Space jam

Author Manash Goswami, Senior Reporter

Permian producers face oil and gas pipeline capacity constraints, potentially weighing on the region’s crude output growth.

If you asked any US onshore producer this time last year what their biggest challenges were they most likely would have answered "uncertainty about oil prices and rising costs of oilfield equipment and labor."

Cut to 2018 and the leading worry by far is a shortage of pipeline capacity to move oil and gas out of the top producing Permian region. Infrastructure constraints far outweigh concerns about price volatility and costs, a survey by law firm Haynes and Boone of 123 producers, lenders and oilfield services companies shows.

The worry is real. Crude output in the top US shale basins is expected to rise to 7.6mn b/d in October, up by close to 1.3mn b/d on the year, the EIA's latest Drilling Productivity Report says. The Permian basin, spread across Texas and New Mexico, has been driving US output.

But the pace of growth is flagging, and output from the region is expected to rise by just over 30,000 b/d in October from September, a nine-month low. And the situation is set to get worse before getting better. Oilfield services giant Schlumberger’s chief executive cautioned that a consensus view that the Permian can provide 1.5mn b/d of annual output growth for the foreseeable future "is starting to be called into question".

"The hydraulic fracturing market has already softened significantly more than we expected, in spite of the overall rig count holding up relatively well," Schlumberger’s Paal Kibsgaard says.

The bottleneck is creating a wider disconnect in crude prices from the Permian. WTI Midland's weighted-average discount to Houston was roughly at $14/bl as of 26 September. While that’s narrower than October's record widest discount of inside $21/bl, it still means producers in the region are making less money at a time when they are under immense pressure from investors to improve margins and boost returns. Taking hedge cover against “a basis blowout” is offering some reprieve.

Even so, the longer-term outlook, beyond end-2019, for the basin remains robust once adequate pipeline capacity comes online. Permian-focused independents have raised their 2018 capital expenditure (capex) as they prepare to ramp up output when pipeline bottlenecks ease.

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