Oil pipeline capacity in the Permian Basin is quickly filling to the brim due to the region's fast-paced growth. That's after output rocketed a jaw-dropping 38% over the past year to more than 3.3 million barrels per day (BPD), which is closing in on the region's 3.6 million BPD of pipeline capacity. That looming shortage has caused drillers in the area to slow their pace until new pipelines come online toward the end of next year.
In addition to those pipelines already under construction, companies continue to pitch new projects to shippers in hopes of locking in the next wave of growth. The latest entry into this building boom is the proposed Permian Gulf Coast pipeline, which is a joint venture between Energy Transfer Partners (ETP), Magellan Midstream Partners (MMP 0.02%), MPLX (MPLX -0.03%), and Delek US Holdings (DK -2.68%). The line could be in service as soon as mid-2020 if everything goes according to plan.
Drilling down into the latest project
Energy Transfer, MPLX, Magellan Midstream, and Delek made a joint announcement this week that they'd received enough commitments to proceed with the construction of a new 30-inch pipeline to move oil from the Permian to the Gulf Coast. The 600-mile line would transport oil from several points of origin in the Permian to Energy Transfer's Nederland, TX, terminal as well as Magellan's East Houston, TX, terminal, where crude could then reach its ultimate destination through their distribution systems.
While the partners didn't unveil the project's planned capacity, Energy Transfer's management team made several comments on the company's second-quarter call about a potentially large oil pipeline project with its joint venture partner Magellan Midstream Partners. CFO Tom Long stated that the company made "significant progress with our new 30-inch crude oil pipeline joint-venture project with Magellan and other strategic partners" that would "provide unprecedented flexibility from the Permian Basin."
Meanwhile, chief commercial officer Mack McCrea said that the company felt good about the conversations it was having with shippers and thought that this project "would add at least another 1 million BPD" of oil pipeline capacity to the region by 2020, which is much more than the 600,000 BPD pipeline Magellan and Energy Transfer initially envisioned. However, it doesn't seem as though they've hit that 1-million-barrel level just yet since the partners are currently seeking additional shipper commitments for the project.
Add it to the list
The Permian Gulf Coast Pipeline is now one of a growing list of Permian oil pipelines in various stages of construction. However, according to an estimate by Wells Fargo, the region only needs to add about 1.5 million BPD of pipeline capacity in the near term to meet demand. That's a concern now that there are more than a half dozen pipelines under development, since it appears as if the region could go from a shortage to a glut in no time.
Currently, three major oil pipelines are on pace to start service in late 2019. They include Plains All American Pipeline's (PAA 1.86%) 670,000-BPD Cactus II, the up-to-1-million-BPD Grey Oak Pipeline by Phillips 66 Partners (PSXP) and Andeavor (ANDV), and the private equity–backed EPIC pipeline that could move up to 675,000 BPD. Add it up, and that's more than 2 million BPD of pipeline capacity. Meanwhile, Energy Transfer and Magellan Midstream are expanding several existing lines, which could add another 400,000 BPD next year. On top of that, Plains All American Pipeline is working with oil giant ExxonMobil (XOM 1.16%) on a 1 million-BPD oil pipeline as well as expanding several other smaller pipelines as fast as it can.
Aside from the proposed Plains/Exxon pipeline, all these projects have already secured enough long-term, fee-based contracts to justify moving forward. However, most haven't locked in agreements for their full design capacity. Because of that, volumes and cash flow could take a hit once the next wave of pipelines, starting with Permian Gulf Coast, enters service in mid-2020 and steal some of the oil not currently committed to long-term contracts.
How much is too much of a good thing?
The oil industry is in desperate need of new pipelines to move crude out of the Permian Basin. However, with several under construction and more in development, the industry is running the risk of building too much capacity, which could impact returns down the road. That's something pipeline investors need to keep an eye on, since it's possible that these projects might not fuel as much growth in the coming years as their developers currently anticipate.