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Did you know? The Permian Basin and their plan for the future


The Permian Basin

A lot is happening in the U.S. upstream business, and the U.S. is now among the world’s largest crude oil producers. Most of the crude comes from the Permian basin which is still developing at high pace because of the shale fracking technology. Currently the Permian basin is accounting for about 1/3 of the total U.S. production.

As production has expanded, much of the crude oil is stuck inside the region because of limited transportation infrastructure. This results in huge differentials during 2018 between the Permian in-land priced WTM and the Cushing in-land priced WTI to the Louisiana and Houston priced crudes LLS and MARS. This is not just an indication of oil being trapped in the Permian, but also that there is an increasing need for further export capacity from the U.S. ports. The MARS and LLS have direct access to the global markets as they are extracted from the gulf rather than in-land, which is part reason for them being priced closer to Brent.

These in-land pricing differentials have led to planning of huge investments in not only in-land pipeline capacity with the main purpose of making Permian crude available outside Texas - but to an even higher degree the export capacity as well. A lot of the investors acknowledge a need for the U.S. being able to load VLCCs as the economics of scale are far better than on the smaller Aframax and Panamax type carriers.


Fact Box: The loading capacity of the crude carriers measured in DWT (deadweight tonnage) is:

Panamax    60000 - 80000
Aframax 80000 - 120000
Suezmax 120000 - 200000
VLCC 200000 - 320000
ULCC 320000 - 550000


In spring 2019 construction of a 1 mbpd export capacity project is set to start - the South Texas Gateway Terminal. The hub is expected to be partially operational in the end of 2019 and fully in the summer of 2020.

Below graph shows the current and planned takeaway pipeline capacity from the Permian and the planned export capacity. Note, that the current export capacity is not fully utilised as the record crude export level was 3.2 mbpd and the 2018 average was 1.9 mbpd. The reason for this is likely that the WTI grade has been at a price level which keeps refiners around the globe from buying the crude. This price is, however, expected to converge to the levels of the WTM grade as the Permian crude WTM becomes available to export. The lower WTI price would result in increased demand and thereby an increased need for export capacity. Therefore, Permian pipeline takeaway capacity is planned to reach 6.5 mbpd and an export capacity equal to the entire Russian production is set to be reached at the same time.

The key to understanding these price differences and how they affect the price of Brent really is that increased capacity for exporting the cheap WTM would drag down the price of WTI and thereby the spread to Brent would widen. Consequently, it would be profitable for refiners around the world to import U.S. grades instead of grades priced basis Brent – thereby making the Brent less attractive and hence ultimately cheaper.


Fact Box: The Permian Basin just recently got its own contract on the Intercontinental Exchange (ICE) as an increasing amount of new pipeline capacity is expected to go directly to the gulf coast export terminals – thereby bypassing the current main pricing hub in Cushing, Oklahoma where the WTI is priced.


Fact Box: please be advised that the 500 kbpd increased export capacity in 19H2 is not official but a best-case guesstimate. 


Decreasing crude oil prices in general could, however, jeopardise these investments as there would be no gain in importing and exporting U.S. crude if differentials are not substantial. Especially if the price of crude decreases below the marginal costs of production, investments not yet financed would be jeopardised.

A concluding remark about the plans and projects is that despite some extra pipeline capacity might come online in the first half of 2019, it is possibly not going to affect the global crude prices significantly. However, if the planned capacity expansions of the last half of 2019 actually are going to stick to the planned timeline, we could see the Permian shale starting to affect the global crude prices significantly towards the end of 2019/start of 2020.

The key take-away is that the U.S. is trying to deal with the capacity problems and the solutions might not be that far away even though there is a degree of uncertainty tied to the timeline of these projects.


Learn more about the Permian Basin here.