I am writing this from the Florida Keys right now waiting for the wind to die down so I can go fishing offshore. Generally, when that happens, the only thing that brings solace is a cold bottleneck. Unfortunately, the bottlenecks that we will be focusing on today can bring a lot of pain to oil and gas prices. We will be continuing the trend of talking about the two biggest production basins for their respective commodities: the Permian and Appalachia.
RBN just made a writeup regarding the Appalachian buildout of transport capacity and the difference between nameplate and effective capacity. While the nameplate capacity is the number that everyone focuses on and models, the effective capacity is the stronger driver for market fundamentals and thus basis differentials on nat. gas pricing. Effective capacity focuses not on the amount of gas that can flow on a pipe, but how much gas can be used at the delivery point of the pipe. If a pipeline can deliver 4 bcf/day to another pipe, but that pipe only has room to take 1 bcf/day on average, then it is very likely that the 4 bcf pipe will only flow 1 bcf. This above argument is the base example that is being made on many of the new projects slated to come online over the next few years. When comparing this effective capacity over production forecasts for Appalachia, it looks like there could be new bottlenecks for gas leaving the region starting in 2020. What will have to happen is that gas leaving the region will have to price itself to flow, meaning the delivered gas at these bottlenecks will have to be cheap enough to incentivize people to buy it rather than other sources.
Regarding the Permian, there are many new projects being built that will deliver crude oil out of the basin to the gulf coast for export. This export occurs on ships, in between the pipelines and the ships are crude transfer facilities that load the oil onto the ships. Many of the largest crude carriers are too large to dock directly with these facilities, needing smaller ships to ferry the crude out to them, taking a significantly longer time. Currently, in the Houston ship channel, slightly under half of the ships being loaded with crude are these smaller “transfer ships." As crude production rises out of the Permian, this transfer issue will become a larger bottleneck. There are a few projects being considered that would allow for the Very Large Crude Carriers to dock directly to the transfer facility, but it looks like more will be needed to prevent a bottleneck.
Both bottlenecks can create wide pricing differentials between the supply side of the bottleneck and the demand side of the bottleneck. If you have royalty production in the supply side, you could begin to see prices fall as the bottlenecks build. ARC has created new financial products that will protect your mineral rights and oil royalties from losing value as these prices fall. Don’t get bottled up — call ARC today to better manage your oil and gas royalties!