Midland Reporter-Telegram, April 18, 2019
Crude connections the sequel is in the works, according to Concho Resources and Frontier Midstream Solutions IV LLC. The two, which formed a joint venture to build and operate the Alpha Crude Connector system in the northern Delaware Basin before selling it to Plains All-American in 2017, have announced plans to build and operate the Beta Crude Connector system in the northern Midland Basin.
Concho is supporting the project with a long-term acreage dedication agreement, and Concho officials told the Reporter-Telegram the joint venture gives the company more optionality and more delivery points for its northern Midland Basin production.
"We are excited to partner again with Frontier in the development of the Beta Crude Connector," Jack Harper, Concho president, said in a statement announcing the project. "Through the joint venture, we will leverage Frontier's midstream expertise and enhance the value of our high-quality footprint in the Midland Basin with a reliable, cost-efficient gathering and transportation solution. Importantly, this is a compelling investment opportunity that we can make with no changes to our capital plans."
Chris Guglielmo, Director of Business Development at Frontier, told the Reporter-Telegram by email that the opportunity to reteam with Concho was a compelling part of the project.
"Concho is a homegrown Permian group, just like much of our company. We had a great partnership with Concho with the Alpha Crude Connector (ACC) we developed together. We successfully supported their highly active exploration and production operations with the ACC and Concho was supportive of our midstream operations, which seemed to grow without ceasing.
"Based on our experience with the ACC, we know that Concho is a great joint venture partner.," he said. "So, when this opportunity came about, we knew if we moved forward together, aligned as we were with the ACC, the operating relationship would be good. Alignment is critical to us as we form a joint venture or partnership."
Guglielmo said that since the sale of ACC, Concho had grown significantly with its acquisition of RSP Permian last year. "We look forward to what that scale and size may accomplish," he said.
Both the Delaware and Midland basins are exciting places to be, and the dynamics created by the unprecedented activity in both basins are exciting to anticipate, Gugliemo said. But both are different, he said.
"ACC was a large system built to support a tremendous geography of dedicated acreage and network of production plans and volumes," Guglielmo said. "I would say the knowledge of the ACC area of the Delaware was less mature than it is today, so the exploration was significant. This led to the necessity of having a system that was 500 miles in length by the time we sold it to Plains.
"This Midland project, the Beta Crude Connector, is an acreage position that is significantly blocked up. This concentration will allow us to be very efficient with our system design and operations, and Beta Crude Connector's proximity to downstream markets is even closer than it was with ACC," he said. "Further, the Midland Basin is a world-class resource and the science of the resource is well known. So, we are looking forward to what BCC can do to assist with the production in the area."
Beta Crude Connector will be a gathering and transportation system consisting of an approximately 100-mile gathering system, 250,000 barrels of crude oil storage facilities and truck terminals. Guglielmo said the storage facilities and truck terminals initially will be located near the Midland-Martin county lines, and additional storage tanks will be located throughout Midland and Martin counties. Throughout Midland, Martin and Andrews counties, he estimated there will be more than 200 people working on various components of the construction.
Initially, the pipeline system will have the capacity to deliver 150,000 barrels per day of crude to multiple delivery points, accessing local refineries and connecting to several downstream pipelines. An open season is planned for later this month, after which construction will begin. Initial flows are expected to begin by mid-year.
Plans are to file with the Federal Energy Regulatory Commission for Beta Crude Carrier to operate as a common carrier pipeline and solicit interest from other producers and marketers for capacity on the system.
"Historically, crude flowed from Midland to Cushing, then from Cushing to the Gulf Coast to be refined," Guglielmo said. "Some went to the Midwest and some stayed in the Permian Basin. Crude flows from lowest to highest price, so prices in the Gulf Coast were traditionally higher than Cushing, and Cushing was higher than Permian. The path from Cushing to the Gulf Coast recently filled to the brim, caused by continued flow into Cushing from the Permian and more growth from the north, pushing the differential on that path to a level that exceeds the pipeline tariffs.
"But new Permian pipes are coming to the rescue to support the continued production and allow for additional transport directly to the Gulf Coast from the Permian," he said. "The Permian Basin will transition from a shortage of long-haul takeaway capacity to an abundance of options by mid-2020."
Inventories: The Energy Information Administration on Wednesday said U.S. crude-oil inventories declined by 1.4 million barrels last week, ending a three-week streak of bearish increases, while U.S. oil production bullishly slipped to 12.1 million barrels a day from last week's record 12.2 million barrels a day.
Bob Yawger, director of the futures division at Mizuho Securities USA, said the market's muted response to the bullish decline in U.S. crude inventories was the result of an even-more-bullish report on inventories late Tuesday from industry group American Petroleum Institute, which showed a 3.1-million-barrel decline. "The whole story here is today's EIA decline was not as big as API's," he said. "API had a significant bullish tone, and the EIA report didn't match it."
