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Robert Rapier

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Could Natural Gas Threaten Permian Oil Production?

In a recent article, I provided a firsthand look at the booming oil production in the Permian Basin. Notably, after 100 years of production, the Permian Basin is pumping record volumes of crude oil.

However, as I also noted there are some looming constraints that threaten to slow this production growth:

“Oil production can expand only as quickly as infrastructure can keep up. And it is struggling to keep up. It’s not just crude oil pipelines that are an issue. Along with oil comes associated natural gas. In some cases, producers have no outlet for this gas, so they flare it. But there are various legal limits to flaring. This week, I heard about a producer who is having to reduce production because they are bumping up against their permitted limits for flaring.”

Since that article published, there have been several more articles highlighting the problem. Platts had perhaps the most in-depth analysis of the issue:

“By summer 2018, Permian Basin gas production will have grown by an estimated 1.2 Bcf/d [billion cubic feet per day], meaning that eastbound capacity is likely to see much higher utilization rates this year compared to last. Looking beyond 2018, limited Permian Basin production takeaway capacity is likely to emerge as the most challenging constraint for producers.”

Bloomberg notes that the infrastructure constraints for the natural gas byproduct (commonly known as associated gas) from the oil boom have created the lowest natural gas price market in the country. They also warn that the problem could curtail oil output from the region and soon drive natural gas prices to zero:

“All that gas production is creating a dilemma for drillers, who may be forced to curtail oil output if they can’t get their gas to market. Producers can burn off some of the gas — a process known as flaring — but state regulators typically won’t allow that to happen indefinitely. And as mild spring weather limits demand for the heating fuel, explorers may be giving their gas away, according to broker Ion Energy Group LLC.”

Related: Higher Oil Prices Boost Saudi Credit Rating

Colton Bean, director of midstream research at Tudor Pickering Holt & Co., emphasized that this problem could become costly for oil producers: “The ultimate downside scenario is you have to effectively slow down on your oil production because you can’t evacuate gas from the basin.”

Not Enough Pipelines

Several natural gas pipelines are being built to transport about 8 Bcf/d of natural gas from the region. These projects will transport Permian Basin gas to Mexico or to the Gulf Coast liquefied natural gas (LNG) markets. However, NAmerico, which is building the 2.0 Bcf/d Pecos Trail Pipeline, projects that Permian natural gas production could reach as much as 20 Bcf/d in a few years — far surpassing the takeaway capacity of currently-planned pipelines.

Mexico is an attractive destination for Permian natural gas. Export volumes to Mexico are surging. However, Mexico has its own infrastructure limitations, despite high demand for natural gas.

More Electricity From Gas

The Houston Chronicle reports that the shale boom is also straining the region’s electricity grid:

“The unprecedented spike in electricity consumption coupled with inadequate transmission have slowed the development of new projects, such as sand mines, that support the energy industry. Excessive demand on a limited system also threatens the grid’s reliability in West Texas, and could lead to blackouts caused by the voltage overload.”

This presents an additional threat for the Permian’s oil boom, but the excess natural gas could be a solution. Excess natural gas in the Permian Basin can be converted into power. This can be done at utility scale, but it can also be done onsite at small scale by oil producers.

Locally produced power can be used to operate fracking rigs and to provide overall power for a site. For producers currently connected to the grid, natural gas can provide necessary backup power to protect against the increasing strain on the grid.

Failure to address these issues in a timely fashion risks slowing growth in the world’s hottest oil play.

By Robert Rapier

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