Last Friday (May 8, 2015), Baker Hughes data showed the Permian basin oil rig count up by two – suggesting that drilling may be picking up in West Texas. A week earlier at the end of April, Enterprise Products Partners (EPD) announced they are moving ahead with a new pipeline from the Permian basin to the Houston area – set to come online in 2017. The new pipeline will add 540 Mb/d of takeaway capacity and comes on top of 450 Mb/d being added in the Permian this year by the Plains All American Cactus and Energy Transfer Partners Permian Express II pipelines. Today we look at the new project and whether the incremental takeaway capacity is necessary.

EPD announced it’s latest – yet to be named – new construction crude pipeline project at the end of April. The 540 Mb/d capacity pipeline will run 400 odd miles from Midland, TX (the main crude trading and storage hub in the Permian basin) to an existing Enterprise terminal at Sealy, TX (black oval on the map in Figure #1). At Sealy the pipeline will connect with EPD’s existing Houston crude distribution network – principally via the Rancho II pipeline, due online this July (2015) that will connect Sealy with the EPD storage hub at ECHO – southeast of Houston (see ECHO and the Blending Men). The Rancho II pipeline will have initial capacity this year of 480 Mb/d but can be expanded to as much as 1 MMb/d if required and as we described recently forms a key component of EPD’s pipeline network to deliver crude from the Eagle Ford (and now the Permian) into ECHO (see When Are You Going to Come Down). The new Midland pipeline is supported by long-term agreements with shippers and is expected online (subject to approvals) by 2Q 2017. The pipeline will be supplied at Midland by a combination of truck and pipeline deliveries into the existing EPD terminal that had 1.4 MMBbl of crude storage as of March 2014 and is going to be expanded for the new pipeline. EPD already own a 674-mile West Texas gathering system in the Permian (turquoise lines on the map) including three terminals in New Mexico at Hobbs, Lynch and Jal. The existing throughput at the Midland terminal is about 335 Mb/d of crude (according to EPD’s Analyst Day presentation in March 2014).

Figure1 Map

EPD said the new pipeline is designed to ship four different grades of crude – West Texas Intermediate (WTI – the U.S. domestic benchmark light sweet crude), West Texas Sour (WTS – a medium sour crude), light WTI (presumably a WTI with higher than normal API gravity – i.e. above 40 degrees) and condensate (above 50 degrees API). These four streams of crude will be segregated in the pipeline using a batch process (see You Can’t Always Get Out What You Put In for more on batch pipeline systems). As we have explained previously, segregation is an important requirement for maintaining crude quality in-transit and also required when transporting processed condensate for export in order to prevent co-mingling of approved export quality condensate with other crude when the condensate is en route to an export dock (see Condensate City). By offering a batch-segregated pipeline, EPD can therefore attract shippers hoping to export processed condensate under a newly emerged exception to the 1970’s crude oil export ban (see CCATS Scratch Fever). The Midland to Sealy pipeline offers a route via ECHO to tidewater at Texas City from where EPD has been by far the most active condensate exporter so far (see What Condition My Condensate Was In).

The first question that came to our mind when we heard about this project was whether the new pipeline capacity will be needed out of the Permian in 2017? To check that out we dusted off our Permian takeaway capacity “stack chart” (last seen in Part 1 of “Come Gather Round Pipelines”) and updated it with our latest production forecast and the various pipeline projects operating and planned for the Permian. You can see the results in Figure #2, which spans January 2015 to December 2020). The rainbow of shaded areas represent Permian takeaway capacity – as indicated in the legend in order of building. The bottom shaded area is local refinery consumption – about 440 Mb/d consumed by refineries in the Permian region or that are fed predominantly from the Permian. At the top of the “stack” of pipelines are the newly proposed Midland to Sealy pipeline (gray shaded area) and existing 80 Mb/d of rail takeaway capacity (bright green). Along with takeaway capacity, the chart also shows the latest RBN crude production forecast for the Permian based on two scenarios. The blue line is the growth scenario under which resilient production keeps volumes growing in the next 5 years – with WTI prices returning to the $80/Bbl range by 2017 and $95/Bbl by 2020. The red line is our contraction scenario where there is some year on year growth in 2015 versus 2014, but production declines begin in 2016. Under this scenario, WTI prices average $48/Bbl in 2015 and only reach an average of $65/Bbl by 2020. Under the growth scenario Permian crude production (including condensate) increases from about 2 MMb/d today to 2.3 MMb/d in 2020 and under the contraction scenario declines from 2 MMb/d today to 1.8 MMb/d by 2020 (about where it was at the start of 2015). As you can see, even in the growth scenario, production does not increase enough to cross into the gray shaded area – indicating that the Midland to Sealy pipeline is not going to be critical takeaway capacity.

Permian Graph LG2

Don’t get us wrong here – that doesn’t mean that no one’s going to use the new pipeline – obviously EPD has signed up customers already before making their announcement. The way the stack chart is constructed it implies that pipeline capacity is used up in an orderly fashion as it becomes available – with new pipes not used until the old ones are full. Doesn’t work like that in the real world – folks use the pipeline that offers them the best deal and route to market. Having said that, if you buy our forecasts then the chart does tell us something – namely that if this new pipeline is to succeed – at least some of its shippers will be defections to Enterprise from other pipelines. Here are a few reasons why they might make that decision:

Better route to Market: The EPD pipeline may offer shippers a more direct route to market. For example, many of the barrels currently flowing through EPD’s Midland terminal may be flowing to Cushing, OK (the Midwest storage hub) on the Plains All American Basin pipeline (that EPD has a 25% ownership in). If those shippers prefer to send barrels direct to Houston instead of Cushing then it makes sense to sign up with EPD - although the Magellan Longhorn and Magellan/Plains BridgeTex pipeline also flow to Houston.

Condensate Segregation: as we mentioned a minute ago, EPD offers segregation to get processed condensate to export docks in Houston.

Better tariff rates: the EPD proposed tariffs for the new pipeline have not been made public but if they are competitive with other pipelines then they could cause shippers to defect from older pipelines. Note that different tariff rates often reflect volume commitments so that a producer may ship more barrels on a particular pipeline to get a better rate.

Reasons we don’t know about: producers may be aware of future drilling commitments and an expected surge in production that prompts them to sign up for new takeaway capacity.


Whatever the reason shippers signed up for EPD’s new pipeline, the expansion of takeaway capacity in the Permian continues. Argus Media reports that Magellan is weighing expanding their BridgeTex pipeline JV with Plains out of the Permian by 70 Mb/d. Although the return of drilling rigs to the Permian basin this week is very positive, it seems reasonable to assume that (for the moment at least) booming production increases of the kind that we witnessed over the past three years (e.g. Permian crude production up 73% since January 2012) are now a thing of the past. In the circumstances, the continued build out of new infrastructure that may not be needed for a while is evidence of heated competition for projects and barrels between midstream companies. Or maybe these guys know something we don’t about Permian production? At any rate the competition for shipper barrels is good for producers – who should benefit from better tariff rates and greater route optionality.

Article featured in RBN Energy LLC.