Iran: More broadly, oil prices were also being held in check by investor trepidation before the U.S. decides how to proceed regarding its sanctions against Iran that prohibit other countries from buying Iranian crude oil. The Trump administration granted temporary waivers for the sanctions in November to eight countries, including China, Japan and India, allowing them to keep buying Iran oil. But after the U.S. decision last week to designate Iran's Islamic Revolutionary Guard Corps a foreign terrorist organization, analysts speculate President Trump may choose to yank all waivers, which could push prices higher.
"Everyone is aware of the fact the Trump administration can come out any day now and say they've extended waivers or they cut waivers, so there's a lot of caution there," Mr. Yawger said. "And nobody knows the timing. You can go to the bathroom and when you return oil is $2-a-barrel higher or $2-a-barrel lower."
Secretary of State Mike Pompeo has said it is too early to say how the designation would affect the waivers. A decision could come around May 1.
China: Prices found some support from Chinese data that points toward an improving economy that could bode well for the global economy and overall oil demand. "A flurry of Chinese data proved supportive in the end, with industrial-production and retail-sales data for March as well as the GDP print for Q1-19 all mildly beating expectations," said analysts at JBC Energy in a research note.
Permian Pipes: Infrastructure building in the booming, oil-rich Permian Basin began with large, takeaway pipelines to quickly and cheaply haul oil to Gulf Coast refineries and shipping ports, and RBN Energy said there is now an increased focus is on so-called gathering pipelines – smaller, extensive lines that run from lease acreages themselves, and reduce the need for trucks.
"These hydra-like systems, with a number of small-diameter-pipe 'tentacles' feeding larger-bore pipes downstream, provide the most cost-effective means of transporting crude oil from the lease to storage and to takeaway pipelines," said RBN's Housley Carr in a research report, noting that Concho Resources ' joint project with midstream firm Frontier Energy Services, a 100-mile system called the Beta Crude Connector, is an example.
RBN Energy, LLC, April 15, 2019
The rapid development of the Permian's vast hydrocarbon resources that we expect will continue through the 2020s and beyond can't happen if there's insufficient gathering-pipeline infrastructure in place to transport crude from well sites to takeaway pipelines. Similarly, the favorable pricing that Permian producers hope to receive for their crude oil is possible only if their gathering systems are interconnected to two or more long-haul, big-bore pipelines that offer them some serious destination optionality. The need for new gathering pipes with multiple links to Gulf Coast- and Cushing-bound takeaway pipes is the driving force behind the Beta Crude Connector, a planned 100-mile-plus pipeline network in the heart of the Permian's Midland Basin that was unveiled on Monday (April 15) by a joint venture of Concho Resources and gathering specialist Frontier Energy Services. Today, we kick off a new blog series on crude-gathering projects in the Permian with a look at the Concho/Frontier plan.
Gathering pipelines play a critically important – but often overlooked – role in the midstream sector. These hydra-like systems, with a number of small-diameter-pipe "tentacles" feeding larger-bore pipes downstream, provide the most cost-effective means of transporting crude oil from the lease to storage and to takeaway pipelines. The rapid development of new, high-intensity production areas like the Permian's Delaware and Midland basins depends on well-planned gathering systems; relying only on trucks to haul crude to long-haul pipelines would slow development of these areas to a crawl. As we said in our Hot Legs blog series a couple of years ago, there's been a fierce battle on to build new gathering pipelines in the Permian, and midstream companies better bring their A game. Why? Because successfully developing these systems requires a keen understanding of three key factors: lining up producer commitments, providing takeaway optionality, and minimizing the total cost of moving crude from the lease to the Gulf Coast, Cushing or other destinations. Takeaway optionality is particularly important. Producers want to get the highest possible price per barrel, and the best way to do that is to have access to the destination that offers the best price at a given moment. (See our recent Hard Hat and a Hammer for more on Midland-Cushing differentials.)
The Midland Basin gathering system that we discuss in our blog series opener today has a whiff of déjà vu about it. Back in 2017, we blogged about a huge gathering system that a joint venture of Concho and Frontier Energy Services developed in the Delaware Basin and then sold to Plains All American. That system – the Alpha Crude Connector, or ACC – includes more than 500 miles of gathering and shuttle pipes in the northern Delaware in southeastern New Mexico and West Texas. In laying out ACC, Frontier developed beneficial optionality for its customers by connecting the pipeline system to three major downstream pipelines that run to Midland, where these pipes connect to takeaway pipes to Cushing, Houston and Nederland, TX, among other destinations.