Crude Observations

That’s gonna need a lot of pipe

OK folks, I think it’s about time we had an honest discussion about widening price differentials against WTI, lack of rail capacity for shipping and the spectre of trucking oil to refineries because of massive pipeline constraints. We also need to have a very serious conversation about the over-production of gas in a trapped market which is causing prices per Mcf to crater and prompting widespread shut-ins of producing wells.


Look, I know what you’re thinking – here he goes talking about that stupid Trans Mountain again – can we not ever get a break from that thing? Like seriously, week after week on TransMountain and pipeline constraints and stupid bitumen by rail and trapped gas in Western Canada is going to make me lose my mind already! Seriously – boo hoo, right?


But wait, enough with the raging. I’m not talking about TransMountain. And for once I’m not talking about Canada.


I’m actually talking about the mighty Permian Basin, home to 3.8 million barrels a day (and growing)  of production as well as, according to the media anyway, pretty much every drilling rig that exists in the civilized and uncivilized world.


It is also home to an extensive infrastructure system that is capable of moving as much as 3.5 million barrels a day of oil and liquids to the massive refinery complex along the Gulf Coast and as much as 8.0 BCf/day of natural gas to wherever that gas may be needed.


Wait – that can’t be right. That means they are producing more than they can ship. How does that work?


The answer, as we Canadians know, is that it doesn’t. And the net effect is that prices paid for oil out of the Permian are severely discounted to WTI with a differential currently in excess of $10 a barrel – almost oilsandsy, right?


Fortunately, there is a solution for this. Build some more damned pipe.


Never mind that shutting in production every other week might actually solve the problem, at least for a while, no, what the drillers in Texas are going to get is more damned pipe. And lots of it.


As I described to a colleague the other day, this is how pipelines seem to be approved in Texas:


Proponent: “Hey, I want to build a pipeline in the Permian. Can you send me the app?”

Regulator: “There’s an app for pipelines?”

Proponent: “Not an app, an application. So I can do the regulatory thing”

Regulator: “You’re too funny. Just tell me roughly where it’ll go and when you’ll be done. It’ll be fine. Will you be needing extra security from the National Guard?”


Look, I know it’s not that easy, but after identifying that takeaway capacity was a big problem, it appears that some decisive action has been taken. There sure are a lot of pipes coming in Texas. Let’s take a look at what is currently being proposed (summary courtesy of Platts).


  • Gray Oak (Q3 2019 completion): Phillips 66 (75%) owner and Andeavor (25%) said in late April it has received shipper support to move ahead with the 700,000 b/d pipeline, and also launched an open season that could increase throughput on the line to 1 million b/d. The pipeline will move crude to Corpus Christi and to Sweeny/Freeport along the Houston Ship Channel and is targeted for start up in third quarter 2019. Part of Gray Oak’s development will be a connection to a 3.4 million barrel marine terminal under development by Buckeye Partners at Corpus Christi for exports. Nearly 50% of throughput on Gray Oak will be targeted for exports, while Phillips 66’s Sweeney refinery near Freeport could utilize 60,000 b/d to 70,000 b/d as feedstock, the company said.


  • EPIC Midstream (Q3 2019): The San Antonio-based company is working to bring on more shippers on its Eagle Ford Permian Ingleside and Corpus Christi pipeline for which it secured 75,000 b/d and 100,000 b/d of firm capacity, respectively, from Apache and Noble Energy. The pipeline is due for start up by the third quarter of 2019 and has increased capacity in the line to 675,000 b/d from 590,000 b/d. That figure may increase further to 825,000 b/d.



  • Cactus II (Q3 2019): Plains All American is moving ahead with the permitting, right of way and procurement process for the 650,000 b/d pipeline that it plans to bring into service in third quarter 2019. Cactus II will ship barrels from the Delaware Basin to the Port of Corpus Christi, and the adjacent Ingleside Terminal on the Texas Gulf Coast, with Trafigura coming on board as anchor shipper, committing to 300,000 b/d. Plains is adding storage tanks and augmenting its gathering system at Wink and McCamey that will add 220,000 b/d of new capacity this summer from the basin to its crude terminal in Southwest Texas.


  • Midland to Nederland (2020): Energy Transfer Partners, which is in talks with shippers, said mid-May it will announce “very soon” strategic partners for the 600,000 b/d pipeline that will ship crude from Midland to Nederland on the USGC. The facility will be built in 2020 and industry officials indicate Permian producer ExxonMobil is widely expected to sign in as a joint venture partner as it plans to increase crude output from the basin to 600,000 b/d by 2025, compared with some 200,000 b/d now.



