Success is catching up with the Permian Basin, the prolific U.S. oilfield that's out-producing many Middle Eastern nations.
With oil prices climbing, the basin has become an expensive bottleneck as drillers try to pump more crude and natural gas than what pipelines can send to refineries, storage tanks and ports.
Billions of dollars worth of new and expanded pipelines are in the works, but it could take years before the oil-rich formation in West Texas sees sustained relief. And the inability to produce more oil and gas from the Permian region could help push up global oil prices.
"We can drill a well anywhere in the Permian in less than 30 days," said Bernadette Johnson, vice president of market intelligence at Drillinginfo. "We can bring that well online within a couple of months. It takes 18 months to bring on a new pipeline. ... It's not a quick fix."
The U.S. benchmark crude oil price recently topped $70 a barrel and hit three-year highs before dropping down to about $67. Some analysts say it could go as high as $100 this year as a result of U.S. sanctions against Iran, Venezuela's continued production decline and political instability in Libya - all key players in the global oil market.
Industry experts are counting on higher oil production from the U.S. and Saudi Arabia to soften price increases. For the U.S., that means more oil from the Permian Basin.
"Permian is going to be tough," Johnson said. "It's going to have to come from somewhere else. And for that to happen, it probably needs a price higher than $70."
Playing catch up
The Permian Basin has produced oil for nearly a century and is crisscrossed with pipelines. Still, recent production increases have been staggering.
At 1 million barrels per day, Permian Basin oil production hit a 13-year high in 2011. Since then, production has tripled to 3.1 million barrels with expectations that it could reach 5 million barrels by 2025.
Observers spotted the pipeline shortages by comparing prices at different points in the system. The benchmark price for West Texas Intermediate crude oil is set in Cushing, Okla. But there are prices elsewhere, from the Gulf Coast to inside the Permian Basin.
The price in Cushing, nearly 500 miles away, is typically more than the price in Midland in the heart of Permian, which accounts for transportation costs. Johnson said that when the so-called "spread" increased to $6 last year, that started "causing some operators some stress."
In May that spread spiked as high as $12.75, a clear sign that drillers' inability to move oil out of the Permian Basin was creating excess supply and pulling down the Permian price. Johnson, of DrillingInfo, said that tends to hit smaller drillers rather than larger producers, who generally have long-term transportation contracts with pipelines companies.
"That was a little bit of a surprise," Johnson said. "It came a little bit sooner than they thought."
John Zanner, lead crude oil analyst at Houston-based RBN Energy, said the spread had shrunk previously when the new Midland-to-Sealy pipeline - 540,000 barrels per day - opened in April.
"But then there's so much production growth in West Texas now that almost as soon as that happened, it (the price spread) blew out again," Zanner said.
Magellan Midstream, which operates pipelines that carry crude from Permian to Gulf Coast refineries, estimated that a "favorable" spread between the Midland and Houston oil prices could produce $30 million in additional revenue for the company.
This isn't the first time Permian Basin pipeline capacity has been squeezed. In late 2014, the spread between the Midland and Cushing oil prices had hit a record $17.50 per barrel because of pipeline capacity shortages, according to the U.S. Energy Information Administration.
That eased after new pipelines came online.
There's also a similar problem with natural gas, which in Permian is mostly an oil drilling byproduct. And there's only one way to transport natural gas: pipelines.
"If you can't move the gas, you can't produce the crude," Johnson said. "You can flare for a little bit, but that's not the solution." Flaring is an industry term for burning off natural gas that cannot be transported.
Although it's expensive, small amounts of crude oil can be transported by rail or truck.
Pipelines on the way
The pipeline companies aren't sitting idle as oil producers seek more options.
In February, Plains All American Pipeline announced that its Cactus II pipeline, running from the Permian Basin to the Corpus Christi area, was going forward. That's expected to open in the third quarter of 2019 with a capacity of at least 585,000 barrels per day.
Phillips 66 and its partners said last month that they had enough commitments to build their Gray Oak pipeline connecting West Texas to the Corpus Christi area. That project, which could open in late 2019, was initially announced as 385,000 barrels per day. Now the companies have said it could reach 700,000 barrels per day or more if there is enough interest.
And the EPIC crude pipeline is scheduled to open in the second half of 2019 with a capacity of 590,000 barrels.
Enterprise Product Partners took a different approach and plans to convert one of its natural gas pipelines to deliver 650,000 barrels of oil a day starting in 2020.
"You really need those major capacity pipelines to see any kind of relaxation in the spread," Zanner said.
Stephen Robertson, executive vice president of the Permian Basin Petroleum Association, said pipeline companies knew bottlenecks were coming. But they didn't want to get too far ahead of the curve when it comes to billion-dollar expenditures.
"You're not going to get a company to make the investment to put in a pipeline that could be sitting a quarter full," he said. "It's really trying to find that balance."
Two announced oil pipeline projects in the Permian Basin have been dropped despite the need for capacity. Buckeye Partners recent canceled plans for its 600,000-barrel South Texas Gateway pipeline. And Magellan Midstream Partners decided against a 350,000-barrels-per-day pipeline. A Magellan spokesman said that the company did not receive "adequate commitments to proceed with the project at this time."
Dallas-based Energy Transfer Partners and Houston's Enterprise Products Partners announced this month that they put back in service the Old Ocean natural gas pipeline, which has been idle since 2012. That pipeline runs from Maypearl, 40 miles south of Dallas, to Sweeney, near the Gulf Coast.
It transported Barnett Shale natural gas during the early 2000s boom. Now the pipeline will use its Permian Basin connection to move natural gas out of that region starting this year.
"Bringing the Old Ocean pipeline back into service will help meet the immediate demand," said A.J. "Jim" Teague, CEO of Enterprise Products Partners' general partner, in a written statement.
Kinder Morgan's $1.75 billion Gulf Coast Express pipeline is expected open in October 2019. And Enterprise Products Partners is also building a natural gas liquids pipeline - with a 2019 completion date - to offset the pipeline capacity it's converting to transport oil.
Until most of these projects are completed, Permian producers will not be able to significantly ramp up production. But that's not a "sky is falling" situation, Robertson said.
"People out here are used to changing conditions, and they're used to adjusting their operations to meet changing conditions," he said. "This is just another one of those."
Zanner said the Permian Basin discount is a problem for some producers, but it's also a side effect of the good times there.
"You're still making $50 or $55 a barrel," he said. "And in West Texas, their break-evens are so low that they're still making a bunch of money right now. ... For West Texas producers, it's probably the best of a bad situation."
Visit The Dallas Morning News at www.dallasnews.com