September 2019, Vol. 246, No. 9

Editor's Notebook

Boom or Bust in the Permian?

Things are heating up in Texas, and it’s not just the weather. There are numerous complexities surrounding the most prolific shale region in North America that has everyone working in the basin uneasy. Though the Permian Basin, in Texas and New Mexico, has pushed the U.S. past Russia and Saudi Arabia as the world’s top crude producer, some headwinds have appeared that have this basin fluxed. 

Today, activity in the Permian varies widely, depending on what side of the wellhead you are on. Drilling cutbacks are on the rise but the reasons for that have been mixed. Some believe a slowdown is not just inevitable but is occurring now. Drillers, worried that production is slowing, admit having cut back their drilling wellhead numbers, while others say the reductions are due to improved drilling efficiencies. 

There are reports that most of the crude being produced now is a lighter grade, which opens up another whole set of issues, since most refiners in the U.S. are dedicated to processing heavier crudes. Also, bottlenecks are still prevalent due to pipeline capacity restraints, even as projects start to come online and new projects continue to be announced. 

By 2021, 4,873 miles of new pipeline is expected to be in service, with 1,550 miles planned to be online by the end of the year. Phillips and Andeavor’s Gray Oak pipeline, along with Plains Cactus II pipeline will begin to alleviate some of the backlog but more is still needed. 

Some believe it’s simply a changing of the guard as larger companies begin to pass the top independent shale players when it comes to initial well output volumes in the Permian.  They have increased oil output per well to record highs at a time when many believe that Permian productivity is close to peaking. 

ExxonMobil and Chevron saw double-digit percentage production increases in the Permian Basin during the second quarter and expect growth to continue over the next several years. Chevron said it expects to deliver 900,000 boe/d in the Permian by 2023. One strategic consulting firm noted that midstream infrastructure investment could peak in 2019, but “nonetheless remain robust through 2035,” driven by a continuing surge in unconventional resource development.

For natural gas out of the Permian, it is more of the same. Gas continues to be flared at record levels, yet discussion of a Permian slowdown continues. Some Permian players are beginning to curtail operations while others say they are still riding the wave and have boosted their projected output. 

Apache Corp. reported a $360 million quarterly loss after intentionally slowing down its output in the Permian because of weak pricing and pipeline constraints. The Houston oil and gas producer announced it would dramatically cut back on its natural gas production in the Permian for an extended period because of steep pricing discounts due to pipeline shortages in the region. 

So, how will it all play out? Can companies count on the Permian to continue producing a multitude of riches for an extended period of time or should they pull back and look for opportunities elsewhere? 

The Permian Basin is filled with skeptics and opportunists, willing to bet near-term and long-term. There are a multitude of issues to sort out as mergers, acquisitions, bankruptcies, consolidations, asset disposals, cutbacks, pipeline takeaway capacity, tariffs, pricing and land acquisitions continue to be at the forefront when discussing the Permian.  

In this issue, P&GJ’s Executive Editor Jeff Awalt sorts it all out with his in-depth coverage on the Permian, and Contributing Editor Richard Nemec provides an overview of liquid lines in North America.

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