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Rising Costs Weigh On Permian Gas Production

Permian gas growth is slowing…

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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Pipeline Problems In The Permian Are Overblown

Texas rig

The Permian pipeline bottleneck continues to pinch the shale industry, forcing steep discounts for oil stuck in West Texas. Yet, the midstream constraints will be temporary and few in the industry are overly concerned.

Despite the lack of pipeline space, production in Texas continues to grow. The EIA said that production in Texas jumped by 165,000 bpd in June compared to a month earlier, a very strong increase in output. That came even as reports of pipeline constraints had already begun to crop up, and discounts for oil in Midland had started to rise.

So far, there are indeed some signs of a drilling slowdown. The rig count has been flat since June and the discounts have steepened. The backlog of drilled but uncompleted wells continues to rise as completion activity has slowed, which is an outgrowth of midstream bottlenecks.

The chief executives of Halliburton and Schlumberger, two top oilfield service companies, said at an industry conference last week that they are already experiencing the signs of a drilling slowdown. “These challenges will likely have a dampening effect on production growth, wellhead prices and investment levels in the coming year,” Schlumberger CEO Paal Kibsgaard said at a Barclays conference.

Ultimately, the bottlenecks have already started to push shale drillers into other basins, such as the Bakken, Niobrara, Eagle Ford, SCOOP/STACK and even the Powder River Basin in Wyoming, long known for its coal production.

Yet, Permian drillers, to some degree, are not all that worried about what they view as a temporary problem. Also, there is disagreement from within the shale industry itself about whether or not efficiency gains have reached their limit, or whether cost inflation is even a serious problem at all. Related: OPEC/NOPEC To Discuss 1 Million Bpd Production Boost Next Week

“While some companies reported that reservoir performance was slipping in key plays such as the Permian and Eagle Ford, others completely disagreed with the idea that the industry is reaching the end of the efficiency gain cycle,” Barclays said in a note, summarizing the key findings from its conference on shale earlier this month. “We believe that, on balance, industry innovation will keep inevitable productivity declines in check.” The investment bank said that most shale companies are confident that further efficiencies can offset rising costs.

Barclays even said that the steel tariffs that have raised the ire of some in the industry are only likely to have a marginal impact. “In fact, producers and service companies alike forecast costs will soften in 2H18. The recently introduced steel tariffs will not likely have much of an impact, as steel tubulars make up a small percentage (<10%) of the overall cost of a well,” Barclays wrote. The bank said that production in the Permian will grow by 400,000 bpd between the third quarter of 2018 and the third quarter of 2019. Related: US Rig Count Holds Steady As Oil Prices Slip

But until pipeline relief arrives, the discounts will linger, and will likely even grow worse as output continues to rise. “Over the near-term, spot Midland prices could drop into the mid or low $40s, limiting cash available to some E&Ps and hampering their ability to keep pace with previously planned completion schedules,” Bank of America Merrill Lynch wrote in a note. “We expect that smaller producers are more likely to throttle back activity as bottlenecks worsen since they usually have less firm takeaway capacity or are less well hedged.”

At this point, however, relief is not that far away. The Permian Express 3 expansion could add 40,000 bpd by the end of the year, before a more significant addition of 500,000 bpd from the Sunrise pipeline in the first quarter of 2019. The EPIC pipeline (440,000 bpd), the Cactus 2 pipeline (670,000 bpd), and the Gray Oak (700,000 bpd) are slated for the second half of 2019. Behind that comes another wave in 2020, with ExxonMobil’s joint venture with Plains All American and Energy Transfer Partners’ project with Magellan adding an additional 2 million barrels per day of pipeline capacity.

With this very full queue of pipelines in mind, shale drillers are focusing on waiting out the current bottleneck. “Beyond 2019, we expect WTI Midland-Cushing to trade positive at times as takeaway capacity to the USGC exceeds production,” Bank of America Merrill Lynch concluded.

By Nick Cunningham of Oilprice.com

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  • Frank on September 10 2018 said:
    A gasline blew up a house in Central PA last night.

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