In Enbridge’s recent 4Q23 earnings call, the company highlighted their plans for the Permian basin. More specifically, they announced record 2023 volumes and spoke on the progress of the Gray Oak expansion. Currently, the Gray Oak Pipeline stretches 840 miles, bringing crude oil from the Permian to Corpus Christi and Houston. The phased expansion of up to 200 Mb/d on Gray Oak is almost complete, with open season set to begin this quarter (1Q24), offering full path export service from the Permian to Enbridge’s terminal and planned Phase VI storage project in Ingleside, TX. The pipeline expansion will also be completed with drag reducing agent (DRA) to reduce turbulence in the pipeline, allowing the expansion to come on rather quickly. However, despite the fact that Gray Oak expansion will likely relieve bottlenecks in the near term, BTU Analytics still believes that the basin will be constrained again by late 2025, thus requiring another expansion.
Current Gray Oak Pipeline capacity is 900 Mb/d. The expansion will bring that closer to 1.1 MMb/d and support continued Permian crude growth. If production holds flat to today’s levels, there is, on average, 1.5 MMb/d of spare capacity through the end of the forecast window in 2029. However, if wells to sale were to maintain the same pace as January 2024, production would grow 380 Mb/d per year on average over the next five years before eventually becoming pipeline constrained at 100% utilization in mid-2026 if no pipeline infrastructure is added.
Not only does current activity support the need for additional infrastructure out of the basin but so does the historical utilization rate. Oil pipeline infrastructure buildout ramped in 2019, as production was expected to continue growing through the 2020s at its 2017–2019 pace. However, the pandemic slowed oil production growth, and Permian pipeline utilization fell from 100% in mid-2019 to 65% in mid-2021. As pipeline capacity additions reached a plateau in 2021 and production growth returned, utilization rates increased again and are estimated to be ~90% today. As Permian production begins to reach pipeline capacity once again, it is expected utilization will surpass 100% by year-end, indicating a need for additional infrastructure or for crude to move by rail instead.
As shown above, the Gray Oak expansion will help alleviate some of the pipeline constraints in the Permian in the near term, but current activity levels show at least one additional project will need to come on before the end of 2025. Depending on whether the pipeline is an expansion with or without DRA or a new build, an announcement should come sooner rather than later to mitigate the impact of pipeline constraints out of the Permian through the end of the decade.
It is important to note, however, that without Gray Oak’s expansion, utilization will rise to approximately 91%, similar to pre-COVID-19 levels. Utilization was above 90% in August 2018, causing Midland differentials to trade at a $16/bbl-discount to WTI, which is in stark contrast to 2023 average pricing of a $1.20/bbl-premium to WTI at an average utilization of 80%. Midland remains a premium market, but high pipeline utilization combined with oil production growth will put downward pressure on regional pricing without expansions or new infrastructure.
In all, Gray Oak expansion will likely only bring near-term relief to existing Permian constraints before the basin requires another expansion at the end of 2025. In the meantime, be sure to check back in with BTU Analytics as we continue to monitor infrastructure developments in the region and the progress of Gray Oak expansion, especially as Enbridge’s annual investor conference arrives in early March.
BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.
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