OPEC’s worst nightmare: Permian is about to pump a lot more

The Permian Basin in West Texas is on track to produce more oil within five years than any OPEC nation except Saudi Arabia, positioning the Texas Gulf Coast to rival the Persian Gulf when it comes to oil and gas activity.

In less than a decade, U.S. companies have drilled 114,000. Many of them would turn a profit even with crude prices as low as $30/bbl. “The narrative has shifted significantly,’’ said John Coleman, a Houston-based oil consultant at Wood Mackenzie Ltd.

Crude volumes from the Permian will more than double by 2023, making the region the world’s third-largest producer after Russia and Saudi Arabia, according to the research and consulting firm IHS Markit.

Most of that oil is headed to refineries and ports near Houston and Corpus Christi, as U.S. crude exports are expected to surge to nearly 5 million barrels a day by 2023, up from more than 2 million today.

“In the past 24 months, production from just this one region, the Permian has grown far more than any other entire country in world,” said Daniel Yergin, IHS Markit vice chairman.

The kingdom would only make one-time supply adjustments to react to “short-term aberrations,” he said, and otherwise allow “the free market to work.” “It will be a series of events throughout 2019 that occur,’’ said Jeff Miller, CEO of Halliburton Co., the world’s biggest provider of fracing services.

OPEC’s bad dream only deepens next year, when Permian producers expect to iron out distribution snags that will add three pipelines and as much as 2 MMbpd. A similar scenario unfurled in 2016, when Saudi output rocketed just before OPEC agreed to cuts.

The comeback of the Permian, which today accounts for more than half the nation’s active oil drilling rigs, is among the the most remarkable stories in the industry’s history. The U.S. energy surge presents OPEC with one of the biggest challenges of its 60-year history.

In the oil-trading community, the expectation is that, perhaps for just a single week, the U.S. will become a net oil exporter, something that hasn’t happened for nearly 75 years.

At the beginning of the decade, the aging oil field was struggling with declining production. With terminals nearly full, Permian barrels could end piling up in the ports of Corpus Christi and Houston.

But advances in hydraulic fracturing, or fracking, and horizontal drilling pioneered by Houston companies such as EOG Resources, have tapped massive reserves of previously inaccessible oil and gas.

’Knowing that more transportation would be available next year, Permian companies are drilling wells but, for now, aren’t fracing many of them.

By 2023, the shortage of pipelines to move oil, gas and natural gas liquids to Gulf Coast markets and beyond is expected to be alleviated by multibillion-dollar projects now underway or planned. Now growth is speeding up.

In Houston, the U.S. oil capital, shale executives are trying out different superlatives to describe what’s coming. Oil, petrochemical and liquefied natural gas companies are investing billions of dollars to process and export petroleum from the Permian and other shale plays.

According to the International Energy Agency, has made the Gulf Coast a global trading center as vital to world’s energy needs as the Straits of Hormuz, through which tankers filled with Middle Eastern crude travel to the world’s markets.

Near Corpus Christi, for example, the Houston exploration and production company Occidental Petroleum, is continuing to expand its crude export terminal at Ingleside. That shift makes shale resilient to a price tumble. After touching a four-year high in October.

West Texas Intermediate, the U.S. benchmark, has fallen by more than 20%. In 2017, Texas accounted for three-fourths of U.S. crude exports, which recently hit a weekly record in May of 2.6 million barrels a day.

If Saudi Arabia and its allies cut production when they gather Dec. 6 in Vienna, higher prices would allow shale to steal market share. But because the Saudis need higher crude prices to make money than U.S. producers, OPEC can’t afford to let prices fall.

IHS Markit estimates that $308 billion in new spending is required to drill more than 40,000 new wells in the Permian needed to meet its projections. That’s more than double the $150 billion invested there from 2012 to 2017.

At that level, American net imports of petroleum will fall in December 2019 to 320,000 bpd, the lowest since 1949, when Harry Truman was in the White House.

The report also assumes that oil prices will continue to average at least $60 a barrel. Oil settled in New York Thursday at $66.89 per barrel. But not everyone is convinced the Permian will achieve the heights predicted by IHS Markit.

OPEC helped create the monster that haunts its sleep. After it flooded the market in 2014, oil prices crashed, forcing surviving U.S. shale producers to get leaner so they could thrive even with lower oil prices.

Only a few months ago, the consensus was that the Permian and U.S. oil production more widely was going to hit a plateau this past summer. Instead, August saw the largest annual increase in U.S. oil production in 98 years, according to government data.

As prices recovered, so did drilling. Prognosticators focus on the oil in the ground rather than the roadblocks on surfaces, said Bill Herbert, senior energy analyst at Piper Jaffray & Co., an investment research firm.

Labor shortages in West Texas are severe, for example. Unemployment in Midland recently fell to a record low of 2.1 percent, Herbert noted, meaning there aren’t enough people to fill drilling and fracking crews.

Saudi officials concede that the tsunami is coming. OPEC estimates that to balance the market and avoid an increase in oil inventories, it needs to pump about 31.5 MMbpd next year, or about 1.4 MMbpd less than what it did in October.

“It’s going to take longer and more expensive than people realize,” said Herbert. By the end of 2019, total U.S. oil production, including so-called natural gas liquids used in the petrochemical industry is expected to rise to 17.4 MMbpd, according to the U.S.

“There’s not a spare body out there.” U.S. oil production has grown more than 25 percent since bottoming out at about 8.6 million barrels a day in September 2016, reaching a new record of 10.9 million barrels a day in early June, according to the Energy Department.

Prior to this current surge, the previous record of 10.04 million barrels daily was set in November 1970. The United States has surpassed Saudi Arabia in production and trails only Russia, which recently increased its crude output to 11.1 million barrels daily.

The growth was possible because oil traders decided not to be stymied by the dearth of pipelines. They used rail cars and even trucks to ship barrels out of the region. The Permian Basin accounts for almost one-third of all U.S. production.

Pipeline and labor shortages are slowing Permian output, but the British oil company BP recently warned in its annual report on the state of the energy industry that the Permian could face bigger challenges in the future.

The oil field’s productivity is likely to decline as oil and gas companies drain the sweet spots and move out to outlying areas, said Spencer Dale, BP’s chief economist. The initial output per well has begun to shrink since peaking in 2016, he said.

A new pipeline came online earlier than anticipated, and with three more expected between August and December next year, production is poised to soar. The only obstacle for another surge is export capacity, as most of the incremental output will need to ship overseas.

And shale reservoirs tend to deplete more quickly than traditional reserves, requiring more new wells to offset the declines. Nearly two years later, Al-Falih has lost enough proverbial sleep. He’s about to make a U-turn. He’ll battle what increasingly looks like a structural problem: booming U.S. production.

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