Permian’s Newest Gusher Creating Wave of Investments

The gusher of crude from the Permian Basin has spurred new investments from refinery and pipeline companies trying to take advantage of low prices caused by rising supplies.

Delek US Holdings Inc. (DK) expects to expand its refinery in Tyler, Texas, by 25 percent in early 2015, and Sunoco Logistics Partners LP (SXL) asked shippers if they wanted to commit to a new pipeline to carry West Texas oil across the state and into southern Louisiana.

The projects underscore the continued influence of the shale boom on the U.S. energy landscape more than five years after hydraulic fracturing and horizontal drilling helped reverse a decades-long decline in oil production.

“There’s like a wall of crude oil coming out of the Permian,” said David Hackett, president of Stillwater Associates, an Irvine, California-based energy consulting firm. “The first projects look like they’re all filled up, now the next wave is getting announced.”

The Permian Basin in West Texas and New Mexico is the largest oil field in the U.S. It’s expected to produce 1.63 million barrels a day of oil in August, up 86 percent from August 2008. The rapid increase has caused prices in the Permian hub of Midland, Texas, to slump to $11.50 a barrel below the U.S. benchmark in Cushing, Oklahoma, from a discount of 35 cents a year earlier, according to data compiled by Bloomberg.

Wide Differentials

“The growing production has exceeded pipeline development, which we think will continue to result in periods of wide Midland/Cushing crude differentials,” Jeff Stevens, chief executive officer for Western Refining Inc., said April 5 in an earnings call. Western operates a refinery in El Paso, Texas.

Delek wants to refine more of that cheap oil at its plant in Tyler, 100 miles (160 kilometers) east of Dallas. It plans to increase crude capacity there by 15,000 barrels a day to 75,000 in the first quarter of 2015, the company said yesterday in its quarterly earnings statement. The refinery gets 92 percent of its crude from West Texas now, the company said in an investor presentation.

The plant will also expand sulfur-removing systems to increase gasoline production by 18 percent to 41,000 barrels a day and low-sulfur diesel and jet fuel output by 27 percent to 33,500 barrels a day. Total cost of the expansion will be $70 million.

Sunoco announced an open season for companies to make binding commitments to ship crude on the Permian Longview and Louisiana extension pipeline. The line would take 100,000 barrels a day from Midland to Longview in northeast Texas and then 80,000 barrels a day to Anchorage, Louisiana. The project, which would use some existing pipelines, would be ready to start operating in the second half of 2016.

To contact the reporter on this story: Dan Murtaugh in Houston at dmurtaugh@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net Richard Stubbe, Margot Habiby

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