In April the Permian became the highest producing field in the world—pumping about 4.2 MMbbl/d. To study the impact of the Permian’s continued production growth, Hastings Equity Partners commissioned a whitepaper in partnership with the University of Houston Energy Research titled “Opportunities and Challenges in the Permian.”
“We wanted to understand the takeaway capacity of the Permian and where the incremental oil will end up,” said Ted Patton, founder and managing partner of Hastings Equity Partners.
According to the study, advanced technologies such as enhanced seismic data gathering capabilities, horizontal drilling, hydraulic fracturing and multipad development techniques have allowed operators to realize cost savings of nearly 40% to drill and complete a well.
“Clearly, the Permian Basin has defined our students’ careers in the industry. So the research was largely driven by the motivation to create awareness among faculty on educating the students on the Permian,” said Dr. Ramanan Krishnamoorti, chief energy officer at the University of Houston and co-author of the research.
The report disclosed a few unanticipated findings, including the industry consolidation in the Permian Basin and the transportation challenges.
Major industry operators are estimated to produce more than half of the oil in the Permian over the next four years representing “a historic shift in economic power,” according to the study. As Patton pointed out, oil majors such as Exxon Mobil and Chevron have designed aggressive strategies to consolidate production, resources and supply chains that will meet the majority of the domestic needs.
Consolidation by majors and increased pressure on the independents will lead to the gradual erosion and ultimate destruction of enterprise value among many oilfield service companies due to the lack of pricing power, Krishnamoorti said.
If major operators continue acquiring acreage in the Permian as well as ownership stakes in the pipelines, downstream refineries and petrochemical facilities, then independent producers that traditionally sell to the majors will need to market internationally and export overseas, according to the findings of the study.
“The Permian Basin used to be a place where wildcatters reigned, and now with technology, the economy is being driven by manufacturing,” Patton said. He added that independents are facing new limitations from the investment community to limit production volume to what can be achieved with cash on hand. At the same time, both Exxon Mobil and Chevron have each announced plans to produce 1 MMbbl/d. The inevitable result will be mergers by independents in an effort to survive, he said.
Pipeline capacity for the crude produced in the Permian has been a major bottleneck, but it will move back into balance with demand by the middle of 2020, if not before, according to Krishnamoorti. He added that the shortage of pipeline capacity and the resulting inability for producers to transport oil from the region has caused a significant discounting of the produced crude oil in the Permian and also has resulted in increasing the inventory of drilled but uncompleted wells.
The study also revealed that although more than $90 billion is currently invested in construction projects for terminals, LNG, refining and petrochemical facilities along the Texas and Louisiana Coast, with another $200 billion planned for the next decade, construction can’t keep pace with the supply of oil coming out of the Permian. “The majority of the recent incremental capacity is and will continue to be directed at the Port of Corpus Christi,” Krishnamoorti said.
Large volumes of U.S. crude are exported worldwide via marine routes. According to the findings of the study, another bottleneck facing the Permian over the coming years is the inability of ports to refill very large crude carriers (VLCCs), which are designed to carry 2 MMbbl of crude and are the largest and most economical vessels used for crude oil export.
Waterways along the Gulf Coast don’t provide 75 ft of depth, which is needed to accommodate fully loaded carriers and as a result require lightering. The partial loading of VLCCs is a cost center for crude transport. Using several smaller ships for lightering adds to these costs. While the costs are relatively negligible for short distances, they compound to significantly higher expenses over longer distances such as for crude transport to Asia.
The Louisiana Offshore Oil Port is the only U.S. facility that can harbor fully loaded VLCCs. The Louisiana Offshore Oil Port was previously used exclusively for imports and was recently modified to accommodate exports. The demand for U.S. crude has highlighted the need for deepwater terminals off the coast of Louisiana and Texas. Projects have been proposed, but permitting and execution permissions will delay progress, thereby creating additional bottlenecks, according to the study.
The research also recognized the need to address sustainability issues including natural gas flaring and water management. The associated gas cannot be appropriately valorized because of the absence of gathering and transportation pipelines and the reluctance of operators to invest significantly in gas infrastructure. In addition, technology to reinject the gas into the formation has not been fully developed to make it a viable option to handle the associated gas.
The pipeline infrastructure to evacuate the oil out of the Permian will be built out on schedule with increased Permian production. However, environmental concerns have recently caused some doubts on the actual development and deployment of these pipelines, the study reported.
For instance, deployment of pipelines across the Texas Hill Country faced stiff challenges from the local community. Moreover, the development of processing and storage units near Corpus Christi also encountered similar opposition from the community.
The flaring and direct release of natural gas have resulted in a negative reaction toward the growth of Permian production. Also, the report suggests that the issues of water usage for hydraulic fracturing and management of produced water continue to grow and the lack of solutions are causing considerable dismay among local communities in these areas.
The study forecasts a bright future for the continued growth of production from the Permian Basin. “[That] won’t happen without continued planning, infrastructure growth and adjustments to market condition,” Krishnamoorti said.
He added that all the operators, especially independent producers, “must adapt to market realities and become adept at maneuvering through the export process. Gulf Coast ports and the ancillary infrastructure will have to learn to manage the additional congestion and technical obstacles posed by increased crude oil and LNG exports.”
Check out the other "2019 Permian Playbook" chapters that appeared in the October issue of E&P magazine:
Producing Unconventional Wells without Electricity
Stranded Oil Resources Corp. retained PetroDivest Advisors to market for sale its oil and gas properties, leasehold and related assets in Wyoming's Natrona County representing a basin-wide exit.
Here’s a snapshot of recent energy deals including the acquisition of Dominion's natural gas transmission and storage segment by Warren Buffett’s Berkshire Hathaway in a transaction worth nearly $10 billion.
Here’s a quicklist of oil and gas assets on the market including the sale of operated properties in South Texas as part of a regional exit by Blackbeard Operating.