Expanding Crude-Oil Pipeline Network Will Accommodate Future Production Gains and Shrink Discounts

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Looking past current low prices for crude oil, Andy Lipow, president of Lipow Oil Associates LLC (Houston, Texas), took a longer-range view--to 2020--and predicted planned pipelines and outbound rail transport capacity will be more than enough to meet expected crude-oil production growth, resulting in narrower differentials. Speaking August 25 at the 27th Annual Rocky Mountain Summit, organized by the Colorado Oil & Gas Association (COGA) (Denver, Colorado), Lipow discussed projected crude-oil production growth and planned outbound pipeline investments for the West Texas, North Dakota and Colorado/Wyoming markets.

Crude oil producers in some markets have had to accept lower prices for their product based on outbound transportation capacity from a given market. But expansion of outbound transportation options tends to shrink discounts compared to the posted price of West Texas Intermediate (WTI), the U.S. benchmark crude, delivered to Cushing, Oklahoma. Lipow used the Guernsey, Wyoming, market as an example of what happens to netbacks when new outbound transportation capacity comes online. Prior to the start-up of the Pony Express crude oil pipeline late last year, a shortage of outbound transportation capacity forced producers in the Bakken Shale to discount their product by $5 to $6 per barrel compared to WTI. But when Pony Express began operating a year ago, differentials narrowed immediately. Today, they are virtually zero, Lipow told the COGA conference.

Click on the icon at right to see how price discounting has all but disappeared for Bakken crude oil at the Guernsey, Wyoming, hub.

The West Texas market is expected to experience the strongest growth in crude-oil production through 2020, Lipow said: Citing an estimate from the U.S. Energy Information Administration (EIA) (Washington, D.C.), Lipow said production there should grow to between 1.9 million barrels per day (BBL/d) and 2.8 million BBL/d by 2020, up from last year's average of 1.7 million BBL/d.

Last year, West Texas oil producers had to absorb discounts of up to $20 per barrel off posted WTI prices at Cushing, Oklahoma, because of a shortfall in outbound transportation options. But by 2020, pipeline takeaway capacity is projected to increase by about 1.1 million BBL/d. Outbound rail transport is projected to grow by 80,000 BBL/d by 2020. Together, the expansion of transportation capacity should match expected increases in production. As a result, Lipow forecast, discounts for West Texas producers should fall to $3 or less per barrel by 2020.

The largest proposed West Texas crude oil pipeline scheduled to begin operating by 2020 is the grassroot Midland-to-Rancho Seely project, a $575 million project being developed by Enterprise Products Partners L.P. (NYSE:EPD) (Houston, Texas), which is scheduled to begin transporting up to 540,000 BBL/d of crude eastward from Midland starting in mid-2017.

Turning to North Dakota, Lipow told the COGA conference production is projected to grow by between 100,000 BBL/d and 400,000 BBL/d y 2020, to a range of 1.15 million BBL/d to 1.5 million BBL/d. Crude-oil pipeline capacity is projected to grow by about 765,000 BBL/d by 2020 while rail transport is scheduled to expand by about 230,000 BBL/d by that year, more than enough to handle projected gains in production. In addition, in-state refinery capacity is scheduled to rise from about 68,000 BBL/d in 2014 to an estimated 208,000 BBL/d in 2020. Most of the incremental refining capacity is geared to meeting North Dakota's in-state need for diesel fuel.

Producers in the Williston Basin have struggled to get their product to market in recent years, as production surged, far outstripping outbound transport capacity. Rail's share of the transportation market surged in 2011-2013, as railroads were able to add outbound capacity faster than pipelines could be permitted and built. For more on that, see May 13, 2013, article - Crude-by-Rail Surges, Dominating Outbound Transportation from Williston Basin. But in recent years, a surge in pipeline construction has enabled pipeline operators to recapture some lost market share. For more on that, see October 14, 2014, article - Crude-Oil Pipelines May Gain Market Share from Rails in Williston Basin and July 15, 2015, article - Crude-Oil Pipelines Recapture Lost Market Share in Williston Basin.

Two large proposed pipelines in the Williston Basin are the Dakota Access and the Sandpiper projects. Dakota Access is a $1.2 billion project developed by Energy Transfer Partners L.P. (NYSE:ETP) (Dallas, Texas) that is scheduled to bring crude oil to Patoka, Illinois, starting in about 13 months. The Sandpiper project, a $2.6 billion, 618-mile project, is scheduled to bring Bakken crude to the Upper Midwest. Developed by a unit of Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta), Sandpiper is scheduled to transport up to 225,000 BBL/d of crude oil when it begins operating in early 2017. When these and other planned outbound pipeline projects come online, Lipow predicted the added pipeline capacity would shrink discounts for Bakken crude by several dollars per barrel.

Turning to the Wyoming/Colorado market, Lipow cited the EIA in projecting crude oil production would increase by about 231,000 BBL/d in 2020, to about 700,000 BBL/d. Pipeline developers plan to add about 1.2 million BBL/d of outbound transport capacity by then, and railroads expect to add nearly 200,000 BBL/d of capacity by that year, more than enough to handle the projected surge in production from those two states. Those capacity additions are expected to shave several dollars per barrel off the differentials with WTI at Cushing, he said.

Lipow also discussed transport capacity into and out of the Cushing crude-oil hub. Right now, there are 21 operating or planned pipelines entering Cushing, with combined capacity of between 3.3 million BBL/d and 3.9 million BBL/d. He told the conference there are between 2.55 million BBL/d and 2.85 million BBL/d of existing and planned pipeline capacity entering Texas from Cushing.

Over the next five years, as the crude-oil pipeline infrastructure expands, "U.S. Gulf Coast refiners will be big winners because of the onslaught of arriving crude oil," Lipow predicted. "Producers will see tighter differentials. It's all about location, location, location."

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