Why Plains All American Pipeline can manage a crude oil imbalance
Plains All American Pipeline’s oil production
PAA expects North American crude oil and condensate production to grow over the next several years, driven by the development of six key crude oil resource basins in the U.S. and Western Canada. North American petroleum demand may remain relatively flat. The recent increases in refinery capacity, focused on processing heavy barrels (particularly in the Midwest), wouldn’t accommodate supply growth. Supply would outstrip demand, in general. Substantially all new regional pipelines, particularly in the U.S. Gulf Coast, would look forward to possible exports as an alternative to sustain growth.
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What the imbalance means for PAA
In the recent past, the inadequacy of existing pipeline takeaway capacity and related logistical challenges in the major oil shale created opportunities that were favorable to PAA’s supply and logistics activities. However, infrastructure additions in many of these resource plays since the latter half of 2013 began to ease off, stabilizing the excess margin opportunities in PAA’s operations. So, even if crude oil lease gathering volumes go up as expected, PAA may have relatively limited opportunities to capture favorable differentials from market dislocations.
The effect of crude oil price volatility on PAA and how the company will manage a changing scenario
Through the next five years, PAA expects to go through price volatility in the crude oil market, resulting from periodic regional bottlenecks, regional crude quality imbalances, and changes in market structure—like contango or backwardation. A contango is when the futures price of oil in greater than the current market price, giving producers incentives to store oil to sell at a profitable rate in future. In backwardation, the current price becomes higher than the futures price, leading to a higher supply of crude oil in the market, and therefore higher demand for transportation infrastructure. The imbalance in higher domestic supply and flat demand would narrow the price differential between WTI and the U.S. Gulf Coast. This may also lead to condensate and crude oil exports if policy changes in the U.S. The company also expects that the huge capital investment required to alleviate bottlenecks in midstream infrastructure would be influenced by the capital market condition.
PAA expects a decline in the rate of production base of the crude oil drilling mines. This would lead to an overall slowdown in production in the next five years.
Plains All American Pipeline, L.P. (PAA) is a master limited partnership that operates in the midstream energy business. Plains GP Holdings LP (PAGP) owns PAA’s general partner. PAA is a component of the Alerian MLP ETF (AMLP), Global X MLP ETF (MLPA), and Global X MLP & Energy Infrastructure ETF (MLPX).