Less than a year ago, IHS Markit predicted that “stunning” growth in the Permian would result in the basin doubling its oil production to 5.4 million bpd between 2017 and 2023. That 5.4-million-bpd output would be more daily production than in any member of OPEC except for Saudi Arabia, the business information provider said in June 2018.
Nine months later, the Permian production is set to break the 4-million-bpd mark as early as in this month, as per EIA estimates. The Permian production is now roughly one third of the total U.S. crude oil output of 12 million bpd.
Analysts expect the Permian production could double from the current levels through 2023, and the basin to pump as many as 8 million bpd in four years.
That’s roughly the total current oil production from the seven key shale regions in the United States, as per EIA’s Drilling Productivity Report.
The growth in the Permian oil production is also set to boost U.S. crude oil exports, analysts have told CNBC.
American crude exports hit a record 3.607 million bpd in one week in February, and have been above 2 million bpd in most of the weeks in recent months.
Permian oil production— currently just shy of 4 million bpd—jumped by around 1 million bpd from a year ago and is set to jump by another 1 million bpd, to 5 million bpd, by early 2020, Eric Lee, energy analyst at Citigroup, told CNBC.
“We’re happy to look out to 2023, when it gets to 8 million. ... They figured out how to access it at very low break-evens, like $30/$40,” according to the analyst.
Not enough pipelines to transport the Permian crude to the U.S. Gulf Coast has led to takeaway constraints in the fastest-growing oil producing region in recent months. But midstream operators and oil majors have laid out plans to significantly raise pipeline capacity over the next two years. Several new crude oil pipelines expected to come on line at the end of this year and in 2020 and 2021 are set to alleviate bottlenecks and reduce the price discounts of the oil in the Permian to the oil priced at Cushing or the U.S. Gulf Coast. Related: Is This A Precursor For Peak Oil Demand?
“We’re going to triple pipelines going into the market from 3 to 9 million in three years, from last year to late 2021,” Francisco Blanch, head of commodities and derivatives at Bank of America Merrill Lynch, told CNBC.
In a sign that new pipeline capacity has started to somewhat ease the bottlenecks, crude oil inventories in West Texas dropped to a four-month-low in February, according to data from market intelligence provider Genscape cited by Reuters.
Analysts have singled out pipeline capacity and the profitability of Permian drilling, especially for smaller players, as the key factors that would determine the pace of growth in the basin. While pipeline constraints are expected to significantly ease in 2020 and 2021, the price of oil and the breakevens of wells in the Permian are the bigger unknowns.
According to an analysis of wells economics in the Permian Delaware basin, Rystad Energy has concluded that large-scale drilling and large players will be the key beneficiaries in the basin.
“Size matters, even more so when drilling for shale oil in the Permian Basin,” Rystad Energy senior partner Per Magnus Nysveen said last month, noting that large operators with vast acreage positions would get handsome returns, even if WTI Midland oil price is at $45 a barrel, while smaller operators might struggle to make profits.
U.S. supermajors Exxon and Chevron both announced last week increased targets for their Permian production. Chevron now sees its Permian unconventional net oil-equivalent production rising to 600,000 bpd by the end of 2020, and to 900,000 bpd by the end of 2023. Exxon revised up its Permian growth plans to produce more than 1 million oil-equivalent barrels per day by as early as 2024, which would be an increase of almost 80 percent. Related: Two Largest Oil Price Benchmarks Are Set To Diverge
The shale game is now a ‘scale game’, as Chevron Chairman and CEO Michael Wirth put it.
“The big thing that I think has changed is the shale game has become a scale game, and so people that can do things at large scale and bring the capabilities to bear that a company like Chevron has are the ones that really can take this to the next level,” Wirth told CNBC last week after the company announced its latest Permian growth targets.
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As for oil prices, currently OPEC looks set to continue supporting prices with the ongoing production cuts, instead of fighting for market share, despite the fact that the higher the price, the more incentive U.S. oil producers have to continue setting production records.
As pipeline constraints start to clear in the second half of 2019, U.S. exports will also rise, John Driscoll, chief strategist at JTD Energy Services, told CNBC at the end of February.
“The U.S. is spoiling the OPEC party. They are now the wild card and they don’t have a seat at the table in Vienna,” Driscoll said.
By Tsvetana Paraskova for Oilprice.com
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