That Was Fast: The Permian Basin is Running Out of Pipeline Capacity

By Motley Fool Staff Markets Fool.com

U.S. oil producers have been rushing to drill in the Permian, and that's now starting to present a problem: There's more oil being produced than pipelines that can ship it out.

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In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman explain the situation in the Permian, and what this means for oil producers and big pipeline companies going forward.

A full transcript follows the video.

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This video was recorded on April 27, 2017.

Sean O'Reilly: The big show, Permian over capacity. This is funny. As I mentioned, "Permian growth overwhelms pipeline capacity": "By the end of 2017, four new pipelineprojects are expected to add over 800,000 barrels per day of capacity, and it is sorely needed. EIA [the Energy Information Administration] estimatesproduction from the Permian Basin this year will grow 420,000 barrels per day." Apparently, WTI [West Texas intermediate] Midland prices relative to WTI Houston are all out of whack because of this. This is particularly funny because I found this article back from the Midland, theMidland Times, their newspaper. This is from March 2016, just a year ago. "Study finds Permian has four years of extra pipeline capacity ahead." What's going on here, guys? Did it really catch everybody that off guard?

Taylor Muckerman:
I think, when you were talking about oil production and natural gas production several years ago, the United States was more diversified. Now, the Permian is the lowest cost, in some areas --

O'Reilly:It's kind of a bottleneck situation?

Muckerman:
Yeah, so everyone has been rushing to the Permian, versus folks focusing a little bit more on the Williston, a little bit more on the Eagle Ford, a little bit more on the Niobrara. All the news has been about everyone rushing to the Permian, and really ramping up that region's production.

O'Reilly:I found a fun map with a list of all the pipelines in the Permian put together byCredit Suisse. Crudetakeaway capacity in the Permian Basin --and these are all the operating companies --Plains All American Pipeline(NYSE: PAA) is a company.

Muckerman:
I've heard of that one.

O'Reilly:
OXY [Occidental Petroleum] (NYSE: OXY),Sunoco [Logistics Partners] (NYSE: SXL),Kinder Morgan(NYSE: KMI), and of course, [MagellanMidstream Partners] (NYSE: MMP).

Muckerman:
Some pretty big names in there.

O'Reilly:For sure. Thebiggest on the list is Plains, 450,000barrels of capacity per day. Sunoco is 400,000,and then it tapers off from there to Magellan at 225,000. Kinder Morgan 120,000. OXY 75,000. This is 1.27 millionbarrels of daily production capacity we're talking about, to move it. There's morecoming online mostly from Magellan, Plains, and Sunoco.

Muckerman:
Yeah. Hopefully it's coming online because they'realready been building it. If I were an investor,I wouldn't want to see companiesrunning out to build crazy capacityjust because there's a shortage,because it'll probably diffuse itself over time.

O'Reilly:Right. Apparently, the management of these companieshave been pretty far-sighted. There's no waythey rushed in there; they just built these.

Muckerman:
Yeah, these take years. Maybe not years and years, but a year or more to throw these things together on the bigger scale of takeaway capacity.

O'Reilly:
I'm surprised Kinderwasn't bigger in the Permian.

Muckerman:
Yeah. You look at them, a lot oftheir business is natural gas.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Sunoco Logistics Partners. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.