In partnership with the University of Houston Energy Research, Hastings Equity Partners recently commissioned a white paper, “Opportunities and Challenges in the Permian,” which reveals major industry consolidation looming and an industry challenge to transport the natural gas that is a byproduct of the crude oil extraction process.
In April, the U.S. became the largest oil producer in the world as a result of increased output in the Permian Basin. Enhanced seismic data gathering capabilities, horizontal drilling, hydraulic fracturing and multipad development techniques have allowed operators to realize a cost savings of nearly 40 percent to drill and complete a well.
“With the Permian Basin predicted to produce an incremental 1 million bpd each year and the pipeline takeaway issue soon to be resolved with several major new pipelines due to come online in the second half of 2019, Hastings Equity Partners commissioned the University of Houston to find out where the incremental oil is going and to understand the downstream impact that new production levels will have,” said Ted Patton, founder and managing partner of Hastings Equity Partners. “Some facts came out of the research that we didn’t anticipate — namely, the impact of the industry consolidation in the Permian Basin and the challenge of how to capture and transport the natural gas that is a byproduct of the process.”
The research found major oil operators are projected to produce more than half of the oil in the Permian over the next four years, representing a historic shift. These large companies are consolidating production, resources and supply chains that will meet the majority of domestic needs. Their acquisitions of acreage in the Permian, as well as ownership stakes in the pipelines and downstream refineries and petrochemical facilities, mean smaller independent producers who traditionally sell to the majors will now need to market internationally and export overseas.
As the industry matures, major companies like Exxon and Chevron are speeding up production and decreasing margins, with both having announced plans to produce 1 million bpd.
“While refineries have increased processing to keep up with production, supply of crude oil will soon outstrip demand,” said Dr. Ramanan Krishnamoorti, chief energy officer at the University of Houston and co-author of the research. “Even though there is more than $90 billion in construction projects for terminals, LNG, refining and petrochemical facilities along the Texas and Louisiana coast right now and another $200 billion planned for the next decade, construction can’t keep pace with the supply of oil coming out of the Permian.”
The majority of the recent incremental capacity is, and will continue to be, directed at the Port of Corpus Christi.
An existing obstacle forecasted to persist for the next three years is the ability of Very Large Crude Carriers (VLCCs) to navigate Gulf Coast waterways to refill for export. Waterways along the Gulf Coast don’t provide the 75 feet of depth needed to accommodate fully loaded carriers, requiring ship-to-ship transfers (known as “lightening”) offshore. The demand for U.S. crude has highlighted the need for deepwater terminals off the coasts of Freeport, Texas City, Corpus Christi and Brownsville, Texas, and Louisiana. These projects have been proposed, but permitting and execution permissions may delay progress.
While the report presented many challenges being faced by the dynamic oil industry, it also presented emerging opportunities. As crude production creates more natural gas, the ability to capture, market and deliver it to potential customers will provide new revenue streams from this byproduct for both producers and service providers.
“Differentiated service providers will thrive as long as they are able to demonstrate either cost savings or incremental production for their customers,” concluded Patton. “These companies provide the rigs, pressure pumping equipment, wireline, wellhead, cement, chemicals and delivery services, and the need is not forecasted to diminish.”