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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Permian Oil Production Could Surge By 500,000 Bpd This Year

  • The Permian Basin struggled to return to 2019 production levels last year, but a surprise spike in output in January pushed it over the threshold.
  • Plains All American Pipeline is predicting that Permian production could soar by 500,000 bpd this year.
  • Other U.S. basins have not seen the uptick in activity just yet, but outlook remains particularly bullish.

Houston, Texas-based pipeline company Plains All American Pipeline, L.P. (NASDAQ: PAA) has predicted that Permian crude output will surge by 500,000 barrels per day in the current year. The company revealed this during its latest earnings call whereby it reported that it’s been recording higher utilization for long-haul systems for its Cactus pipelines in Texas. PAA reported Q4 2022 revenue of $12.95 billion versus $12.98 billion a year earlier; unfortunately, fourth-quarter net income shrunk 42% to $263 million while net cash also contracted 47% to $335 million. 

Although U.S. production in the oil-and-gas-rich Permian Basin grew in 2022, it remained below 2019 levels for most of the year. But later in the year, the Permian suddenly came alive with production last month climbing 12% to a record 5.6 mb/d. Unfortunately, the same cannot be said of other U.S. oil fields, a big reason why overall U.S.  production has only been inching up slowly.

That said, the U.S. oil production outlook for the current year is generally bullish. The Energy Information Administration (EIA) has released its latest Short Term Energy Outlook (STEO) wherein it sees crude production clocking in at 12.49 and 12.65 million barrels of crude per day in 2023 and 2024, respectively, up from 11.90 mb/d in 2022. 

Commodity analysts at Standard Chartered are also bullish, and have predicted that U.S. crude supply and shale oil supply have both yet to peak. 

According to StanChart, total U.S. oil liquids supply surpassed the pre-pandemic high in July, with higher output of natural gas liquids (NGLs) and other liquids offsetting lower crude oil output. The analysts have further projected that U.S. crude output will exceed 13 mb/d by June 2024. StanChart has, however, not provided any insights into how they arrived at this decidedly bullish projection for the U.S. crude production.

Source: Standard Chartered

Other indicators are also bullish. 

According to Wood Mackenzie’s ‘Oil and gas exploration 2022 edition, exploration well numbers in 2022 were less than half the numbers during pre-pandemic years, yet the total volume of 20 billion barrels of oil equivalent matched was comparable to the average in the 2013 – 2019 period, creating at least $S33 billion of value. Another interesting development: Liquids accounted for 60% of new discoveries, marking just the third time in two decades that liquids made up the majority of new discoveries.

Previously, Rystad Energy had warned that proven oil and gas reserves by the Big Oil  companies namely ExxonMobil (NYSE: XOM), BP Plc. (NYSE: BP), Shell Plc (NYSE: SHEL), Chevron (NYSE: CVX) were rapidly falling due to produced volumes not being fully replaced with new discoveries. 

According to the energy expert, only TotalEnergies ( NYSE: TTE), and Eni S.p.A (NYSE: E) avoided reductions in proven reserves over the past decade. ExxonMobil, whose proven reserves shrank by 7 billion boe in 2020, or 30%, from 2019 levels, was the worst hit after major reductions in Canadian oil sands and US shale gas properties. Shell, meanwhile, saw its proven reserves fall by 20% to 9 billion boe; Chevron lost 2 billion boe of proven reserves due to impairment charges while BP lost 1 boe.  

Luckily, the latest exploration data suggests that the decline in reserves is likely to be arrested sooner rather than later.

U.S. Ramps Up Gas Output

Whereas U.S. crude production is expected to grow significantly over the next two years, the natural gas and LNG markets are where the real action will be. 

The EIA has predicted that the U.S. will export 11.8 and 12.6 billion cubic feet of LNG per day in 2023 and 2024, respectively, up from 10.6 billion cubic feet per day in 2022. However, natural gas prices are expected to remain muted, averaging $3.40 and 4.04/MMBtu in 2023 and 2024, down from $6.42/MMBtu in 2022.

Last year, the United States overtook Qatar and Australia to become the world’s top LNG exporter, and appears set to cement its lead. Once again, the Permian will play a pivotal role, with the basin preparing to unleash a torrent of gas and gas projects to meet exploding LNG and nat. gas demand

Also last year, a consortium of oil and natural gas firms namely WhiteWater Midstream LLC, EnLink Midstream (NYSE:ENLC), Devon Energy Corp. (NYSE:DVN) and MPLX LP (NYSE:MXLP) announced that they had reached a final investment decision (FID) to move forward with the construction of the Matterhorn Express Pipeline after having secured sufficient firm transportation agreements with shippers.

According to the press release, “The Matterhorn Express Pipeline has been designed to transport up to 2.5 billion cubic feet per day (Bcf/d) of natural gas through approximately 490 miles of 42-inch pipeline from Waha, Texas, to the Katy area near Houston, Texas. Supply for the Matterhorn Express Pipeline will be sourced from multiple upstream connections in the Permian Basin, including direct connections to processing facilities in the Midland Basin through an approximately 75-mile lateral, as well as a direct connection to the 3.2 Bcf/d Agua Blanca Pipeline, a joint venture between WhiteWater and MPLX.”

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Matterhorn is expected to be in service in the second half of 2024, pending the regulatory approvals. 

WhiteWater CEO Christer Rundlof touted the company’s partnership with the three pipeline companies in developing “incremental gas transportation out of the Permian Basin as production continues to grow in West Texas.” Rundlof says Matterhorn will provide “premium market access with superior flexibility for Permian Basin shippers while playing a critical role in minimizing flared volumes.”

Matterhorn joins a growing list of pipeline projects designed to capture growing volumes of Permian supply to send to downstream markets. Earlier, WhiteWater revealed plans to expand the Whistler Pipeline’s capacity by about 0.5 Bcf/d, to 2.5 Bcf/d, with three new compressor stations. 

Meanwhile, KMI has already completed a binding open season for the Permian Highway Pipeline (PHP), with a foundation shipper already in place for half of the planned 650 MMcf/d expansion capacity.

By Alex Kimani for Oilprice.com 

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