The Last Barrel
The first evidence that the Permian basin contained oil was discovered by ranchers, who settled after 1875 and were drilling wells to provide water for their livestock. They encountered the viscous liquid in relatively shallow horizons. In the early 1900s, work by University of Texas geologist Johan Udden contributed to a greater understanding of the basin’s structural features and its areal extent. Early development drilling established production down to 4,500 ft, but the “deep” basin started at Big Lake field in Reagan County, when, in 1928, a robust flow of oil and gas was encountered at 8,525 ft. After countless boom-bust cycles, the multi-faceted sedimentary jewel of West Texas is once again the center of U.S. attention.
Not all shale is created equal. According to the EIA, Texas shale is the most productive in the U.S. To tap the resource, shale drillers filed 1,011 permits last month with the Texas Railroad Commission, compared with just 631 in July 2016. Of those permits, 893 indicate operators will drill new oil or gas wells. If crude prices move above $60/bbl, Permian activity could drive about 20% of the growth in exploration through 2021.
“The Permian continues to surprise us to the upside,” said Alex Beeker, an analyst at Wood Mackenzie. With U.S. benchmark crude continuing to trade below $50/bbl, drilling rig additions will slow, but they also see production continuing to rise, he added. The firm projects another 300,000 bopd coming from the Permian, by the end of the year, while the latest EIA report projects production to increase 2.5% in July, to about 2.5 MMbopd. The Permian region is expected to approach or surpass the 2.7-MMbopd mark next year and represent about 30% of total U.S. crude production. The EIA also is optimistic about Eagle Ford production, and is forecasting a 2% increase by the end of July, up to 1.38 MMbopd.
Higher service costs/oil prices are limiting factors. Investors have sold off shares in a range of Permian shale producers after Pioneer Natural Resources disclosed an unexpected drop in second-quarter oil production and higher costs on some Permian wells.
Several oil companies have cut their capital spending plans for this year, citing the sub-$50/bbl prices or greater production efficiencies. The number of active U.S. drilling rigs also has slid in recent weeks, prompting concerns that overall production growth could stall. But the oily Texas shale fields will play a significant role for the foreseeable future.
Unprecedented export opportunity. To ensure that Permian and Eagle Ford production can reach world markets, we need to invest in our energy transportation infrastructure, to realize the enormous opportunities, said Texas Railroad Commissioner Ryan Sitton. Corpus Christi is the leading port for crude exports from the U.S., and two new, planned major pipelines from Midland-Odessa will increase shipments through the port by 2 MMbopd.
The U.S. is producing nearly as much oil as it did at its peak in 1970. The daily rate, which now stands at 9.5 MMbpd, is increasing faster than it did during the oil boom from 2011 through 2014. The EIA predicts U.S. LNG exports will increase from 1.4 Bcfd at the end of 2016 to 9.5 Bcfd by the end of 2019. This U.S.-produced energy is being exported to Mexico, India and South Korea. Energy Secretary Rick Perry has acknowledged that a comprehensive energy policy is a vital element of economic policy, and some officials are predicting that the U.S. will be a major energy exporter by 2022.
Prioritize the Corpus Christi ship channel project. Oil and gas in Texas account for 40% of the Texas economy and roughly 3.8 million jobs. According to Sitton, increased oil exports from the port will lead to 30,000 additional jobs in Corpus Christi, alone. Now is the time to focus on improving the Corpus Christi ship channel so that, as production rises, we have the ability to safely, and efficiently, export WTI to quench global demand.
Although Congress has given preliminary approval for a $350-million dredging project that would deepen the channel, the Port of Corpus Christi Authority (POCCA) has faced unnecessary regulatory roadblocks. At the current crude delivery rate, the port’s customers do not require a deeper channel. But with the new pipeline supply, the channel will need to be deepened and widened to accommodate larger tankers.
In July, Occidental Petroleum tested water depths at Corpus Christi with the largest tanker to ever enter a U.S. Gulf port. The Anne, which is 1,100 ft long and 200 ft wide, and has a capacity of 2.2 MMbbl, could not be loaded, because the ship channel isn’t deep enough to allow egress. Since 1990, POCCA has worked on the channel improvement project, which would deepen the 36-mi trough down to 52 ft at mean low tide from the current depth of 45 ft. The improvement would enable million-barrel supertankers to load.
Typical pork barrel politics. The project has been authorized by Congress three times, but the U.S. Army Corps of Engineers has slowly stripped the project from the budget, and instead funded four new deepening projects in Boston, Charleston, Tampa and Jacksonville. The majority of those have benefit-cost ratios well below the Corpus Christi project. When complete, the revamped ship channel would add $35 billion annually in value goods exports, provide $10 million in annual transportation cost-savings, and help the port fulfill its potential to become the largest site for LNG exports by 2020.
But as we are all painfully aware, the U.S. government does not base its policies or decisions on real world economics, because if it did, this project would have been funded when the ban on crude oil exports was lifted, if not before. It’s time to cut through Washington’s red tape and get this project done and realize the significant return-on-investment for the U.S. 
