As a result of the slide in oil prices over the past three months, operators have already started to guide down activity for 2019 compared to their initial plans to ramp up activity. Consequentially, we have lowered our expectations for oil production growth by about 500,000 bpd for 2020 and 2021, implying less need for takeaway capacity. This raises the question as to which (if any) of the pipelines projects in the Permian slated for development will move forward if there is less oil to fill them. We do however see risk of widening differentials in Q2 2019 as long-haul trucking demand rises from current levels of ~100,000 bpd to about 350,000-400,000 bpd.
Since our last update, Permian outbound pipeline capacity has increased by 400,000 bpd to ~3.4 million bpd due to the Permian Express 3 operating at full capacity and the Sunrise Extension project entering service. Permian Express 3 was completed in December 2017 with 90,000 bpd capacity. The remaining 50,000 bpd was added in September 2018. Sunrise Extension was confirmed in-service during early 4Q 2018 as mentioned in PAA’s Q3 earnings calls. Actual throughput reached a staggering 350,000 bpd as Wichita Falls was able to offer additional disposition options. PAA’s initial expectation was in the range of 200,000-250,000 bpd, whereas we forecasted 315,000 bpd net impact on outbound Permian capacity. It is clear that actual throughput outperformed market expectations. Consequently, this was one of the drivers behind improved Mid-Cush differentials when Sunrise Extension had played a major role in the debottlenecking of the physical crude market in the Permian.
After narrowing from -$16.1 to -$12.2 in August and September 2018 to around -$6.1 per barrel in October 2018, Midland-Cush differentials have been stable during Q4 2018 where they averaged out at -$6.4 per barrel. They have also stayed at this level during the first days of January. We do however see the risk of widening differentials during Q2 2019 as long-haul trucking demand rises from current levels of ~100,000 bpd to about 350,000-400,000 bpd. This is also contingent on the degree to which these bottlenecks have been priced into the market. It is noteworthy though that the market moved relatively slow in pricing in the bottlenecks and associated widening in differentials experienced during 2Q-3Q 2018.
Adding to the picture is the recent data for PADD3 railway receipts showing another month of consecutive increase in October 2018. While it is expected that this increase continued during Q4, it could also contribute to dampening the effect on the bottlenecks coming up in 2Q-3Q 2019.
Moreover, Enterprise Product Partners has also provided an update that adds more capacity in 2019. While EPD took down capacity from 650,000 to 200,000 bpd for its NGL-Crude conversion pipeline initially communicated in December 2017, the expected in-service date has been brought forward from 1H20 to mid-2019.
Over the past three months, we also witnessed a steep drop in oil prices after WTI Cushing touched its four-year high of $75 per barrel in early October. While prices have recovered some since hovering around $45 per barrel around Christmas, we have already seen operators starting to guide down activity for 2019 compared to their initial plans ramp up activity even further. Consequently, we have lowered our outlook for oil production growth by ~500,000 bpd for 2020 and 2021 which translates as less need for future takeaway capacity. Given our current production outlook, we see marginal need for the pipelines that have not been approved yet (purple and orange colors in Figure 1) before 2022. This equates to about 2.7 million bpd capacity over six pipelines.
One of these pipelines is the Jupiter Pipeline that initially was announced on October 17, 2018. This pipeline commenced open season on November 30, and it will be interesting to see if it is able to secure enough volumes to move forward. Another open season to watch is the expansion of the Gray Oak pipeline, which is currently under construction. Philipps 66 commenced open season for this expansion on November 9 and communicated expected in-service during Q4 2020. This expansion was previously communicated to raise capacity by 200,000 bpd from its already announced capacity of 800,000 bpd. Philipps 66 now communicates that the capacity addition will depend on the outcome of the open season. We thus see downside to this 200,000 bpd number and there’s a likelihood that sufficient commitments won’t be reached at this time.