The bottlenecks in the Permian are starting to capture the attention of the oil market, raising the prospect that U.S. shale production does not live up to the hype.
The frenzy in West Texas has predictably led to bottlenecks up and down the supply chain. Oil drillers are facing rising prices for labor, rigs, services and land. The lack of pipeline capacity is starting to force discounts for oil as large as $9 per barrel.
A new report from Rystad Energy points to the bottleneck specifically for pumping horsepower and frac sand. When wells are drilled, companies deploy trucks connected to pressure pumps that inject water, sand and chemicals underground to fracture a well. But the sky-rocketing level of drilling activity is actually straining the market for pressure pumping capacity. There just isn’t enough to go around.
“Capacity is expected to be particularly tight in the Permian in the second quarter before the majority of new equipment comes online in the second half of the year,” Rystad Energy wrote in its report. “More than half of total U.S. pumping capacity will be in the Permian.” Obviously, that means booming business if you are in the market of selling such equipment. “We are comfortably behind at the moment, and we are just fine with that,” a VP at an unnamed equipment manufacturer told Rystad.
To be sure, Rystad Energy predicts that 2 million horsepower of new capacity will come online by the end of the year, a nearly 10-percent increase from 2017. That should help relieve some of the strain.
Related: Canada’s Oil Patch To Turn Profitable In 2018
The market for frac sand is also stretched to the limit. But that too should be temporary. Rystad Energy sees the supply of frac sand jumping by a massive 52 million tons in 2018, much of it located in the Permian in close proximity to drilling sites, which is different from the past when much of the sand had to be shipped to Texas from Wisconsin and Minnesota.
Still, moving all that sand around requires a lot of trucks, and the market for trucks is also tight. To top it off, a zillion trucks moving around wears down roads, which ultimately could create bottlenecks for sand. “You’re going to see similar problems as to what happened in the Eagle Ford years back; roads get chewed up and no one wants to have them shut down for repairs,” an official from an E&P company told Rystad.
Another VP agreed, telling Rystad that “it’s not just the quality of roads anymore, it’s the NUMBER of roads. I just don’t think there are enough roads to service this kind of demand without traffic jams of semis all over the Permian.”
However, the most critical bottleneck this year could be for pipeline capacity. Permian oil production is set to hit 3.18 million barrels per day in May, while pipeline capacity is expected to average 3.078 mb/d for the year, according to the Wall Street Journal and Goldman Sachs. The pipelines are essentially full, which is why Midland crude is suffering discounts. Additional supplies might need to be moved by truck, a costly form of transport.
Related: Norway To Create Thousands Of Jobs In Arctic Oil
All of these constraints will add costs and likely push up breakeven prices. The WSJ estimates that Permian drillers could see production costs rise by 15 percent this year.
However, oil producers might ultimately have to throttle back on production growth or even shut in wells. The backlog of drilled but uncompleted wells (DUCs) in the Permian has skyrocketed, jumping to 3,044 wells in March, up 14 percent since the start of the year. E&Ps are opting not to complete wells for a variety of reasons, most of which have to do with a shortage of completion crews or some other supply chain bottleneck. Roughly 87 percent of supplies and equipment used to frack a well in the Permian is booked up, according to Matt Johnson of Primary Vision Inc., as reported in the WSJ.
Finally, there is the gusher of natural gas coming out of all of these oil wells that could spell problems for producers. There are limits to the amount of flaring allowed, and without pipelines to take away all of the natural gas, producers might have to shut down wells.
The bottom line is that a whole series of bottlenecks could act as a significant drag on the growth rate of the Permian basin. And because the Permian is the largest source of supply growth for the entire world, any hiccups will ripple across the global market.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
- The Bullish And Bearish Case For Oil
- JP Morgan: Oil Prices Won't Go Higher Than $70
- China To Double Shale Gas Output
Make us pay for the expences. LoL