As the tanker division of Stevens Transport announced its closing this week, an analysis of the situation on the ground in the Permian Basin for trucks suggested things could get a lot worse.
While the statements from Stevens said that a loss of business hauling frac sand was a major reason for the division's closure next week, an analysis from RBN Energy said it is the pending completion of a significant amount of pipeline capacity in the region that will further squeeze drivers who work the oil patch of the Permian Basin, centered in the Midland/Odessa region of Texas but spreading across the New Mexico line.
According to the RBN analysis, spreads between crude oil delivered into the Midland/Odessa region and the West Texas Intermediate at Cushing, Oklahoma have been narrowing following the completion of new pipelines in the region. Not only have they been narrowing; the two key prices have crossed, with crude in Midland now priced higher than that at Cushing, as the chart below using data from S&P Global Platts shows.
Those two new pipelines are the Cactus II and the EPIC line, both of which take oil out of the Permian and directly to the Gulf Coast. Another new pipeline, the Gray Oak, is coming on line next year. And that's where there's a problem for truckers.
The spreads were so wide in the past that the economics of moving crude by truck – which are usually terrible – could make sense. "At times, trucking is treated as a necessary evil in the crude oil business. It can be expensive, and it takes a lot of communication and coordination among the producer, trader and trucking company to execute correctly," the RBN report said. "But in the right environment, such as in a takeaway-constrained, highly prolific producing region, trucking can be a welcome fix for all involved."
As the report notes, at the sort of spreads that existed previously because there wasn't enough pipeline takeaway capacity, putting crude oil on a truck and driving it potentially many miles to the nearest injection point on a pipeline could work economically. If the crude was eventually going to make its way on that pipeline to the Gulf Coast, it would ultimately fetch a price that was tied to the Gulf Coast market, which by extension is the world market. But at the original delivery point – the Midland/Odessa area – the spread would not reflect that.
That proved to be lucrative for drivers. During the time of a wide spread, "trucking outfits were going like gangbusters," the RBN report said. Not only that, but capital was pouring into the Permian and production was soaring, even for producing areas that had no obvious way of easily getting to a major market.
"The producer/trader and his or her trucking group would be left to find another pipeline option – one that's close by, ideally," the RBN report said. "In this way, the market relied on trucks to ensure that wells and production sites didn't get backed up with crude, and that oil could reach a variety of pipeline destinations."
There will always be some trucking of crude. The kind of pipeline connections that the report refers to are major interstate pipelines. But not every well is hooked up to a pipeline that takes the oil to a gathering facility for further processing and shipment on the big lines. Many of those wells, if they're small, need to have their output trucked. That's not new. What had been new is the amount of crude being moved by truck from the gathering facilities to pipelines.
But even the gathering business is affected by the new pipelines, the RBN report says. The new lines come with connections out into fields to wells that may have been served by trucks in the past. "New wells in those dedicated acreage areas are likely to be pipe-connected from the get-go," is how the report describes it. And that's a problem for truck drivers.
"Once an afterthought, that trucking rate that may have been $0.10/barrel (bbl) or $0.15/bbl too high is suddenly a looming problem," RBN said. "The Permian is now a place where that kind of margin matters. So, traders will likely be going back to their trucking providers to ask to re-negotiate rates – if they haven't already."
The report notes that the same sort of re-set happened in North Dakota's Bakken region, where an influx of significant takeaway capacity by pipeline hurt business for trucking companies. (It hurt railroads too, which saw their crude-by-rail business shrink.)
What are the numbers? The RBN report says gathering rate are "really, really cheap and truck rates at $1.60/bbl for a 20-mile haul are getting blown out of the water by their gathering-pipe competition."
"We've heard from some folks that it's likely in the short-term that we'll see trucking rates come down at least 10% in an attempt to keep them in a competitive ballpark with gathering," the report said. "Down the line, we could see truck rates fall by much more than that."
And although it was a decline in frac sand hauling cited as a key reason for the demise of Stevens' oil division, the RBN report cautions that other opportunities will remain. "The good news for the trucking industry is that upstream operations still need trucks to haul frac sand, water used in hydraulic fracturing, and produced water generated when wells are producing crude and associated gas." the report said. "So, the drivers that showed up in the Permian during the trucking boom times may have a chance to drive products other than crude oil around the region."
The recent high in drilling activity in the Permian, according to the Baker Hughes rig count, was 493 rigs in November of last year. Its most recent number was 415. Those trucking jobs the RBN report refers to already were challenged; just ask Stevens Transport. The new pipelines are clearly making those challenges greater.
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