The US now pumps a record 11 million barrels a day in oil, surpassing both Saudi Arabia and Russia, and becoming the world’s largest oil producer. Behind this historic achievement is America’s most productive region, the Permian Basin in west Texas and New Mexico, where approximately one-third of the nation’s daily supply is extracted from the ground via hydraulic fracking.
However, the shale revolution has overwhelmed the region’s infrastructure with massive supply – driving up costs, depressing regional oil prices and slowing the pace of growth, according to Reuters.
The Trump administration has been cheering the country’s oil output rising to record levels, but some severe logistical constraints have developed – leaving many producers unable to turn a profit and encouraged some to drill elsewhere.
Consider the Permian Basin, the country’s largest oil field, which has increased production from 1.5 million barrels per day (bpd) to 3.43 million bpd, in the last three years. The influx of new supply has strained pipeline capacity for Permian Basin producers and is not expected to exceed overall oil production until late in 2019 or early 2020. Several new pipelines are expected to be operational in the next several years, but in the meantime, producers are resorting to rail and trucks in higher frequency.
Shortages of human labor, water, and even fuel used in fracking are skyrocketing the cost of production.
At the same time, Permian producers are being paid $17 a barrel below West Texas Intermediate (WTI). Sellers have to offer the discount to compensate for the higher transport costs, said Reuters.
“We’re our own worst enemy,” said Ross Craft, chief executive of Approach Resources, a West Texas oil producer which last year averaged about 11,600 barrels per day. “We can drill, bring these wells on so quickly that we basically outpace the market. It is going to take a little bit of time,” for the infrastructure to catch up to producers.
Since mid-2016, the number of drilling rigs in the Permian rapidly increased, but the momentum is now slowing, in part because of the deep discount of Permian oil versus WTI.
With the shale revolution in danger, the number of uncompleted wells in the Permian jumped by 80% to 3,630 in August compared with a year earlier, according to US Energy Department data. Outside of the shale bubble, uncompleted wells are only up 10% from the same period a year ago.
ConocoPhillips and Carrizo Oil & Gas are reducing their operations in the Permian. Each has moved a Permian rig to another oilfield, and Conoco idled a second, Reuters said. Noble Energy also scaled back rigs in the region and said it is transferring resources to Colorado.
John Hopkins, a managing partner at Global Drilling Partners, said they were ready to drill at least seven wells with a Permian operator this summer, but those plans fell apart due to the lack of pipeline capacity.
“There will be a shift out of West Texas temporarily until they can solve their midstream problems,” he said. Companies are looking to boost their drilling in other fields in Texas, Colorado and Oklahoma, he said.
The deep price discount on Permian oil has damaged the equity price of some shale producers such as Parsley Energy, which operates rigs only in the Permian. Parsley delivered an eight fold-rise in profits in the second quarter versus a year earlier and boosted output by 57% over the same period. But investor still dumped the equity because of concerns that plans to increase production by another 5% by spending 17% more will deliver diminishing returns.
Wood Mackenzie, a global energy consultancy group, published a report that estimates Permian oil production in 2019 will be 200,000 bpd lower than it could be because of infrastructure constraints. Permian output will be 3.9 million bpd in 2019, Wood Mackenzie estimates, but if proper infrastructure was in place, production could have soared well above 4.1 million bpd.
“We’ve had a more significant increase in costs this year than we would have assumed,” Timothy Dove, chief executive of Pioneer Natural Resources, one of the largest Permian oil producers, said in August.
Some producers are being forced to use truck and railcar as pipeline capacity has reached its upper limits. In return, oil by truck to Gulf Coast refinery and export hubs costs $15 to $25 a barrel, compared to $8 to $12 a barrel by rail and less than $4 a barrel by pipeline, according to Reuters’ market sources.
“Truck traffic is unlike anything we’ve ever seen,” said James Walter, co-CEO of Colgate Energy, a Midland-Texas based oil producer, who adds his company has contracts to transport all of its crude and gas production via pipelines.
Reuters noted that rail capacity will not increase because oil producers are not signing long-term contracts to lease cars. They would prefer to wait for the new pipelines to be built. Meanwhile, rail companies are reluctant to purchase new oil railcars without long-term contracts.
“We do think it’s a short-term situation,” Union Pacific Executive Vice President Beth Whited said in July. “So we will not invest to support that.”
Meanwhile, Jean Laherrere at Forecast For U.S. Oil & Gas Production shows the Permian oil production peaking sometime in 2019.
And so with logistical hurdles surpassing oil price as the key extraction bottleneck, one wonders if we have finally hit peak shale?
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