Just two years ago, in response to booming domestic demand and insufficient pipeline capacity to move the oil to market, pipeline operators began building more pipelines in the prolific Permian Basin of Texas and New Mexico, capable of transporting up to seven mbd of fracked shale oil. Today, in the wake of the Covic pandemic and the corresponding precipitous drop in demand, the area has an abundance of pipelines -- a welcome change for shale oil companies but one now squeezing pipeline operators' profits.
“We are going to need significant consolidation in the midstream space overall, and particularly in these basins where the oversupply is as dramatic as it is,” Tyler Rosenlicht, a portfolio manager at investment firm Cohen & Steers Inc., said of the pipeline companies.
According to East Daley Capital Advisors, an energy data firm, oil fields often fluctuate between not having enough pipelines to move their crude to market and having too many. But the mismatch between pipeline space and oil output in the Permian is particularly extreme. As of September, large Permian conduits and local refineries could absorb roughly 7.3 million barrels of oil a day.
The Wall Street Journal reports that even without the detrimental effects of Covid 19 on the market there would likely have been too many pipelines, since producers already were beginning to slow production as investors pressured them to prioritize returns over growth.
Last year, pipeline firms Energy Transfer and Epic Midstream Holdings LP responded by lowering some of the rates they charge to ship oil, according to East Daley. Companies also have discussed reversing the direction oil flows on their pipes to send more oil to Gulf Coast export markets, or converting oil conduits to ones that carry natural gas or natural-gas liquids, according to people familiar with the matter.
Enterprise Products Partners, for example, has considered switching one of its Texas pipelines back to handling natural-gas liquids, after having converted it to crude early last year to satisfy the crush of Permian demand. A spokesman said Monday that the company had yet to decide whether to pursue the conversion.