A growing price differential is leading producers to believe Midland oil is of better quality than that in the Delaware
US shale producers' operations in the prolific Permian basin are no longer a sure bet to attract investors. With rangebound crude prices squeezing margins and shareholders demanding better returns, companies are differentiating themselves with every extra dollar of revenue they are able to generate.
Against that challenging backdrop, many operators in the Midland portion of Texas and New Mexico's Permian basin are pitching themselves as winners on grounds that oil from the region is of a better quality than that of their peers in the Delaware part of the basin. Their reasoning reflects a growing price differential. New production from the Delaware is lighter than WTI and the ability to blend the oil into WTI is limited. The increase in light oil coming into the Midland, Texas, pricing hub has led to the segregation of a new grade, West Texas Light (WTL) with 44-50°API gravity, compared with WTI Midland's 42-44°API. WTL has averaged a discount of $1.00-1.75/bl to WTI Midland in recent trade months.
Midland-focused Parsley Energy, with oil output of about 85,000 b/d, talks up its price benefits. "In an environment where every extra dollar of margin will have a meaningful impact on free cash flow, possessing a favourable crude quality is a nice inherent advantage," Parsley senior vice-president Stephanie Reed says. "Ultimately we are in the business of generating cash flow."
Pioneer Natural Resources' chief executive, Scott Sheffield, emphasises a growing divergence in his operational outlook for the two Permian regions. The Delaware will face challenges as producers work through their top acreage, with wells too close to one another, he says. Partly driven by this challenge, Sheffield has cut his 1mn b/d growth outlook for the Permian this year to 600,000-700,000 b/d, and sees a further slowdown in growth for 2020.
Output from the Delaware may peak in 2024, he says, but the Midland segment will only plateau in the mid-2030s. "The Delaware is being drilled aggressively by many more operators," Sheffield says. "Tier 1 acreage is being exhausted at a very quick rate." He reiterates expectations that Permian output will eventually reach 8mn b/d, but at a "much slower pace, with the Midland basin as the only growing basin in the US past 2025".
ExxonMobil, which is doubling down on the Permian as its portfolio there becomes central to meeting output targets, acknowledges that Delaware presents challenges. It says that it takes up to 30pc more time to drill the same lateral length well in the Delaware as it does in the Midland. It is "key for all the players in the Delaware that we find a way to get those drilling times down closer to what we see in the Midland", upstream senior vice-president Neil Chapman says.
Shake your money maker
ExxonMobil has 29 rigs in the Delaware, compared with 22 in the Midland, as it develops the former with upfront investments on compressor stations and development corridors, and brings large pad facilities on line. And the firm's well inventory is much larger in the Delaware than in the Midland.
Permian-focused independent Occidental is seeking to tap into the Midland advantage, with new access to acreage in the area following its $57bn acquisition of peer Anadarko. It is expanding in the Midland in a joint venture with Colombian state-controlled Ecopetrol to develop 97,000 acres (392km²). But the Anadarko deal increases Occidental's Delaware development potential by more than 50pc, giving it at least another decade of prospective operations there.
Independent ConocoPhillips continues to bet on the Delaware to drive output growth. It sees output from its Bakken acreage in North Dakota possibly reaching a plateau of 80,000-90,000 boe/d.
