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David Messler

David Messler

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…

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Is a Tipping Point Approaching for America's Most Prolific Oil Basin?

  • The Permian Basin has been the driver of growth in shale output for several years, but some fear its production may soon peak.
  • A number of factors have contributed to the flattening and potential peaking of Permian shale output, but one factor has been largely overlooked: gas-to-oil ratios.
  • The increasing gassiness of the Permian basin could hinder production in the coming years, providing a good opportunity for midstream companies.

Midstream companies are benefiting from the Permian gas problem. The Permian basin has been the driver of growth in shale output for a number of years now, adding about 4-mm BOPD and 18 BCFD of gas to its output. Other key shale oil basins - notably the Eagle Ford and the Bakken, have fallen off their 2014 highs for oil production. Today we are producing about 9.8 mm BOPD and have been at or near those levels for several months now. Could a tipping point be approaching?


A number of reasons have been discussed for the flattening and potential peaking of Permian shale output. Most recently in this Oilprice article. Declines in the rig activity levels for the basin, lower completion activity thanks to DUC (Drilled but Uncompleted) well building, a winding down of undrilled Tier I (the most economical) drilling locations, and lower WTI prices for much of the last couple of years have contributed to stalling the growth rate of Permian output. Thus far the advances in technology such as longer lateral sections and higher completion intensity have overcome these negative factors enabling the incremental 10-20K BOPD rises we have been seeing each month.

A new factor that has not gotten a lot of discussion is the increasing gas-to-oil ratio (GOR) for shale production. This is happening in other basins as a review of the full EIA-DPR reveals the Bakken, Eagle Ford, and the Denver Julesberg are notching higher levels. This trend is led by the increasing gassiness of the Permian as noted in a DPR-GOR supplement put out in December of 2023, up nearly 30% since 2019.


So with the fact of associated gas being on the rise, the issue of takeaway constraints, ie. the ability of Midstream providers to take increasing amounts of gas to market becomes an issue. The lack of installed transport pipelines leads in only one direction, decreased drilling activity until new capacity is available. Explaining in part the flattening of Permian output since the first of the year, the graphic below from a blog post by RBN Energy with credit to Natural Gas Intelligence illustrates the bind in which Permian producers find themselves currently.


There is help on the horizon as the RBN graphic indicates in the pink section at the top. The Matterhorn Express line is due to begin service in the middle of this year and will provide takeaway for another 2.5 BCF/D. Running from the WAHA Hub in the Permian to Hubs in Katy and Wharton, expectations are it will fill up quickly providing only temporary relief for the situation.

To mark time while waiting for the Matterhorn Express to begin operations, Permian drillers have been shifting activity from the gassiest portion, the Texas side of the Delaware sub-basin to the more oil-weighted Midland sub-basin. The RBN graphic below shows this shift in a rig count that was declining anyway, moving sharply lower in the Delaware this year. Part of the rationale for the shift is that wells in the Delaware tend to be deeper and hotter than in the Midland to tap the key producing formation - the Wolfcamp A - leading to the change in the GOR ratio.


There is more help coming for this situation longer term. Next up potentially in the greenfield pipeline space is the 690-mile DeLa Express now going through the permitting process. It will run from the Permian to Lake Charles, LA, and provide another 2-BCF/D of egress. Assuming no extensive delays the DeLa Express won’t be in service until 2028, potentially 4 years down the road. East Daley Analytics notes other takeaway projects that may also come to pass in this general time frame.

“The (DeLa) project joins a list of pipeline proposals including Targa Resources’ (TRGP) Apex, Energy Transfer’s (ET) Warrior, and Kinder Morgan’s (KMI) brownfield 80 MMcf/d expansion of the Natural Gas Pipeline of America system (expected in-service date in November ’24).”

Whatever the outcome of these new pipeline proposals, the gassy future of the Permian depends on at least some of them going forward to deliver growth in liquids.

Your takeaway

As investors, this increase in gassiness of Permian production has implications that impact both Upstream operators and Midstream companies. On the upstream side, development plans may encounter hiccups for gas-weighted production. As noted earlier we have already seen this as operators moved rigs out of the Delaware basin, preferring the oilier content of the Midland basin. For companies with high Delaware exposure, this could lead to delays in bringing high-potential projects forward. A scenario in which production and revenues might be impacted.


For Midstream companies the problems of the Upstream companies spell opportunity - full pipes and higher tolling, and you have seen this play out this year in pricing trends for their stocks. Upstream companies have to a large extent languished, while Midstreamers have rallied noticeably.

Something to keep an eye on would be the startup of the Matterhorn Express. As this massive 2.5 BCFD project begins line fill, producers' stocks could ramp higher in anticipation of higher volumes and revenues.

By David Messler for Oilprice.com

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