Oil producers in the Permian Basin, dealing with a shortage of pipelines, are increasingly turning to trucks and rail to ship the flood of crude from the West Texas oil field to refineries and export terminals on the Gulf Coast.
These transportation shifts are driven by two simple math problems. First, crude oil production in the Permian has reached 3.6 million barrels a day, while pipeline capacity out of the region is just 3.5 million barrels a day, according to the energy research firm Wood Mackenzie. Next, crude is selling for as much as $10 more a barrel in South Texas, the Gulf Coast and other markets outside of West Texas, where inventories are building in part because of the lack of pipeline capacity.
The latest effort to move oil to more lucrative markets was launched last month, when the Houston oil transport company JupiterMLP signed a deal with Vista Proppants and Logistics of Fort Worth to ship West Texas crude by rail from Vista’s loading terminal in Pecos. Vista plans to ship about 400,000 barrels a month from its Pecos terminal through 2019 and potentially into 2020, depending on when pipeline projects are completed.
It’s unclear how much of crude Vista will handle for JupiterMLP, which has completed permitting to build a processing and export terminal at the Port of Brownsville and plans a 670-mile pipeline from West Texas to the export terminal. Neither company immediately responded to requests for comment.
Pipeline capacity has become a particular problem in the Permian, as booming production of both crude and natural gas has exceeded capacity and created bottlenecks. Several companies, including Kinder Morgan and Phillips 66 Partners, both of Houston, are racing to complete pipeline projects, but most are not expected to begin operations until at least next year.
The bottlenecks, meanwhile, are not only having an impact on prices in West Texas prices, but also production. The Railroad Commission of Texas, which oversees the oil and gas industry, recently reported that oil production in the state — most of it concentrated in the Permian — declined about 2 percent in June, compared to the same month a year earlier, the first year over year decline since early 2017. Analysts attributed the decrease to the pipeline shortage.
A recent analysis by the London consultancy Westwood Global Energy Group estimated that pipeline constraints could delay as much as $1.4 billion of investment in the Permian and keep 345 wells from getting completed in the second half of this year. That means the wells have been drilled, but not hydraulically fractured, or fracked, to begin producing oil and gas.
The number of these drilled but uncompleted wells, known as DUCs, have increased significantly in the Permian. The Department of Energy estimated 3,470 DUC wells in the Permian in July, up 80 percent from just over 1,900 a year earlier.
Production companies big and small are contracting for pipeline capacity on yet-to-be completed and cutting deals with trucking companies and rail carriers to get their crude out of West Texas to other markets. Union Pacific Railroad, one of the largest rail operators in the U.S., has seen a recent uptick in crude oil coming out of the Permian, said company spokesman Jeff DeGraff, though he wouldn’t cite specific figures.
Oil companies have also turned to the trucking industry to transport their crude, potentially adding more stress on the industry, already under pressure from driver shortages and the demands of hauling record amounts of sand, water and equipment for fracking and moving drilling rigs from one site to another.
Matt Nevarez, the director of operations for the Midland trucking company TexStar Crude Transport in Midland, said demand for shipping crude is so strong that his company is hiring trucks out of San Antonio to carry oil West Texas to South Texas markets in Three Rivers, Cotulla and Victoria. When asked which companies were moving oil by truck, Nevarez said “all of them.”
“The market spread for what they can sell a barrel for in South Texas versus Midland, it’s huge, so everybody’s wanting to get their oil down there,” Nevarez said.
But environmentalists worry that all of these extra trucks on the road carrying crude oil and trains going through populated areas could pose a public health risk. Luke Metzger, the director of the advocacy group Environment Texas, pointed to the oil train accident and explosions in the Canadian town of Lac-Mégantic that killed more than 40 people when a train full of North Dakota crude oil derailed in the middle of town and exploded.
Metzger said he doesn’t believe that many people in the state are aware of dangers posed by increased shipment of crude by truck and rail.
“I think that’s unfortunate because these could be very dangerous and people need to know that this could be going to a neighborhood near them soon,” Metzger said.
Relief may be coming in the form of what John Coleman, a senior research analyst at Wood Mackenzi calls three mega pipeline projects. Totaling 2.1 million barrels of capacity they are the EPIC Crude Oil Pipeline, the Gray Oak Pipeline, and the Cactus 2 Pipeline. All hope to be completed by the end of 2019.