U.S. refiners and other domestic customers will be unable to absorb growing production from the Permian Basin, so the bulk of that production is destined for export, a study from UH Energy and the University of Houston’s Department of Industrial Engineering has found.
The study points to several potential obstacles that could stand in the way of successfully exporting the excess production, including the capacity of ports along the Gulf coast to handle large transport ships and concerns over the flaring of natural gas in the Permian.
The Port of Houston is unlikely to be able to handle the largest ships, known as Very Large Crude Carriers, or VLCCs, the researchers said. The Port of Corpus Christi, destination for much of the Permian crude destined for export, is expanding its capabilities, including its ability to handle VLCCs.
Any delays in expanding export capacity will slow Permian production, the study said.
Ramanan Krishnamoorti, chief energy officer at UH, said escalating demand to export also will place an additional strain on independent producers, already pressured by the growing operating presence of the major oil companies.
“The independents are relatively inexperienced with exports, and if they can’t build that expertise, they could become targets for acquisition,” he said. “They also face additional stress because of the flight of capital from the Permian.”
Among the report’s findings:
- The construction of additional pipelines already underway or planned to carry oil from the Permian to export terminals along the Gulf Coast should relieve current bottlenecks by mid-2020, but new bottlenecks will emerge downstream. Export terminals in Corpus Christi, in particular, are unlikely to be ready to handle the volume, even though the port is designed to handle VLCCs
- Efficiencies have driven the cost to develop and operate wells in the Permian below $15 per barrel; refracturing older wells has resulted in savings of 75% over drilling a new well
- The lack of a solution for the flaring of natural gas in the Permian poses a risk to the continued viability of the Permian
Suryanarayanan Radhakrishnan, managing director of UH Energy and lead author for the study, said the continued growth of oil exports will be determined largely by the ability of Gulf Coast ports to efficiently move crude from terminals onto oil transport ships, specifically VLCCs, which are the most cost-effective solution
Most Gulf Coast ports, including the Port of Houston, don’t currently meet federal requirements for fully loading VLCCs; instead they commonly use smaller ships to ferry the oil offshore, where it can be transferred to the larger VLCC ships. Those back-and-forth trips, Radhakrishnan noted, increase port congestion and cost of transportation.
The Louisiana Offshore Oil Port (LOOP), off the coast of southern Louisiana in the Gulf of Mexico, is currently the only U.S. facility that can harbor fully loaded VLCCs. It was previously used exclusively for imports and has been modified to accommodate exports.
New projects to build deepwater terminals off the coast in both Texas and Louisiana have been proposed, but the researchers said the Houston Ship Channel is too shallow to accommodate the bigger ships; air quality standards pose another concern.