  • Jupiter (2020): An open season will be launched late summer by Dallas-based Jupiter Midstream for the pipeline, which will have a capacity of up to 500,000 b/d and will move barrels from the Permian to Brownsville on the southernmost tip of the Texas Gulf Coast. The pipeline will serve crude export plans that Jupiter has at Brownsville which includes two new docks to load Panamax and an offshore facility to load VLCCs. The pipeline is targeted to be built by 2020 and Jupiter is seeking a JV partner. For the planned VLCC loading facility that will be built six miles off the coast of Brownsville, China Harbor Engineering Company is acting as consultant on the construction, Jupiter said. CHEC, with its parent China Communication Construction Company, is the builder of VLCC-capable oil terminal at the Zhanjian Port in South China.


Still not convinced that’s a big deal? Let’s look at it another way.


All these pipelines added together will add 3.1 million barrels per day of shipping capacity out of the Permian to the Gulf for processing and export. Just a shade under Western Canada’s current total export capacity. And it is expected to all be built by 2020, with most of it done in 2019, otherwise known by its other name – next year. In the meantime, we may have cleared the TransMountain right of way by then. I get it’s different, the lines are shorter, the regulatory system is laxer, whatever. It’s still a massive amount of capacity. And last I checked, nary a Dogwood Initiative or Great Texas Wild Boar Preserve to worry about.


Natural Gas


On the natural gas side of the energy ledger, the folks down South are also addressing a Texas sized problem through infrastructure.


Currently, natural gas pipelines in the Permian are operating at 98% of capacity due to the associated gas that is produced from tight oil wells.


After oil production grew 25% last year, the 8.1 BCf of pipeline capacity that criss-crosses the Permian now finds itself at the breaking point. Short term options for dealing with the excess are limited to two extremely poor choices – it can be flared or it can be shut in. Flaring is an environmental problem and shutting in cuts back on the all-important oil production.


Fortunately, relief is ion the way with close to 10.5 Bcf of pipeline capacity currently underway or planned, but the earliest online date is in 2020.


Current estimates are that Texas flares about 3% of the gas it produces, some analysts see that number growing by a factor of 5 before any pipeline relief comes along.


Regardless, the capacity additions are happening, including another export pipeline into Mexico being built by, wait for it, TransCanada.


And at the other end of the pipelines…


Since lifting the crude oil export embargo several years ago, exports of oil ex-Canada out of the United States have grown aggressively. A large portion of these exports are emanating from the Permian and other tight oil producing areas. Given that the export infrastructure in the Gulf Coast region was primarily finished product oriented, massive port expansions are a critical component to solving the United States’ infrastructure issues.


Currently, the US has only one port capable of loading the 2 million barrel VLCC tankers that are all the current rage – that being the LOOP project in Louisiana. Two new projects in Corpus Christi and Brownsville Texas will add two new docks and are expected to be completed in 2020 allowing a relief valve to the currently trapped Permian production.


With total export capacity currently estimated at 3.8 million barrels per day there is no pressing need to solve the issue today, but once the above referenced pipeline capacity out of the Permian comes online, it may not be long before that capacity is constrained. The expansions above will come in useful as will the planned 54 million barrels of new storage facilities and all the additional terminal and capacity projects at 40 separate shipping locations.


I’m not even going to talk about all the petrochemical and refinery investments happening domestically in the US. It’s depressing.


What’s the Point?


Look, I know the United States is different than Canada and our export options are limited to north south piepliens and the PETTMX (Pierre Eliott Trudeau TransMountain Expansion). But all it takes is a cursory glance at the above to recognize the scale of the investment that is happening south of the border. This is how the United States deals with an infrastructure shortfall – decisively and by easing the regulatory burden that may stand in the way of allowing the Americans to exploit its natural resource boom. If you’re an energy guy, you’re green with envy at how things get done.


Anyway, agree or disagree, this is what Canada is up against as it moves ever so slowly ahead with its energy infrastructure debates. A market to the south that dispenses with a lot of the debate and solves the problem. The US market may not move at the speed of light, but it sure ain’t glacial. They have many of the same issues, concerns and infrastructure deficit issues that we have. The only difference is that they are doing something about it and they are doing it now. Who knows, maybe tight oil enters into a terminal decline sooner than anyone thought (well except for a few of us) and the infrastructure will be overbuilt. The point is that it got built, is getting built and will be completed.


Ontario Election


OK, so it wasn’t the result I predicted. But as I always say, you get the government you deserve. I am sure that all the PCs that voted early and often are happy and I feel bad for the earnest NDP voters who thought they actually had a shot. Sometimes life doesn’t work out. Anyway, how bad can it be? Doug Ford seems to be nothing more than a walking soundbite and doesn’t seem to have much ideological backbone. I rather suspect it will be more like the previous Liberal government than anyone expected – high deficits, growing debt, the odd scandal – the usual. Except it will be vastly more entertaining, taxes will be lower and the beer will be cheaper.


