By Q4 2021, total utilization of the largest oil pipelines in the Permian Basin will drop to 57 percent. That’s according to a recent survey from industry research firm Wood MacKenzie.
Some level of spare capacity is necessary for a functioning midstream system, to accommodate demand spikes and the fact that pipelines and related infrastructure must be periodically sidelined for maintenance. The current level, however, is quite elevated, basically for two reasons.
First, based on announced plans of producers for this year, US crude oil output is expected to drop well below the pre-pandemic level of 13 million or so barrels per day. Second, a sizeable amount of new shipping capacity came on line at the end of the previous decade to accommodate expected increases in shale output. That includes natural gas pipelines built to ship associated natural gas produced from oil wells, much of which historically has been flared.
The vast majority of North American pipeline capacity is long-term contracted. And much of that isn’t sensitive at all to changes in volumes, as it’s sold on either a 100 percent capacity basis or is attached to minimum volume commitments. Both arrangements compel producers to pay, whether or not they actually ship the physical commodity.
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Elliott and Roger on May. 26, 2021
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