Folks in the West Texas counties of Martin, Midland and Howard, aka, the land that the downcycle forgot, have been furiously planting steel in the ground and building storage tanks to the sky.
Last basin standing? In its core of the core, the Permian is more like the last basin galloping.
"We are just as busy today as we have ever been," Matt Vining, chief commercial officer and co-founder of Dallas-based Navigator Energy Services LLC, told Midstream Business. "We've managed to install over 450 miles of pipe and are now looking at building in excess of 600,000 barrels of crude storage. We're in full operation and moving a lot of crude."
Vining's company, which has grown from a group of four industry veterans with big dreams in 2012 to a staff of 60 to execute those dreams in 2016, is not alone. Brett Wiggs, CEO of Midland, Texas-based Oryx Midstream Services LLC, has his team working at full throttle as well in the Permian.
"We have about 175 miles of pipe in the ground," Wiggs told Midstream Business. "By the end of this year, we're expecting to have between 300 and 350 miles of pipe in the ground. We are a purely focused Permian Basin team."
Look at the maps that accompany this story and stick your finger smack dab in the middle of the play over Midland and Odessa, Texas. Navigator operates in three counties northeast of your finger (Midland, Martin and Howard), and Oryx is in six counties to the southwest (Midland, Reeves, Ward, Crane, Upton and Pecos).
Monthly production of oil in Navigator's three counties, from January 2015 to January 2016 as measured by the Texas Railroad Commission, was up about 1.16 million barrels (MMbbl) or 15.4%. In Oryx's area, monthly production rose by more than 550,000 (Mbbl) to around 13.25 MMBBl.
Drilling efficiencies are a big part of this story, but they are not the whole story. Producers in the Eagle Ford Shale in South Texas have access to the same technology and techniques, yet suffered a January-to-January drop in production of 19.7%, the U.S. Energy Information Administration (EIA) has reported. There's a reason why producers have retreated in the Eagle Ford and pumped up overall production in the Permian, and the reason is the rock.
"It's the underlying resource," said Wiggs, explaining what gives the basin its competitive edge. "The Permian, compared to other resource plays, has multiple benches and multiple opportunities with significant recoverable hydrocarbons in place. Depending on where you look at the core opportunities, you'll see anywhere from five to seven to eight potential horizons for development vs. many of the other shale plays in the U.S. The Permian provides multiple opportunities in the same acreage position to create some of the most compelling economics in the U.S."
Jessica Pair, upstream manager for Stratas Advisors, sees it, too.
"These counties—Howard, Mitchell, Glasscock, Martin—those areas are just great areas geologically," she told Midstream Business. "We see some similarities in counties in the Delaware Basin as well; mainly Midland, Reeves and Loving, Ward and Culberson are also hot spots. I expect us to see a lot more activity move into these areas as people try to home in on the core of the core."
But don't exclude technology as a driver.
"There's been a lot of transformative events on the producers' side in the field, and the advent of pad drilling in the Spraberry Formation has really been a step change in the production profile that we're seeing across our project's footprint," Vining said. "While you've seen a marked decline in overall rig count across the basin—and really everywhere, that's no surprise—we've seen an increase in production across our four-county footprint in the last six months."
Again, the numbers tell the story: overall crude production in the major U.S. shale plays is down, January to January, except for in the Permian.
Keeping up keeps Oryx busy.
"We've put in 150 miles of pipe in the last five months," Wiggs said. "We expect that clip to continue. Currently, we're gathering for two producers actively. We're moving about 15,000 barrels a day from the current producers connected to the system."
The gathering systems are part of the Oryx Trans Permian Pipeline System (OTP), which currently connects to Magellan Midstream Partners' Longhorn Pipeline in Crane County. The company is working on another gathering system of 35 miles of pipe for a third producer. Three more gathering systems are on the docket to be completed in the next six to seven months, bringing the total of gathering pipe to more than 200 miles.
"The other major project that we've got is continuing our 16-inch line from our Crane station up to Midland to complete the second delivery connect to Enterprise Product Partners' oil terminal on the east side of Midland," he said.
In a time of drastically declining rig counts, Navigator is enjoying the results of fresh E&P activity.
"We're set to hook up 60 central tank batteries in the next six months," Vining said. "These are new drills. We are very excited and enthusiastic because I think the resiliency of at least our area of the Midland Basin has proven to be one of the most economic plays in the Lower 48."
Still on top
The Permian's status as the premier North American oil play will only strengthen in the next few years, Stratas forecast, but its lead will lengthen in output of natural gas and NGL as well. That's a result of increased attention to the Delaware Basin.
"[Producers are] actually increasing frack stages, in addition to extending lateral lengths," Stratas analyst Cory Regal told Midstream Business. "They have a lot of different completion efficiencies that they're working on, particularly in the Delaware and southeast New Mexico."
"That's where you're seeing a lot more drilling now, in the Delaware Basin," he added. "As opposed to the Midland, where vertical drilling has been the standard for some time."
The southern Delaware Basin, in particular, appears to be the resource provider of choice for exports of natural gas to Mexico.
"Mexico decided to help build three pipelines out of [the Waha hub] with 3 Bcf [billion cubic feet] of capacity," Gary Conway, principal, president and CEO of Vaquero Midstream LLC, told attendees at Hart Energy's recent DUG Permian Basin conference in Fort Worth, Texas. "To me, that's really a pretty good indicator that this is exactly the spot where they want to pick up their gas."
Mexico produces about 2 Bcf/d and imports about 2 Bcf/d from the U.S., much of it through the Agua Dulce Hub in Nueces County, Texas. Natural gas makes up about 40% of the country's energy consumption, but that percentage is growing as gas replaces oil in electric power generation.
Vaquero's solution is focused on the ability to expand, as seen in its rich gas gathering system in the Permian's Reeves County.
"If you put a large pipeline in, you create scalability on day one," Conway said. "We've put a 30- and 24-inch in the belly of the basin in Pecos and Reeves counties in order to do that so we can assist producers. It's also large enough to handle the liquid fallout in these particular rich gas plays."
The system boasts 75 miles of lines with capacity of 800 MMcf/d. Vaquero's 300-acre Caymus Cryo Plant I has multiple outlets for residue and four physical connections to 12 total markets, including Mexico. The plant also connects to two NGL outlets, the Lone Star NGL Pipeline and the Chaparral NGL Pipeline.
'Cue to drill'
"We've actually seen the price point of what we're calling the 'cue to drill' again decrease," Pair said. "WTI [West Texas Intermediate] has to hit a certain point for us to see a rebound in activity and production levels. A few months ago, we had that price point at $50 to $60 per barrel, so we needed WTI to be close to that point. Under current techniques, seeing efficiencies and new production results come in, we've actually dropped that price point to below $40 per barrel for some regions."
So, in the price range of $35/bbl to $40/bbl, some operators will be able to manage quite well. In fact, in certain parts of the Permian, that price point could drop to as low as $24/bbl, Regal said.
That's an average as low as $24/bbl in parts of the Permian. Don't try this in the Bakken.
Wiggs expressed confidence that E&Ps will move rapidly when prices recover.
"That set of companies responds very quickly to pricing, and I think you're seeing a natural balancing of the marketplace," he said. "Within the Permian, you see flat to increasing production, especially if you have a little bit of recovery in prices. With some recovery in prices, we think that that production increase could accelerate pretty rapidly."
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