Good luck Ontario. You will need it. I don’t see a massive exodus out of province just yet, but one never knows. As it regards the carbon tax, maybe we leave that discussion for another day.


And now, a public service announcement about tariffs.


I don’t like them. They are generally bad. They are a tax on consumers. They are job killers and inflationary. Interestingly, Justin Trudeau is going toe to toe with the Donald on this one and has recently been told that Canada may actually be a security threat because we burned down the White House in 1814. Rather than dismiss that comment, I think it may be beneficial for Justin to remind Donald that he can easily revoke Canadian citizenship for Justin Bieber, Celine Dion, Samantha Bee and Jim Carrey – stranding them in the US – unless he stops his feckless trade war. Not only that, as someone who gives so much thought to the national anthem, it may be worth reminding President Trump that without our reckless disregard for the White House and love of torches, it is likely that the Star Spangled Banner would never have been written at the end of that completely unnecessary war between a nascent United States and a Laura Secord led wannabe Canada. Just a thought to share …


Oh, final point on tariffs and pipelines if anyone out there is listening. All this stuff? It’s made with steel. Can we stop the foot shooting?


“Show up on time. I learned this from the mentor who I call Bigfoot in Kitchen Confidential. If you didn’t show up 15 minutes exactly before your shift—if you were 13 minutes early—you lost the shift, you were sent home. The second time you were fired. It is the basis of everything. I make all my major decisions on other people based on that. Give the people you work with or deal with or have relationships with the respect to show up at the time you said you were going to. And by that I mean, every day, always and forever. Always be on time. It is a simple demonstration of discipline, good work habits, and most importantly respect for other people. As an employee, it was a hugely important expression of respect, and as an employer, I quickly came to understand that there are two types of people in this world: There are the type of people who are going to live up to what they said they were going to do yesterday, and then there are people who are full of shit. And that’s all you really need to know. If you can’t be bothered to show up, why should anybody show up? It’s just the end of the fucking world.”  – Anthony Bourdain. RIP


Prices as at June 1, 2018 (May 25, 2018)

  • The price of oil held fell early in the week on a surprise storage addition, then rallied as OPEC cooled supply increase speculation.
    • Storage posted an increase
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected injection, natural gas gave up some ground then rallied thru the end of the week…


  • WTI Crude: $65.74 ($65.70)
  • Nymex Gas: $2.890 ($2.972)
  • US/Canadian Dollar: $0.7733 ($ 0.7713)


  • As at June 1, 2018, US crude oil supplies were at 436.6 million barrels, a increase of 2.1 million barrels from the previous week and 76.6 million barrels below last year.
    • The number of days oil supply in storage was 25.8 behind last year’s 29.7.
    • Production was up for the week by 31,000 barrels a day at 10.800 million barrels per day. Production last year at the same time was 9.318 million barrels per day. The change in production this week came from a fall in Alaska deliveries and a increase in Lower 48 production.
    • Imports rose from 8.159 million barrels a day to 8.356 compared to 8.341 million barrels per day last year.
    • Exports from the US fell to 1.714 million barrels a day from 2.179 last week and 0.557 a year ago
    • Canadian exports to the US were 3.645 million barrels a day, up from 3.418
    • Refinery inputs were up during the week at 17.369 million barrels a day
  • As at June 1, 2018, US natural gas in storage was 1.817 billion cubic feet (Bcf), which is 22% lower than the 5-year average and about 31% less than last year’s level, following an implied net injection of 92 Bcf during the report week
    • Overall U.S. natural gas consumption was up 2% during the report week
    • Production for the week was down 1%. Imports from Canada were down 11% compared to the week before. Exports to Mexico were down 1%.
    • LNG exports totalled 21.8 Bcf.
  • Slowly but surely… As of June 4 the Canadian rig count was 113 – 73 Alberta, 2 BC, 35 Saskatchewan, 2 Manitoba and 1 elsewhere. Rig count for the same period last year was actually higher.
  • US Onshore Oil rig count at June 8, 2018 was at 862, up 1 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 1 at 199.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 1 at 19
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 70%/30%



  • Tariffs
  • Retaliatory tariffs
  • Quebec’s government proposes to ban fracking
  • AKITA Drilling Ltd. and Xtreme Drilling Corp. announced their entry into a definitive arrangement agreement to combine the two companies to create a leading intermediate North American land drilling contractor.  The combined company, which will operate under the AKITA name, will have a fleet of 44 high-spec drilling rigs with operations in major resource basins in the US and Canada. Deal size is about $209 million.
  • Trump Watch: G7. No, G6 + 1. No G7 – 1 plus Russia? I’m confused. Also, the Eagles disappointed their khaki clad robot fans by getting themselves disinvited from the White House.
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