Most of the additional 4 million bpd of crude from the Permian Basin over the next five years will have to be exported
The shale revolution has demonstrably increased the production of crude oil from the U.S. and given the country the title of the world’s largest oil producer, even if it lasted only briefly. The increased output from the Permian Basin, located in West Texas and Southeastern New Mexico, has been the biggest contributor to this growth.
We conducted a recent study on the rapidly growing production from the Permian Basin and the attendant consequences on the energy business in the U.S. The key findings were validated through conversations with members of industry, government and infrastructure leaders. The key implications of this work are summarized here.
A major point: There is no significant domestic customer for the incremental crude projected to come out of the Permian Basin over the next five years. The Permian Basin produced 3.2 million barrels per day in 2018. That production is expected to grow by 1 million barrels per day each year for the next four years, to about 7 million barrels per day in 2022. Permian production was already up to 4 million barrels per day midway through 2019.
For comparison, the U.S. Energy Department reported earlier this month that U.S. oil production had surpassed 12 million barrels per day in April, meaning more than one of every three barrels produced in the United States today comes from the Permian.
U.S. refineries already are buying all the light crude they can use from domestic suppliers; Gulf Coast refineries have not imported significant quantities of light crude since 2015. Most of the additional 4 million barrels per day of crude coming out of the Permian Basin over the next five years will have to be exported .
Pipeline capacity for the crude produced in the Permian has been a major bottleneck, but it will move back into balance with demand by the middle of 2020, if not before. The shortage of pipeline capacity, and the resulting inability for producers to transport oil from the region, has caused a significant discounting of the produced crude oil in the Permian and has also resulted in increasing the inventory of drilled but uncompleted wells.
Plans to build pipelines from the Permian to the Gulf Coast – several to the ports at Corpus Christi, Houston and Beaumont – have been announced in recognition of the need for additional pipeline capacity to move the oil from the Permian, and most are planned to come online between now and 2022. The announced pipeline capacity and timing will be more than adequate for the evacuation of the additional crude oil that will be produced in the Permian.
However, new supply chain bottlenecks will emerge further downstream as the export terminals in Corpus Christi, in particular, are unlikely to be ready to handle the volume, even though the port expansion is being developed for the operation of very large crude carriers (VLCCs). Currently the Louisiana Offshore Oil Port (LOOP) is the only port along the Gulf Coast capable of handling VLCCs, which can carry 2 million barrels of oil. The remaining ports along the Gulf Coast will be capacity constrained for the foreseeable future.
But getting the oil out of the Permian and delivering it to the ultimate customer aren’t the only challenges facing the basin. The major operators, including ExxonMobil, Chevron, BP and Shell, are increasingly consolidating production and resources in the Permian, as well as the supply chain leading to domestic refiners. The announced acquisitions of acreage in the Permian by the majors, along with their part ownership of the pipelines and the downstream assets along the Gulf Coast, means the smaller independent producers still operating in the Permian will have to look for options to export their crude.
That won’t be easy. Independent producers are relatively inexperienced with the complexities of exporting oil, and they are likely to face business challenges in the absence of appropriate intermediaries stepping into the market. If the independent producers don’t – or are unable to – build their export capabilities, they could become targets for acquisitions.