portion of these lighter barrels would be taken by rail up to Edmonton for dil-bit blending.  The economics that used to steer Permian light condensate to Canada have vanished for a variety of reasons:


  • Edmonton condensate values over the past 12 months have weakened from the WTI +$3 to +$5 range to WTI -$2 to -$4  
  • Takeaway capacity has reduced the Midland to Cushing discount from the -$5 to -$10 to the -$.50 to -$2 range  
  • The current market conditions for West Texas condensate in addition to $12 in rail freight to Edmonton cannot compete as a substitute for condensate and C5 shipped to Canada on the Southern Lights and Cochin West pipelines.


Currently it does not make sense for these 68+ API Permian condensate barrels to travel down to the Gulf Coast as C5 and light naphtha trade at a discount to WTI in the region.  However, in my opinion, it will become increasingly economical to ship heavier barrels, API less than 60, of Permian condensate to the Gulf coast over the next few years. 


Plains and Enterprise effectively captured the opportunity to cost-effectively deliver stabilized and segregated barrels of condensate to Corpus Christi and Houston via their joint venture in the Cactus pipeline.  Transporting these heavier condensate barrels to the water adds on the regional differential LLS premium as captured by pipelines like Bridgetex through shipping WTS and WTI crude oil down to Gulf Coast refineries. 


However, a pipeline that is even more attractive is planned to begin shipments in the second quarter of 2017, Enterprise’s Midland-Sealy pipeline will segregate these barrels, “keeping them neat,” through a four category batch system, enabling these 50-60 API condensate barrels to have the optionality of being sold to the strongest of three markets:


  • Gulf Coast Splitters
  • Export via Texas City
  • Gulf Coast Petrochemical Facilities



Are you confident that existing midstream facilities have the required capacity and specifications to transport condensates to their optimal destinations? If not, what types of infrastructure are top priorities to be built next?


The midstream sector in the United States continues to stay ahead of the curve and continuously adapts to a changing landscape.  While every midstream project ever completed may not be a homerun, the midstream repeatedly delivers solutions that address the needs of the market and improve efficiency.  


If I had to pick a mode for transporting condensate that is not available and I would like to utilize, it would be the driverless, automated tanker truck which will one day benefit the market by reducing trucking costs and improving punctuality.




The appetite of refineries for high gravity commodities will also be a critical factor in determining the optimal destination for condensates. What would your advice be to a refiner considering whether or not to upgrade or modify their assets?


Upgrading refinery hardware is not a black and white situation.  The right course of action depends on several factors, including:

  • the location
  • the company’s degree of vertical integration (does it have production or gathering it can rely upon to optimize its slate?)
  • forward view of the magnitude of discount on light barrels (will the discount increase or decrease?)
  • perspective in regards to a potential change in export policy, outlook for regional/global price differentials
  • capital budgeting analysis to measure the gained efficiencies relative to costs/commitments over a medium and long term time horizon



Despite the depressed oil prices, production across the Permian has remained exceptionally strong and already the industry is talking about break-even points for new drilling. What are your expectations for production quantities over the next 1-2 years? (e.g. Remain stable, rise steadily, rise significantly?)


My research indicates the Permian will definitely maintain and even continue to grow its share of production relative to total domestic production for at least the rest of this decade.  The Permian Basin is resilient.  We must remember that a year ago when crude was in the $85 to $100 range in Cushing and on the Gulf Coast, Permian production continued to boom in spite of trading at a $10 to $15 discount at times throughout the year versus Cushing and LLS. 


The expanded takeaway capacity in the region over the past ten months has drastically narrowed the Midland discount and Permian Production has continued on at a very impressive pace.  One in every five barrels we produce domestically today comes from the Permian Basin whereas five years ago this ratio was approximately one out of every ten domestic barrels. 


While I am cautious to attempt to peg production volumes two years ahead because it requires me to make a distant prediction on the flat price of crude oil, ceteris paribus, my perspective is the Permian Basin will produce in excess of 2.25 million barrels per day of crude oil and 7.5 billion cubic feet per day of Natural Gas by end of 2017. 


Assuming the Midland Benchmark is above $52/barrel, my view is that crude oil and natural gas production in the Permian Basin will continue to grow at an annual rate of at least seven percent over the next two years which is more than twice the growth rate of the EIA’s total domestic production pegged at 8.7 million barrels per day in 2014 and forecast to reach 9.2 million barrels per day in 2016.



The criteria for exporting crude is perhaps the hottest talking point across the oil and gas industry. What are your expectations for crude export regulations – will it be allowed? And what will be the criteria?


I will recuse myself from elaborating in detail on this question.  While I can apply reason to make sense of the fundamental drivers of oil markets, unfortunately my same logic is ill-suited for understanding an outdated export restriction policy and the lack of leadership by our elected officials to reinforce the foundation of America’s vast success, namely free market capitalism.



What are you hoping to learn at the 4th Permian Midstream Congress? If you could take away one solution to help in your day to day role, what would it be?


I am hoping to learn about each of the participants at the Congress and how we may potentially be able to add value to each other’s operations.  So if you read this conference introductory brief, please take the time to share your thoughts in regards to these developments mentioned in the Permian.  I look forward to participating in another first class conference and engaging in the discussion of opportunities to make the Permian Condensate Market more efficient.

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