Pipeline capacity in the Permian Basin is approaching maximum capacity, leaving up to 740,000 barrels per day of crude stranded by September 2019 according to PLG Consulting. Alternatives like rail and trucking cannot make up the capacity shortfall. This will result in an estimated $40 million per day or 200 million barrels of unrealized revenue for Permian producers over the next 16 months until new pipeline projects are completed. To mitigate the capacity constraints, producers may be forced to shift rigs and completions to other shale plays in order to maintain production growth goals.

1. 1www.plgconsulting.com
PLG Consulting Predicts up to 740 kbpd of Crude to be Bottlenecked
in the Permian by September of 2019
Pipeline capacity in the Permian Basin is approaching maximum capacity. Even with the smart and
creative use of crude by rail (CBR) or trucking logistics, we predict takeaway constraints will leave
billions of dollars of crude in the ground and shippers struggling with production over the next 16
months.
Background
Permian crude production has grown
significantly since the basin transi-
tioned from vertical to horizontal
drilling in 2014. Since that time and as
crude production grew, there were
short periods of pipeline under-
capacity before additional pipeline
capacity came online. During those
times, some of the several small rail
transload facilities in the Permian and
a small volume of trucking would try to
fill the gap, but not enough to close the
resulting price differentials. As
depicted in the graphs to the right,
normally the spread between the
Midland and Houston markets has
averaged less than $4/barrel except
during times of pipeline capacity
constraints.
Source: RBN, April 2018

2. 2www.plgconsulting.com
Pipeline Capacity Analysis
The Permian has become the largest
production region in the U.S., with over 3MM
barrels per day (bpd) of crude. The rapid
growth in production has overwhelmed
pipeline capacity three times in the past four
years. Production is now, once again,
outstripping capacity and causing the price
spread between Midland and Houston to
reach nearly $15/barrel in recent days. Large
and sustained price spreads mean that,
for all practical purposes, the basin is
out of crude pipeline capacity.
There are a few initiatives and projects
underway to relieve the bottleneck and
add marginal capacity, but not enough to
make a material impact over the next year
and a half. For example, capacity on crude
pipelines can be moderately expanded by
injecting drag reducing agents (DRA).
BridgeTex, a major crude pipeline between
the Permian and Houston, plans to increase
its capacity by about 40k bpd with DRA soon,
but that increase may be all the industry will
add until the middle of 2019.
The next three major pipeline projects
underway are Plains Sunrise, Plains Cactus
II, and P66 Grey Oak. Sunrise will add 120k
bpd of capacity by mid-2019, and the Cactus
II and Grey Oak projects will add a combined
capacity of over 1 MMbpd in late 2019. Until
then, however, up to $40MM per day of
Permian Basin crude will be left stranded
and without an outlet unless other
logistics alternatives are developed.
PLG Consulting has examined those
alternatives and their relative strengths,
weaknesses, and viability.
Logistical Option Analysis
Rail - During past pipeline capacity
shortages in 2014, several Permian
transload facilities were mobilized to ship
stranded barrels to the Gulf Coast. However,
these were all small facilities. There are no
full-scale, unit
train-capable
facilities in the
Permian (as
were built in
the Bakken) sitting and waiting on this
temporary shipping volume. And the lead
time to build such terminals is at least one
year and at a price tag of over $50MM each.
So, crude by rail will not be able to grow
quickly enough to meet the short-term
demand.
Among the smaller rail transload sites
already operating, the Murex facility in
Carlsbad, NM is currently moving about 15
kbpd to 20 kbpd and has plans to double its
capacity. There are several other existing rail
terminals that are owned by oil producers or
terminal companies in the Permian; some of
which are in the process of restarting or
expanding operations. However, crude by
rail operations have many challenges, as we
learned in the Bakken, with few facilities
consistently shipping their nameplate
capacity. Additionally, west Texas’ rail
capacity is limited and strained by large frac
Crude by rail will not be able to
grow quickly enough to meet the
short-term demand.

4. 4www.plgconsulting.com
Assumptions
 Utilizing the EIA forecasted Permian production for May 2018 of 3.2M bpd as the baseline
 Effectively 100% of pipeline capacity is utilized
 Using the EIA’s last three-month average production growth of 65,000 bpd, we have projected
this recent growth rate out 16 months until September 2019 when two major new pipelines are
coming online, adding nearly 1 MM bpd of takeaway capacity.
Conclusions / Other Impacts
This pipeline capacity shortfall is a rapidly
developing story that will have domestic and
global crude market implications over the
next year. In the chart above, we are
projecting potential logistics alternatives that
likely will occur with realistic volume
capacities.
If growth were to continue at the current pace
and there was adequate takeaway capacity,
the Permian production theoretically would
reach ~4.25MM bpd by September 2019.
Based on our best estimates for adding more
takeaway capacity through trucks and rail,
we believe the takeaway capacity can
only grow to ~3.5MM bpd. Therefore, we
are projecting that about 200MM barrels
of crude production will not make it to
market over the next 16 months, due to
the capacity constraints. At current
prices, this represents roughly $40MM
per day of unrealized revenue for the
Permian Basin.
The industry is quickly coming to grips with
this situation, and we expect there to be a
number of actions taken soon to try to
increase takeaway capacity.

5. 5www.plgconsulting.com
Obviously, the shortage will drive increased
price differentials, with some experts already
predicting a $20+/barrel Midland-MEHspread
before the end of Q2 2018. This level of
differential will justify otherwise expensive
logistics solutions that are seldom if ever
used (for example, the CBR build-out in the
Bakken).
Opportunists will focus on bringing
mothballed rail loading stations online as
soon as possible. Nimble trucking
companies will begin diverting trucks and
drivers to capture this new high-volume,
long-distance hauling business. Based on
our analysis, even if these creative minds
come up with ways to double our
projected rail and truck takeaway
capacity in the Permian, it would only add
140 kbpd of additional capacity, which is
only about two months of the current
production growth rate. As a result, the
production growth volume that has not
secured takeaway capacity will have to be
curtailed. This overcapacity situation will
likely force multi-play producers to move rigs
and completion equipment to other shale
plays in order for them to keep their planned
production growth, further incentivized by a
~$70/barrel WTI price. We are in for an
interesting ride, with logistics becoming the
decisive issue affecting the near-term growth
in the Permian.
Author: Taylor Robinson, president PLG
Consulting. You can connect with Taylor on
LinkedIn @taylorrobinson.
PLG Consulting is a bulk logistics and
supply chain consulting firm who
delivers customized and practical
solutions to the industrial economy.
Over 200 of the world’s most admired
shippers, transportation service
providers and PE firms trust us to help
solve their complex logistics and supply
chain challenges.
PLG Consulting brings decades of
unique, specific expertise and
experience to solve your most complex
bulk logistics and supply chain
challenges. Senior executives from the
world’s largest shippers, transportation
companies, and private equity firms
trust PLG Consulting to:
 Improve operations
 Reduce costs
 Understand & penetrate markets
 Mitigate risk
 Invest wisely
If you would like to learn more, please
contact us at info@plgconsulting or call
312-957-7757.
Don’t forget to follow us on LinkedIn for
additional bulk logistics and supply
chain conversation.
© 2018 PLG Consulting. All rights reserved