While well known among oil and gas industry professionals, the Permian Basin of West Texas and eastern New Mexico doesn't attract nearly as much attention from the media as North Dakota's Bakken Shale or Texas' Eagle Ford Shale.
Well, that's a shame because it really should get more attention. Unbeknownst to many, the play was a veritable beehive of oil and gas activity as early as the 1920s. But, after peaking in the early 1970s at around 2 million barrels per day, Permian production started to decline and the play gradually fell out of favor.
Over the past five years, however, the play has experienced a phenomenal resurgence, due largely to the application of new drilling technologies. Daily production volumes are currently twice that of the Bakken and the number of rigs drilling in the play has risen sharply. In fact, Permian output is so high that current pipeline capacity has proved inadequate in keeping up with production.
But that looks like it is certainly about to change. Recognizing the high demand for takeaway capacity from the play, midstream companies have embarked upon a host of new pipeline projects that will transport Permian oil to the U.S. Gulf Coast. Let's take a closer look at these individual projects one by one.
West Texas Gulf Pipeline expansion
The first is the expansion of the West Texas Gulf Pipeline, which is operated by Sunoco Logistics Partners (NYSE: SXL) – an entity that is now part of Energy Transfer Partners (NYSE: ETP). The project, which is scheduled to start up by the end of this quarter, entails expanding the existing West Texas Gulf pipeline that runs from Colorado City to Wortham, and then runs east to Longview. The expansion is expected to boost capacity from Colorado City to Longview by about 30,000 barrels per day.
The other part of the expansion project entails reversing the flow of an existing pipeline that runs north from Nederland (a Gulf Coast city located near Port Arthur, Texas) to Wortham. This reversal will permit the flow of oil directly from Colorado City to the Texas Gulf Coast, via Wortham.
The second major Permian pipeline project is the Longhorn reversal project. The Longhorn Pipeline, operated by Magellan Midstream Partners (NYSE:MMP), originally carried refined products from Houston to El Paso via Crane (a western Texas city located very close to Permian production).
The new project will reverse the direction of Longhorn's flow, such that it flows from El Paso to Houston, with the Crane to Houston line carrying crude oil instead of refined product. From its terminal point at the Magellan Terminal in Houston, crude can be transported south to the Texas Gulf Coast and further east to Louisiana.
The reversal is expected to be completed sometime this quarter and will provide a capacity of 135,000 barrels per day from Crane to Houston. By the middle of this year, Magellan plans to expand capacity to 225,000 barrels per day, for which it has already secured contracts.
Sunoco Logistics Permian Express Pipeline Phase II
The third major Permian pipeline project is the second phase of the Sunoco Logistics Permian Express Pipeline. The first phase entailed reversing an existing pipeline, which runs from Wichita Falls south to Wortham, and then continues south on a pipeline to the coastal city of Nederland.
This pipeline will interconnect the Basin pipeline, which runs eastward from the Permian to Cushing, Okla., at Wichita Falls. This is expected to allow oil destined for Cushing to be diverted to the Permian Express, from where it can be transported to the Gulf Coast. Phase I of the Permian Express is expected to start up this quarter with an initial capacity of 90,000 barrels per day, which will be expandable to 150,000 barrels per day later in the year.
Phase II of the Permian Express will entail an additional expansion of the West Texas Gulf Pipeline, which is expected to add 200,000 barrels per day of capacity form Colorado City to Nederland. Sunoco is also contemplating an extension that would run east from Nederland to St. James, La., and other refineries in that state. Phase II should be up and running by the second quarter of 2014.
Finally, the fourth major project should be the proposed BridgeTex pipeline, a new 400-mile line with a capacity of around 280,000 barrels per day from Colorado City to Texas City. BridgeTex is operated as a joint venture between Magellan Midstream Partners and Occidental Petroleum (NYSE:OXY). If the project progresses as planned, it should be operational by the middle of 2014.
As long as oil prices remain high, there is no doubt that drilling activity in the Permian Basin will continue to flourish. Permian producers are already seeing strong production rates, thanks to the play's superior economics and the use of horizontal drilling, multi-stage hydraulic fracturing, and enhanced oil recovery methods, such as carbon dioxide injections.
Going forward, production is expected to keep booming. According to Turner Mason, a leading energy consulting and research firm, Permian Basin production could rise by 250,000 barrels per day to a little over 1.45 million barrels per day by 2016.
While exploration and production companies are the most obvious beneficiaries of growing production, the aforementioned midstream companies should also see nice returns. Many have already secured multi-year contracts for their lines, which should boost cash flow and allow for greater scope to increase distributions.