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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Permian Growth Is Reaching Its Limits

The Permian isn’t just suffering from a bottleneck for oil, but also for natural gas.

In 2016, for instance, gas flows leaving the Permian typically clocked in at about 3.6 billion cubic feet per day (Bcf/d), according to S&P Global Platts. That number has ballooned to 6.3 Bcf/d as of May 2018.

Obviously, the surge in gas flows from the Permian is the result of a massive increase in gas production. Gas output has surged more than 135 percent since 2013 and is expected to rise to just shy of 10.5 Bcf/d (including natural gas liquids) in June 2018. The problem is that the region’s ceiling on takeaway capacity stands at about 7.3 Bcf/d.



Skyrocketing natural gas production has unsurprisingly weighed on regional prices. According to S&P Global Platts, natural gas prices at the Waha Hub in West Texas traded at an 8-cent per MMBtu discount to Henry Hub two years ago, but that discount widened to about $1/MMBtu this month.

With so much gas on their hands, Permian drillers have resorted to higher rates of flaring. The Environmental Defense Fund estimates that top Permian producers are flaring as much as 10 percent of their gas. “This flaring is so extreme, it can be seen from space,” EDF says. “In 2015 alone, enough Texas Permian natural gas was flared to serve all of the Texas household needs in the Permian counties for two and a half years.”

S&P Global Platts reported that gas flows to Mexico have increased over the past few weeks, relieving some pressure. But infrastructure within Mexico hasn’t been able to keep up with the supply of gas north of the border, so some of the pipelines are under-utilized. In any event, the gas volumes moving to Mexico will be swamped by new supply coming online in the Permian. At some point, the glut of gas could force curtailments in drilling. Related: OPEC Could “Relax” Production Cuts

Surplus gas is the byproduct of the frenzied pace of oil drilling. Meanwhile, the bottleneck for oil is arguably just as bad, except because oil is the primary target for shale drillers in the Permian – and not gas – the inability to move oil will be a much bigger obstacle to higher production levels.

Clogged pipelines and a crowded shale patch are starting to force some companies to look elsewhere. For example, ConocoPhillips is looking to places like the Eagle Ford and the Bakken because the Permian is becoming saturated. “Now that people have left the Eagle Ford and gone to the Permian and other places around the U.S., we're seeing the opportunity," Conoco CEO Ryan Lance said earlier this month, according to the Houston Chronicle. "The cost structure is lower, and we're not seeing the sort of rapid inflation you're seeing in the Permian." Conoco’s output in the Eagle Ford (163,000 barrels of oil equivalent per day) vastly exceeds its operations in the Permian (19,000 boe/d).

That strategy certainly goes against the grain – a lot of shale-focused drillers have disposed of Eagle Ford and Bakken assets in order to become increasingly concentrated in the Permian. Conoco is going in the opposite direction.

However, they actually aren’t the only ones pivoting away from the Permian as West Texas becomes too crowded. The Eagle Ford and the Bakken have seen a revival of sorts over the past few quarters, with rig counts and production rebounding. Shale executives have begun to boast about their diversified holdings when speaking to shareholders or analysts, a marked shift from the allure of the pure-play Permian driller.

With both gas and oil pipeline capacity just about tapped out, shale companies could be forced to cut back on the pace of drilling. New pipelines are in the works, but new conduits aren’t expected to come online until the second half of 2019. Related: Will The U.S. Push Venezuela Into The Abyss?

Surplus oil is currently being sold locally in the Midland region, depressing prices. The discount for WTI in Midland relative to Cushing ballooned to double digits this month, which is to say, Permian drillers have been getting less than $60 per barrel for their oil while everyone else is selling WTI at just over $70.

But while there are plenty of warning signs that the Permian is overheating, any curtailments have yet to show up in the data. The EIA expects the Permian to add 78,000 bpd of new supply in June compared to May, and 225 million cubic feet per day of extra gas supply. Plus, the Permian has seen an additional 15 rigs added into the field since April.

However, there is a bit of a lag time between price signals and a change in drilling plans, so the damage from the blowout in the Midland price differential due to the sudden lack of pipeline capacity has yet to be truly reflected in the production figures.

By Nick Cunningham of Oilprice.com

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  • Hal Smith on May 23 2018 said:
    Nick ! Keep up the attack ! Your efforts have kept oil prices suppressed. Thank you. HS
  • Lee James on May 27 2018 said:
    Adam Smith would expect that the wisdom of the marketplace would dictate more reasonable production in overheated oil fields. That's what we'd think. A closer read of Adam Smith reveals concerns....

    In this article we see a couple of forces at work that are putting petroleum production out of healthy balance. First off, our major focus on oil production leads to a surplus of NG, as mentioned in the article. This leads to incredible waste from flaring -- something oil investors do not see, even if it's all too obvious to astronauts. It's amazing to me how so many of us do not see flaring as wasteful. Big picture, it took millions of years to create those hydrocarbons; there is a finite limit of them on planet Earth -- not to mention the harmful byproducts of combusting the resource and venting or leaking the gas.

    A second failure in our marketplace is the free-for-all in the United States of a myriad of jockying companies, all wanting to get to the resource first. The term is dressed up to read, "free competition." But it's the kind of things that contributes greatly to the cyclical nature of the petroleum industry. When the industry is ticking upward, everyone is blind to the seeds of market destruction that are present. Overshooting production by wide margins, costs.

    In today's administration of our nation, regulation is a dirty word. So, an industry that we need today (oil), is seen as the only thing that we need and is to be protected at all cost. We follow industry ups and downs, but can't see beyond THE industry to what should come next. We're ecstatic over the "up," and fixate on a down that we know must come up. But things change.

    Are we prepared for when something is different, in the industry?

    Today, we can expect extreme volatility in pricing. We can expect extreme damage to clean air and water. We live for the promise of crude prices, and offer a generous discount to what pollution and fighting over oil has to offer for our children.

    But what if something changes. Or what if something has already changed, and people notice?

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