August 12, 2014 / 5:00 PM / 3 years ago

Oil production in Permian causes pipeline bottleneck in Texas

NEW YORK, Aug 12 (Reuters) - Oil production from the burgeoning Permian Basin of West Texas is outpacing pipelines' ability to transport oil to the Gulf Coast, causing coastal refiners to pay an additional premium to acquire oil.

On Monday, that bottleneck caused oil for delivery at Midland, Texas WTC-WTM to trade at nearly $20 a barrel less than Gulf Coast benchmark Light Louisiana Sweet WTC-LLS, the deepest discount in 17 months. It was little changed on Tuesday.

The deep discount is a consequence of the U.S. shale revolution, which has unleashed a revival in U.S. production, unlocking billions of barrels of reserves of crude oil, boosting the economy and potentially outstripping domestic demand.

In shale formations in the Permian Basin of Texas and New Mexico, the rate of growth for oil production is set to increase for the sixth consecutive month in September, according to data from the EIA's drilling productivity report. The formation's growth rate is outpacing Texas' Eagle Ford, where growth slowed between February and August, and North Dakota's Bakken fields, where growth has been relatively stable in recent months.

As Permian production has taken off, infrastructure to move the crude has lagged.

With rising production, widening differentials may mean shippers need to be more creative to get oil to the coast, says Amrita Sen, chief oil analyst at Energy Aspects.

"On the whole, there's not enough takeaway capacity. What we will see is the differentials widening out as other forms of transportation like rail and trucking will become more economical," she said. "But we expect Gulf Coast grades to ease in the fourth quarter because of maintenance season. All that should ease some of the pressure."

PERMIAN ON THE RISE

The Permian Basin is set to produce about 1.72 million barrels per day in September, 38,000 bpd more than August, according to the Energy Information Administration's drilling productivity report.

"The bottom line is that the incremental growth is slightly more than the market expected," Barclays Plc Analyst Michael Cohen said.

Meanwhile, Eagle Ford is set to produce about 1.51 million bpd, an increase of 31,000 bpd from the prior month, and the Bakken play is set to produce about 1.14 million bpd, an increase of 20,000 bpd, EIA data showed.

PIPELINES

A number of pipelines may reduce the glut of crude in the Permian, although they are not coming online quickly enough to offer immediate relief.

Magellan Midstream Partners LP's 300,000 bpd BridgeTex crude oil pipeline, which will move oil from Colorado City, Texas, to the Houston area, is set to start up at the end of September. That should help narrow the spread, traders said, although more capacity is required.

Sunoco Logistics Partners LP's Permian Express II, moving crude from the Colorado City area to the Gulf Coast, may also alleviate the backlog. The pipeline will come into full-service in the second quarter of 2015. (Reporting By Catherine Ngai; Editing by Jessica Resnick-Ault and Dan Grebler)

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