Sooner Oil and Gas Production Leads to New Pipeline Projects in Oklahoma
The Permian and Marcellus/Utica are not the only games in town. Over the last few years, Sooner country, specifically the Anadarko basin in Oklahoma, has also seen substantial growth in the production of both oil and natural gas. The expiration of long-term contracts for natural gas pipeline capacity and this growth will create a fluid market for pipeline capacity in 2019 and possibly allow for new expansions in the area that may impact both the pricing and future production growth in the region.
Today, we examine three projects in open season -- one project, sponsored by Tulsa’s SemGroup and Colorado’s DCP Midstream to drive crude flows, and two Southern Star Central Gas Corp. gas projects. We then turn to the contracted capacity currently held by producers in the region, and consider how a contract cliff that occurs this year along with the additional capacity being provided by Cheniere’s Midship project could create uncertainty over renewal and extension negotiations among the region’s producers and pipelines.
If you have an interest in either of these commodities, the producers spurring this growth or the pipelines that provide the takeaway capacity for the region, you can follow this growth by tracking the level of contracted capacity and the projects that are being proposed to serve the growing production levels.
“Boomer Sooner”
According to the EIA, the oil production from the Anadarko basin first peaked in early 2015 at almost 500,00 bpd, before falling back to less than 400,000 bpd in early 2017. Since then, however, the growth in production has boomed; current production is almost 50% higher than it was just two years ago. The same can be said for natural gas production from the region, which reached its peak of 6 Bcf/day in mid-2015, before dropping to less than 5 Bcf/day in mid-2016. Since then, natural gas production has similarly grown by about 50%, to the point where early this year, it was almost at 8 Bcf/day.
New Open Seasons for Pipeline Capacity
SemGroup Corporation and DCP Midstream, LP, the 50-50 joint venture between Enbridge and Phillips 66, announced just last week that they were extending for one month, until February 28, 2019, an open season for their proposed Gladiator Pipeline. The proposed pipeline is designed to provide transportation of crude oil from Cushing, Oklahoma to the Gulf Coast region. According to the companies, if they obtain sufficient commitments, they intend to have the pipeline in operation by the third quarter of 2020. The Cushing origin would provide potential shippers the ability to source barrels from key pipelines that converge in Cushing, including the White Cliffs Pipeline, majority-owned by SemGroup, which serves Colorado’s DJ Basin, and is anxiously awaiting an important market-based rate ruling, which we discussed recently in White Cliffs Market Based Rate Ruling Could be a Juggernaut.
Similarly, for the region’s increasing natural gas production, Southern Star Central Pipeline just concluded late last week the open season for two expansions on its existing system. Southern Star has been circling takeaway projects in the region for the past five years, including the Sooner Trails project, which it sponsored with NextEra Energy, before shelving the project during pre-filing. These expansions are designed to provide up to 200,000 dth/day of capacity to the producers in the Anadarko basin. Both of these projects, should they move forward, would be subject to FERC regulation and will be tracked in our platform.
Capacity Currently Held by Producers in the Region
Our platform provides a comprehensive assessment of the natural gas pipeline capacity held by a particular producer, as well as detailed records of the capacity by receipt point on all interstate pipelines. By combining this data, one can gain an understanding of the current takeaway capacity from a region and how it may grow as contracts come on and roll off in the future.
With just a couple of clicks, our customers can quickly gain insight into the capacity held around the country by a particularly producer. For example, the capacity held by Devon Energy affiliates is detailed below. While many of these contracts were originally long-term contracts, the vast majority of the capacity is set to expire this year.
A quick click over to the Midship project page shows that Devon has a substantial capacity position on that new pipeline. If Devon’s Midship capacity is designed to absorb an increase in its production, then it would need to renew all of its expiring capacity on Gulf Crossing and Midcontinent Express, plus acquire additional capacity to provide takeaway for the increased production being transported on Midship. But if Midship capacity were to simply replace existing intrastate capacity, then Devon would not necessarily need additional capacity on either Gulf Crossing or Midcontinent Express.
No matter what the purpose is for Devon’s Midship capacity, we don’t currently project that the Midship project will be in-service by the time Devon’s capacity on Gulf Crossing is set to expire. Our current median projection for the Midship in-service date is December 31, 2019. Midship received authorization to commence construction on most of the project on December 20, 2018, but the status report filed yesterday, indicates that they are still working on obtaining permits for the remaining portions of the project and have not yet commenced construction of the pipeline itself. As a result, Devon may find itself in negotiations with both Gulf Crossing and MidContinent between now and August.
By looking deeper into the data found on our platform, it is possible to gain a view of the capacity held by producers in a region across the multiple pipelines serving that region. Because we offer our customers the ability to download the actual point data associated with contracts, it is possible to narrow such information to the takeaway capacity from a certain region. To illustrate, set forth below is the total capacity under contract by producers across the multiple pipelines serving the Anadarko basin based on the contracts in effect as of January 1, 2019.
Interstate Pipeline Capacity Held by Regional Producers
As can be seen in the chart above, there is a substantial drop-off in the amount of contracted capacity this year. It appears that Devon, and likely other companies, will be in negotiations with the interstate pipelines, and Midship’s projected in-service date will only create more uncertainty as the producers and the pipelines negotiate extensions or renewals of their existing relationships.
Insights Coming Soon
- Permian Dashboard product launch
- Greenhouse gas analysis at DC Circuit and FERC