OGIS: Pioneer’s Tim Dove Sees No Midstream Stress In Permian Until 2019

NEW YORK—As the midstream goes, so goes Permian Basin powerhouse Pioneer Natural Resources Co. (NYSE: PXD), its president and CEO told a packed house at the Independent Petroleum Association of America’s (IPAA) annual Oil & Gas Investment Seminar (OGIS) on April 4.

Timothy L. Dove noted that Pioneer will drill its 1,000th well in the Midland Basin, the largest campaign of any producer, and announced a 10-year level development plan to reach 1 million barrels of oil equivalent (MMboe). That would represent a 15% compound annual growth rate from fourth-quarter 2016 production of 242 boe (57% oil) to 2026.

But for all that upstream achievement and planning, Dove strongly emphasized the midstream.

“In production in the Permian, and especially for our growth plans, it is essential for us to stay ahead of the bottlenecks,” he said. “Essentially we have to add a new gas-processing plant every year in the Permian. We already have a massive water system. In this play you had better control your own water.”

In the breakout session, the midstream emphasis continued, with four of the first six questions concerning transportation and processing.

“Midstream operators in the Permian have done a good job of staving off the bottlenecks,” Dove said. “In crude we don’t see any rough spots until 2019. That said, it’s at least two years from the dream to flow, so we are looking at the next phase already. The MLPs are knocking our door down for firm transport deals already. That is good because at 560,000 barrels of incremental oil, we had better have pipes plus tanks and export facilities.”

Putting a fine point on the issue, Dove noted, “Our Permian crude is 41-43 API gravity, which is ideal for the worldwide market. But the pipeline spec is 45. So our goal is to segregate our crude in batches down the line. We have the premium oil.”

On the gas side, Dove does not see any midstream issues until 2019 either.

“In the Permian, 10% of our molecules are gas” that needs to be moved, he said. “The proposed Kinder Morgan Gulf Coast Express line to Agua Dulce line will take gas close to Corpus Christi, Texas, and from there it can get to Mexico, or the Gulf Coast LNG terminals, or to the Henry Hub.”

The non-binding open season for the Gulf Coast Express ends April 20.

Dove added that Mexico is a strong emerging market, with serious infrastructure limitations.

“We can deliver all the gas they want to the border, but then what?” he asked. “There is no meaningful storage in Mexico. You have to deliver gas to the utility as base load.”

Overall, Pioneer’s approach to the midstream is that the company invests in gathering and processing, but not transmission.

“As long as the MLP tax rules apply, we cannot compete for capital in the midstream,” he said. “So we do not invest in pipe unless we are forced to. But we do invest in processing. We need a new plant every year in the Permian.”

Pioneer has a long-standing collaboration with Targa Resources, which is working well, Dove said. “Of course, we want to put in the gas plant empty and fill it, and they want to put it up when it can be full and run at maximum return. Still it is important to be at the table when those decisions are being made.”

One recent decision that Pioneer has made on its own is to mothball its Fain processing plant in the west Panhandle.

“It is 40 years old and is not efficient to run,” said Dove. “We are going to shut that and run the gas up to a Regency facility nearby.”

Returning to the strategic importance of midstream integration with upstream development, Dove added, “we can easily go out and buy acreage. Doing those deals is the easy part. The hard part is executing on development. Getting boots on the ground is the tough part.”

He also sees a major role for the U.S. as an exporter of crude in general, and especially what his firm and others are lifting in the Permian.

“The smart play is for us to export the light, sweet crude for which we can get a premium because that is what most of the rest of the world likes to refine. In the long term I see loading VLCC’s out of the Gulf Coast for Japan, China, and India. We import the heavy sour stuff that is at a discount. That is where our refining technological advantage is. But whatever we do we have to export. We have to move the volumes coming up. We can’t put it on corn flakes.”