Calendar An icon of a desk calendar. Cancel An icon of a circle with a diagonal line across. Caret An icon of a block arrow pointing to the right. Email An icon of a paper envelope. Facebook An icon of the Facebook "f" mark. Google An icon of the Google "G" mark. Linked In An icon of the Linked In "in" mark. Logout An icon representing logout. Profile An icon that resembles human head and shoulders. Telephone An icon of a traditional telephone receiver. Tick An icon of a tick mark. Is Public An icon of a human eye and eyelashes. Is Not Public An icon of a human eye and eyelashes with a diagonal line through it. Pause Icon A two-lined pause icon for stopping interactions. Quote Mark A opening quote mark. Quote Mark A closing quote mark. Arrow An icon of an arrow. Folder An icon of a paper folder. Breaking An icon of an exclamation mark on a circular background. Camera An icon of a digital camera. Caret An icon of a caret arrow. Clock An icon of a clock face. Close An icon of the an X shape. Close Icon An icon used to represent where to interact to collapse or dismiss a component Comment An icon of a speech bubble. Comments An icon of a speech bubble, denoting user comments. Ellipsis An icon of 3 horizontal dots. Envelope An icon of a paper envelope. Facebook An icon of a facebook f logo. Camera An icon of a digital camera. Home An icon of a house. Instagram An icon of the Instagram logo. LinkedIn An icon of the LinkedIn logo. Magnifying Glass An icon of a magnifying glass. Search Icon A magnifying glass icon that is used to represent the function of searching. Menu An icon of 3 horizontal lines. Hamburger Menu Icon An icon used to represent a collapsed menu. Next An icon of an arrow pointing to the right. Notice An explanation mark centred inside a circle. Previous An icon of an arrow pointing to the left. Rating An icon of a star. Tag An icon of a tag. Twitter An icon of the Twitter logo. Video Camera An icon of a video camera shape. Speech Bubble Icon A icon displaying a speech bubble WhatsApp An icon of the WhatsApp logo. Information An icon of an information logo. Plus A mathematical 'plus' symbol. Duration An icon indicating Time. Success Tick An icon of a green tick. Success Tick Timeout An icon of a greyed out success tick. Loading Spinner An icon of a loading spinner.

How pipelines saved America’s biggest oil basin from shale bust

Eagle Ford , Texas
Eagle Ford , Texas

To understand why U.S. oil production is so resilient, it helps to consider the maze of pipelines running out of Midland, Texas.

New lines have relieved a chokepoint in America’s biggest oil-producing area. A massive supply glut had forced producers to offer discounts of more than $20 a barrel below the U.S. benchmark last year. This month, prices have been at an average premium of 78 cents, the most in records going back to 1991.

Magellan Midstream Partners LP, Plains All American Pipeline LP and Sunoco Logistics Partners LP finished work in the past year that added more than 750,000 barrels a day of capacity, while output grew by only 400,000. With an outlet to Gulf Coast refineries, the Permian has been the only major U.S. shale region to keep growing as prices dropped by more than half to less than $50.

“Putting in those pipelines and connecting the Permian to the Gulf directly allowed that premium to develop,” John Auers, Dallas-based executive vice president at Turner Mason & Co., an energy consulting firm, said by phone on July 27. “When you talk about these price levels, $5 to $10 is the difference between putting rigs back to work or shutting down.”

The Permian is a vast expanse of arid territory in West Texas and New Mexico, stretching over 75,000 square miles, or about the size of South Dakota. It’s been producing energy commercially since the 1920s after ranchers and farmers struck oil while drilling for water.

Production Rebound

After peaking at more than 2 million barrels a day in 1973, basin production slid to less than half that by the turn of the century. That changed in 2010, when companies starting using horizontal drilling and hydraulic fracturing, the techniques employed elsewhere for shale drilling. Output has doubled since then, back to more than 2 million barrels daily.

But the infrastructure didn’t keep up. There was only about 1.6 million barrels a day of refinery and pipeline capacity last summer. Storage tanks filled and producers had to offer discounts to buyers willing to ship on more expensive trucks and trains. West Texas oil sold at an average discount to crude in Cushing, Oklahoma, of $12.42 a barrel in August 2014 and dipped as low as $21. That’s changed.

“Now there simply isn’t enough crude to supply all of the pipes out of the Permian and to satisfy regional refinery demand,” said Dominic Haywood, an analyst for Energy Aspects Ltd. in London.

Pipeline Relief

Producers are shipping their crude out of the basin to coastal refineries where prices are higher. Crude inventories in Midland have fallen about 40 percent in the past five weeks to less than 3.5 million barrels as of July 17, according to Genscape Inc., a Louisville, Kentucky-based energy information provider.

Prices in Midland were above those in Cushing, the delivery point for futures on the New York Mercantile Exchange, on Tuesday. West Texas Intermediate oil fell 22 cents to $47.76 a barrel in electronic trading at 6:43 a.m. New York time on Wednesday.

“Had these pipelines not existed, you’d see Midland differentials at an $8-to-$10 discount to WTI,” Andy Lipow, president of Lipow Oil Associates LP in Houston, said by phone.

The new lines came at a good time for Permian drillers such as Concho Resources Inc. and Occidental Petroleum Corp. Prices collapsed in part due to extra supply from West Texas and other U.S. shale areas. Drillers responded by cutting budgets and idling more than half their rigs since December.

Eagle Ford

Production is falling in the other major shale regions. The Eagle Ford in South Texas will drop by 10 percent from March to August, while the Bakken in North Dakota will be down about 5 percent, according to the Energy Information Administration. The Permian has slowed to a growth rate of about 0.2 to 0.4 percent monthly from 2 to 4 percent, but it’s still expanding. Large swaths of the Permian are still profitable with $49 oil, according to Wood Mackenzie Ltd.

“Even at $50 oil, a lot of development in the Permian looks pretty tight,” Christopher Kopczynski, a senior research analyst for Wood Mackenzie in Houston, said by phone. “If you imagine an extra $10 discount for crude, things start to look pretty ugly pretty quickly.”

Recommended for you

More from Energy Voice

Latest Posts