ExxonMobil, Enterprise still adding to massive Permian crude pipeline glut
The embattled, but resilient Permian Basin quickly evolved from a glut of oil to a glut of excess pipeline capacity as the coronavirus pandemic crippled global demand, and new long-haul crude pipelines will further exacerbate the divide as they continue to come online through 2021.
Pending projects led by ExxonMobil and Enterprise Products Partners would cause the Permian’s crude pipeline capacity to nearly double the basin’s oil output by the end of next year, leading to a maze of half-empty pipes operating on reduced rates amid increasingly cutthroat competition, energy analysts said.
A series of pipeline project completions late last year and into early 2020 moved the Permian from a dearth of takeaway capacity to a surplus of pipe. But surging crude production was supposed to keep pace. That is, until the pandemic took hold in March.
“Once again, the industry overbuilt. We flew too close to the sun to handle the COVID demand shock,” said Ethan Bellamy, midstream strategist with East Daley Capital, arguing that firms will have to work through re-contracting and lower profit margins longer term. “The new normal for the crude pipeline operators looks pretty poor.”
Now, the Permian’s crude pipeline capacity is expected to hit almost 8 million b/d by the end of 2021, while crude output should still be relatively flat near 4.2 million b/d, according to S&P Global Platts Analytics. And that’s even after a slate of pipeline project cancellations and deferrals. Bellamy sees Permian oil volumes staying below 5 million b/d through 2025.
Permian crude production plunged from a high of 4.8 million b/d down to an estimated 4.1 million b/d in August as activity plummeted and wells were shut in, according to the US Energy Information Administration. Crude takeaway capacity is now close to 6 million b/d and will soon rise to about 6.5 million b/d when Enterprise Products Partners’ new Midland to ECHO III pipeline to Houston comes online in August or September.
That Enterprise pipeline will link next year into the ExxonMobil-led Wink to Webster crude system that will push capacity to above 7.5 million b/d. Wink to Webster was pushed back from the spring of 2021 to a likely third quarter completion date. And, by the end of next year, Enterprise still plans to bring online its delayed 450,000 b/d Midland to ECHO IV pipeline.
ExxonMobil and the Permian’s other biggest producers essentially pitted the midstream firms against each other as they fought to ensure there was ample pipeline capacity, said Hinds Howard, CBRE Clarion Securities portfolio manager.
“The midstream guys were played against each other with a bunch of half-full pipelines,” Howard said. “That’s a story that’s going to play out over time. It’s going to put pressure on a lot of these guys as contracts roll. They were built on shorter-term contracts than they were in the past.”
The pipelines will still benefit from minimum-volume commitments, but those contract obligations aren’t as strong as they once were. Until there’s midstream industry consolidation or an unexpected spike in crude output, the midstream outlook isn’t promising, apart from continued cost cutting, Howard said. “It doesn’t feel like there’s a quick fix. It’s a challenging environment. It feels rough.”
A new normal
The new Permian pipeline projects still pressing forward do seem like “overkill,” but there’s some sound logic for ExxonMobil wanting a new system to move its own crude as it eyes an extended future in West Texas and New Mexico, said Sandy Fielden, director of oil research at Morningstar. But it makes sense for ExxonMobil to further delay the Wink to Webster system’s startup if feasible, he said.
“They [ExxonMobil] typically take a long term view on the fundamentals, and they need the capacity to get planned increases in Permian production to market sooner or later,” Fielden said.
ExxonMobil declined to comment.
The company has gone from an industry-leading 55 drilling rigs in the Permian down to about 30 rigs now, with plans to shrink down to just 15 rigs or fewer by the end of this year, it said in a July 31 earnings call.
Enterprise scaled back its initial plans for Midland to ECHO III and could continue to defer the fourth-phase pipeline beyond 2021. Enterprise is looking for joint venture partners on this and other projects, but hasn’t found much success yet.
“In this environment, everyone is just kind of pulling their horns in,” Enterprise co-CEO Jim Teague said during its July 29 earnings call.
Because Enterprise plans to reduce some crude throughput in existing pipelines to accommodate other commodities, total Permian crude takeaway capacity at the end of 2021 could be closer to 7.8 million b/d than 8 million b/d, according to Platts Analytics.
The Permian still accounts for almost 40% of total US crude production. US output plunged from an all-time high of nearly 13 million b/d down to 10 million b/d in May, according to the EIA, and is now back up to an estimated 10.7 million b/d. And benchmark, front-month NYMEX WTI still seems range-bound and stuck just above $40/b, which won’t spur much new drilling activity in the near term.
Plains All American Pipeline is building Wink to Webster as a key JV partner with ExxonMobil and others.
“There’s easily five years of crude capacity before we have to worry about building any more long-haul pipes,” said Plains CEO Willie Chiang of the Permian during a recent energy conference. “This is by far a [global] demand problem.”
Essentially, Plains and others battled to keep pace with producers and inadvertently ended up way ahead because of the pandemic.
“For the last 10 years, the midstream segment really spent a lot of time focused on trying to stay ahead of our E&P and upstream brothers and sisters as far as production,” he said.
Which leads us to today, said Colton Bean, a midstream analyst at Tudor, Pickering, Holt & Co.
“I think we’re entering a more mature stage for the US midstream sector with fewer growth opportunities and, consequently, less need for capital investment,” Bean said.