West Texas oil is gushing but pipelines can't handle it

Crude oil production in America is on fire. The U.S. has become the world’s largest crude oil producer, and exports have soared to new highs.

But the infrastructure — pipelines that transport fracked oil across the country — in one U.S. oil-rich region hasn’t been able to keep up with the production boom. As a result, producers like ConocoPhillips (COP) and Noble Energy (NBL) have had to adapt. The lack of pipelines in the Permian Basin (the western part of Texas and southeastern part of New Mexico) is forcing producers to relocate rigs and even put the brakes on production until more infrastructure is in place.

“We already hear anecdotally in conference calls of [producers] moving rigs out of the Permian to a place that doesn’t have these issues,” said Jennifer Rowland, a senior energy equity analyst at Edward Jones.

An oil pump is seen operating in the Permian Basin near Midland, Texas. REUTERS/Ernest Scheyder/File Photo

A boom in technological advancements that enabled oil producers to use fracking (hydraulic fracturing) to extract oil and natural gas from shale rock unleashed a massive supply of oil into the markets. But the two main regions that benefited from the fracking, Cushing, Oklahoma, and the Permian Basin, diverged in their pipeline development. Producers in the Permian have been pumping so much oil that they have to sell it at a discount to Cushing to get it through its small congested system of pipelines.

This month, the price difference between WTI Cushing (oil from the Rocky Mountains and Midwest that connects to Cushing, Okla.) and WTI Midland (oil from the Permian Basin) reached above $17 per barrel.

Source: EIA

ConocoPhillips said in a conference call last month that they are moving rigs from the Permian to the Gulf Coast for better transportation and pricing. There, the local benchmark LLS, or Louisiana Light Sweet crude is pegged to higher Brent prices because of the Gulf ports’ international exposure.

Meanwhile, Noble Energy is moving some of its production from the Permian to places like the Denver-Julesburg Basin in Colorado, which already has pipelines connecting to the Cushing trading hub.

“Given the industry pressures in the Permian, due to widening basin differentials and service cost inflation, we plan to moderate our activity in the Delaware Basin [within the Permian],” said Noble Energy Chairman and CEO Dave Stover on the latest earnings call. Stover also said he is postponing plans for well completions until late 2019 to align the company’s activities with upcoming pipeline projects in the region.

Other oil companies like EOG Resources Inc. (EOG) are sitting on land and putting a pause on production until pipelines arrives. The company believes regional diversification is important to take advantage of what’s to come.