Opportunities and Challenges in the Permian, a white paper commissioned by Hastings Equity Partners in partnership with the University of HoustonEnergy Research, concludes a major industry consolidation looming and sheds light on natural gas transportation challenges.
In April 2019, the United States 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% to drill and complete a well.
With the Permian Basin predicted to produce an incremental one million barrels per day 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.
“Some facts came out of the research that we didn’t anticipate,” said Ted Patton, founder and managing partner of Hastings Equity Partners, in a statement issued Monday. “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 that 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 in economic power. 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, means that smaller independent producers who traditionally sell to the majors will now need to market internationally and export overseas.
In the early days of this oil revolution, the independent oil and gas companies were nimble and profitable. They acquired leases, assets, and mineral rights with more alacrity than their major counterparts. As the industry matures, major companies like Exxon and Chevron are speeding up production and decreasing margins and pushing out the independents.
With major producers owning their own refineries and petrochemical facilities, they no longer need to purchase crude from independent producers. Finding new, foreign customers has become the priority for independents. The findings of the study are clear: independents must combine balance sheets to buy downstream assets, or form a combined marketing organization to sell their product internationally.
“While refineries have increased processing to keep up with production, supply of crude oil will soon outstrip demand and the producers will need to find new customers,” said Dr. Ramanan Krishnamoorti, chief energy officer at the University of Houston and co-author of the research. “Even though there is more than $90B 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 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 deep-water terminals off the coast of Freeport, Texas City, Corpus Christi, Brownsville and Louisiana. These projects have been proposed, but permitting and execution permissions will delay progress, thereby creating additional bottlenecks.