Magellan Eyes Export Opportunities For Permian’s Looming Takeaway Problem

MIDLAND, Texas—As the threat of too much oil and too few pipelines in the Permian Basin continues to loom, midstream developers are trying to keep up with the aggressive pace of producers with some looking toward growing export opportunities on the Texas Gulf Coast.

At some point production is going to exceed current takeaway capacity out of the Permian, Robb Barnes, senior vice president of commercial - crude oil at Magellan Midstream Partners LP (NYSE: MMP), said at Hart Energy’s Midstream Texas conference on May 24.

Barnes added that Magellan is one of several companies looking to lay a new pipeline from the Permian to Corpus Christi, Texas, and also is currently expanding its BridgeTex Pipeline in the basin.

“The rationale around laying a pipeline from the Permian down to Corpus Christi is to get it on the water”—a capability being pushed by many producers, he said.

Despite relatively flat crude prices in 2017, the Permian has clearly been where the majority of drilling activity is taking place in the U.S. thanks in part to increased rig activity driven by efficiencies, Barnes said.

“Why the Permian? If you look at the analysis that shows breakeven economics based on where to spend the money, producers that have acreage in the Permian are getting the most bang for their buck,” he said.

The rig count in the Permian Basin has more than doubled since 2016 with 361 active rigs in the basin as of May 19 vs. 137 a year ago, according to Baker Hughes Inc. (NYSE: BHI).

At the same time, the Energy Information Administration is also projecting an increase of crude oil production in the Permian Basin to an estimated 2.4 million bbl/d in May. The Permian produced about 2 million barrels per day (bbl/d) of crude oil in May 2016.

Barnes said there are numerous production forecasts for the Permian out there by a lot of various firms, though “don’t focus on the numbers—they’re all a little bit different.” The upshot, he said, is that across the board these projections all reveal the same danger emerging for takeaway capacity.

“All of them indicate at some point based on the production curves that they’re projecting that additional takeaway capacity is going to be necessary,” he said. “And that’s where midstream companies like Magellan come into play to address those concerns for all the producers out there.”

Barnes said Magellan forecasts a takeaway capacity constraint hitting the Permian by 2022 or 2023.

However, midstream developers are already addressing the projected constraint with announced midstream projects in the Permian so far during second-quarter 2017 significantly exceeding activity in the rest of the U.S., according to a May 23 report by Stratas Advisors.

So far, Permian midstream developers have announced 23 new projects, expansions or completions at expanding pipelines, terminals and docks, tanks and processing plants during the second quarter compared to the 20 projects elsewhere, the report said.

Currently, Magellan's crude oil assets include more than 2,000 miles of pipelines and 26 million bbl of storage—the Permian being a big portion of that, Barnes said.

“Our focus is increasing our takeaway capacity out of the Permian Basin through this Corpus Christi pipeline project,” he said. “In addition to that, going back to the expansion of our BridgeTex Pipeline and doing all that while we maintain quality of the barrel flow producers so that they can have the greatest ability to sell that barrel for a higher value.”

Through its Longhorn and BridgeTex pipeline systems, Magellan currently has takeaway capacity of roughly 575,000 bbl/d, which is expected to increase by 100,000 bbl/d in a month or so following completion of its BridgeTex expansion project.

“Through the process of doing all that we’ve identified some ways to increase the capacity even further,” he said. “We’re very confident we’ll get to 450,000 and we may even be able to get above 450,000 with fairly limited work that needs to be done.”

Barnes said the new pipeline Magellan is developing to transport Permian crude to Corpus Christi will have multiple origin points, both in the Delaware and Midland basins, as well as multiple delivery points in the Corpus Christi area.

“There’s been a lot of emphasis and push to go to Corpus Christi from a lot of producers to have that marine export capability,” he said.

As far as potential problems from the public for the new pipeline, Barnes said he feels like Magellan has an advantage due to the company's experience with previous pipeline projects, including its work on the Saddlehorn Pipeline, which is a crude pipe from Colorado’s Denver-Julesburg Basin to Cushing, Okla.

“I think the key to that is being proactive,” he said. “It’s definitely something that’s on our mind and I feel like we’re in a unique situation to take what we’ve learned on previous pipelines and bring it to the pipeline that we’re looking to construct down to Corpus Christi.”

Emily Patsy can be reached at epatsy@hartenergy.com.