Despite relaxation of transport constraints in the Permian basin, a slowdown in oil-production growth in US shale plays will continue, says Fitch Solutions Macro Research.
The firm cites oil-price stability, caution by exploration and production companies, and weakening allure of oil and gas in capital markets. Fitch notes that the US Energy Information Administration expects Permian basin shale production to grow by 16.7% in August after increasing by 44.7% in August last year. And it says similar trends are evident in the Bakken and Eagle Ford plays.
Bottlenecks easing
Transport bottlenecks in the Permian basin, often cited as the reason for the production-growth slowdown, have been easing.
Expansion of Plains All American’s Sunrise Pipeline and conversion of the Enterprise Product Partners Seminole-Red natural gas liquids line to crude service eased transportation constraints and helped the price of West Texas Intermedia crude oil increase to nearly the WTI price at Cushing, Okla., this year.
But Fitch notes signs of new crude price weakness in the region.
“With the next major capacity additions not slated to come online until the end of third-quarter 2019, the summer months could see another squeeze on takeaway capacity and, consequently, production growth,” it says.
Due online this year are the 400,000-b/d EPIC, 670,000-b/d Cactus, and 900,000-b/d Gray Oak pipelines.
Fitch does not expect the capacity additions to return production growth to its 2018 high, partly because 2018 growth occurred against a low base.
The firm expects growth in total US shale liquids production of 9.4% this year and 6.9% in 2020, compared with 15.7% last year.
It also expects “significant downward revision this month” to its current projections for the average annual WTI price: $63/bbl in 2019 and $69/bbl in 2020.
Those prices remain well above break-even prices reported by shale producers of $48-54/bbl.
“However, these represent the average and not the marginal prices, which are more important for setting the pace of growth,” the firm notes.
Furthermore, gains in well productivity and operational efficiency since the crude-price collapse of 2014 “are not inexhaustible.”
Fitch says signs have emerged of diminishing well productivity, “reflecting growing issues with well interference as the number of child wells eclipses parent wells in the Permian, the main engine of US growth.”
While further cost savings are possible through leasehold consolidation and “industrialization of shale production processes,” especially as the roles of major and large independent companies grow, “we believe prices will be a constraining factor for growth over second-half 2019 and 2020,” Fitch says.
Volume vs. value
And companies have shifted emphasis from production growth to investment value since 2014.
Even so, the producing industry continues to rely heavily on external financing from sources becoming wary.
“This could further drag on growth as financial conditions deteriorate,” Fitch says.
A drop of more than 50% in debt and equity issuance by US exploration and production companies in first-half 2019 from first-half 2018 is part of a trend only partly explained by increased capital discipline and deleveraging.
“It likely also reflects less appetite to lend to the sector at previous, more favorable rates,” Fitch says. “Sentiment around the oil and gas sector is weak in general, with concerns over long-term sustainability blending into concerns over shorter-term price pressures.”
UH Study: Increased production raises questions about USGC port capacity
As US refiners and other customers will be unable to absorb rising production from the Permian basin, several potential obstacles could stand in the way of successfully exporting the excess production, according to a study from UH Energy and the University of Houston’s Department of Industrial Engineering.
Obstacles include the capacity of ports along the Gulf Coast to handle large ships as well as concerns over the flaring of natural gas in the Permian.
Researchers said the Port of Houston is unlikely to be able to handle the largest ships—very large crude carriers. The Port of Corpus Christi, a destination for much of the Permian crude destined for export, is expanding its capabilities, including its ability to handle VLCCs.
Any delays in expanding export capacity will slow Permian production, the study said.
Ramanan Krishnamoorti, chief energy officer at UH, said escalating demand to export also will place an additional strain on independent producers, already pressured by the growing operating presence of major oil companies.
“The independents are relatively inexperienced with exports, and if they can’t build that expertise, they could become targets for acquisition,” Krishnamoorti said. “They also face additional stress because of the flight of capital from the Permian.”
Among the report’s findings:
• Construction of additional pipelines under way or planned to carry oil from the Permian to export terminals along the Gulf Coast should relieve current bottlenecks by mid-2020, but new bottlenecks will emerge downstream. Export terminals in Corpus Christi, in particular, are unlikely to be ready to handle the volume, even though the port is designed to handle VLCCs.
• Efficiencies have driven the cost to develop and operate wells in the Permian below $15/bbl; refracturing older wells has resulted in savings of 75% over drilling a new well.
• The lack of a solution for the flaring of gas in the Permian poses a risk to the continued viability of the Permian.
Suryanarayanan Radhakrishnan, managing director of UH Energy and lead author for the study, said the continued growth of oil exports will be determined largely by the ability of Gulf Coast ports to efficiently move crude from terminals onto oil transport ships, specifically VLCCs, which are the most cost-effective solution.
Most Gulf Coast ports, including the Port of Houston, don’t currently meet federal requirements for fully loading VLCCs; instead they commonly use smaller ships to ferry the oil offshore, where it can then be transferred to larger VLCCs.
Those back-and-forth trips, Radhakrishnan noted, increase port congestion and cost of transportation.
The Louisiana Offshore Oil Port (LOOP), off the coast of southern Louisiana in the Gulf of Mexico, is currently the only US facility that can harbor fully loaded VLCCs. It was previously used exclusively for imports and has been modified to accommodate exports.
New projects to build deepwater terminals off the coast in both Texas and Louisiana have been proposed, but the researchers said the Houston Ship Channel is too shallow to accommodate the bigger ships; air quality standards pose another concern.
