Low Pipeline Utilization in Midstream USA

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Low Pipeline Utilization in Midstream USA

Tue, 06/16/2020 - 10:31
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View of pipeline in northern Alaska (copyright by Adobe Stock/reisegraf)
View of pipeline in northern Alaska (copyright by Adobe Stock/reisegraf)

The advent of Covid19, lockdown in lower 48, slack demand, oil price crash and a corresponding slash in capital expenditure have all taken a huge toll on the upstream sector of the US petroleum industry.  Many of the companies specializing in shale oil production will not survive in this low price environment.   

Alex Beeker, Wood Mackenzie’s upstream corporate research team, says “many are electing to defer drilling and completion activity, in violation of their minimum volume commitment contracts with midstream companies. They’d rather pay a few million dollars in penalties than drill at current prices."   

Beeker added that “very little new drilling makes sense at $35 a barrel (/bbl). On a basin-wide average, the Permian is the only region that can make money at that price level. In order to see a meaningful recovery in drilling and completion activity, we need to see prices north of $45/bbl.”                                                                         

Several years of significant production growth in the Lower 48 prompted an expansion of midstream infrastructure, including gathering and processing lines, as well as long-haul pipelines.  In this context the Permian basin was viewed as the Lower 48’s growth engine, driving infrastructure investment. As a result, pipeline capacity from the basin was overbuilt even before the price downturn, advises the Wood MacKenzie research team.

This does not bode well for the overall industry, as each component is intertwined with the other, and so when one sector, be it upstream drilling, goes through a rough patch it will likely bring the others with it.

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