Energy issues

The world’s hottest play—the one that has made the U.S. the second largest crude producer in the world while breaking a 47-year-old record—is just getting hotter by the day. The U.S. Energy Information Agency (EIA) estimates that the U.S. production, driven by the Permian’s increasing output, reached 11.3 MMbopd in August 2018, according to EIA’s latest Petroleum Supply Monthly, up from 10.9 MMbopd in July. That was the first time that monthly U.S. production levels surpassed 11 MMbopd. That figure subsequently hit 11.48 MMbopd in September, said EIA. U.S. crude oil production exceeded the Russian Ministry of Energy’s estimated August production of 11.2 MMbpd, making the U.S. the leading crude oil producer in the world.

Looking ahead. EIA’s November Short-Term Energy Outlook (STEO) forecasts that U.S. crude oil production will average 10.9 MMbpd in 2018 and 12.06 MMbpd in 2019. If realized, both of these forecast levels would easily surpass the previous record of 9.6 MMbopd set in 1970. This national increase is driven almost entirely by tight oil. In particular, the Permian region in West Texas and eastern New Mexico is expected to account for more than half of the growth in crude oil output through 2019.

EIA expects Permian regional production to average 3.3 MMbopd in 2018 and 3.9 MMbopd in 2019. Although favorable geology combined with technological and operational improvements have contributed to the Permian region becoming one of the more economically favorable regions for crude oil production in the U.S., recent pipeline capacity constraints have dampened wellhead prices for the region’s oil producers. Lower wellhead prices in the region are contributing to slower growth for Permian crude oil output in 2019, compared with 2018. The slowdown is not expected to last. According to an article by Reuters, oil production in the Permian basin is expected to total 5.4 MMbpd in 2023, driven by nearly 41,000 new wells and $308 billion in upstream spending between 2018 and 2023, said analytics and data provider IHS Markit in June.

Pipeline situation. The booming production in West Texas’ Permian basin has overwhelmed existing pipelines to Gulf Coast export markets, driving oil prices to as much as $18 below those at the coast this year. In response to this bottleneck, pipeline operators, overall, are slated to add 3 MMbopd of takeaway capacity in the Permian by the end of 2020, according to a Wood Mackenzie report referenced by Collin Eaton in Reuters, almost doubling the region’s current 3.5 MMbopd, which includes local refining capacity, according to Marissa Luck in the Houston Chronicle.

“Most Gulf Coast refineries are configured to process heavier crudes from Latin America and Canada, which has limited their abilities to capitalize on the record production from the Permian, where output has reached 3.7 MMbpd—about one-third of U.S. production. Those refining constraints have come into focus recently, as crude from the Permian trades at significant discounts to U.S. and international benchmark prices, in part because a lack of pipelines has made it difficult to deliver oil from West Texas to Gulf Coast markets.”

“Some of the nation’s biggest energy companies are considering expanding their refining capacities to capitalize on their growing production in West Texas. Exxon Mobil of Irving, Texas, and Chevron of San Ramon, Calif., have each invested billions of dollars in acquiring and developing holdings in the Permian,” said Luck.

Industry give-backs to the community. With the boom strengthening in the Permian, oil company largesse is in full view. A couple of months ago, I wrote about Apache’s generosity in donating money to repair damage at the Permian basin’s Balmorhea natural swimming pool. A group of oil companies operating in the Permian basin have now upped the ante significantly. The 17 companies are pledging more that $100 million to help improve roads, schools, health care, housing and workforce training in the Permian.

Regional effects. Large areas of the Permian have been highly–and negatively–impacted by the oil boom in the area. Massive truck traffic associated with fracing, oil exports, rig moves and a number of other tasks has destroyed significant portions of the area’s road system. Housing and community services have been upended by the massive inflow of oil and gas workers. New business ventures have failed, when owners cannot compete with oil and gas wages, and are unable to hire employees. To address these, and other, issues, Big Oil players Chevron, Exxon Mobil and Royal Dutch Shell, as well as a bevy of Houston producers, such as Occidental Petroleum, EOG Resources, Anadarko Petroleum Corp., Apache Corp., and major services providers such as Schlumberger and Halliburton, will provide seed money for public-private partnerships to help support the necessary growth.

The companies announced the initiative in late November, in a letter published in the Midland Reporter-Telegram. “A once-in-a-generation opportunity has brought us together for a common purpose—to strengthen the communities where we live and work,” the partnership said in the announcement.

According to the Reporter Telegram, the plan in the coming months is for the partnership to open an office and hire staff to help lead the effort. Early next year, the companies will launch a series of community meetings to invite citizen input and recruit volunteers.

“This will be a long-term process,” the announcement stated. “Building new roads, recruiting new doctors and teachers, and developing new neighborhoods will require years of work, substantial resources and sustained cooperation among many entities. But we share a sense of urgency with our communities to find both interim and long-term solutions.” 

About the Authors

William J. Pike

World Oil

William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.