US majors unfazed by Permian bottlenecks

The two largest US-based oil and gas producers remain unfazed by pipeline bottlenecks in Texas' Permian basin as they ramp up drilling activity to drive output growth there.

ExxonMobil and Chevron are redoubling their efforts to boost unconventional output even as the Permian basin — a major area of operation for both — faces growing pipeline and other infrastructure constraints to move crude and associated natural gas out of the region. The shortage, which is likely to worsen later this year and last at least until the middle of next year, has already widened the discount in the region's crude prices to more than $10/bl against Nymex WTI.

Chevron's Permian shale output rose to 270,000 b/d of oil equivalent (boe/d) in the second quarter, up by 92,000 boe/d from a year earlier, but it "is not materially exposed to the Midland basis differential", upstream executive vice-president Jay Johnson says. That is because it has agreements in place to lift all forecast output, both from projects it operates and those it is a partner in, from the region this year and in 2019. "Agreements are in place to access additional pipeline capacity in early 2019 in line with our production growth forecast," Johnson says.

Pipeline takeaway capacity and output do not always align. Chevron in June had surplus pipeline takeaway capacity of 50,000 b/d from the Midland basin, which is part of the Permian. It filled that space by buying volumes from third-party producers. To ensure it has capacity across the supply chain, the major has agreements in place to further increase its dock capacity in the Houston Ship Channel in 2019, so that its Permian output can tap the export market. Chevron has exported 8mn bl of liquids from the US Gulf coast so far in 2018, allowing it "to secure the highest value", Johnson says.

In addition to infrastructure, operators in the basin have to contend with a shortage of truck drivers, drill site workers, equipment and inputs such as sand and water, all of which increase costs. Chevron, which has 19 rigs in the region, up from 17 in the first quarter, says it has not experienced any shortages and is close to meeting its growth plans.

The sheer size of its operations helps. So far this year, it has swapped, farmed out or sold 31,000 acres (125km²) in the Permian to pare its acreage and drill longer lateral wells. Overall, the average length of each well has increased by 35pc since 2016, and it continues to look for more such deals. "We do not intend to slow down activity or divert capital," Johnson says.

Moving on

ExxonMobil's Permian activity is running ahead of schedule. It has 34 rigs in the basin, 17 each in the Midland and Delaware, and six in the Bakken in North Dakota. This compares with 27 in the Permian and four in the Bakken in the first quarter, and a 2018 target of 36 in total with 30 in the Permian. Amid the ramp-up, shale output from the Permian and the Bakken increased by 30pc from a year earlier to 250,000 boe/d during the quarter.

To ensure takeaway capacity keeps pace with output, ExxonMobil is undertaking a huge pipeline and processing expansion to move oil from the Permian to the Houston area and Beaumont, home to its two big Texas refineries. In addition to a terminal in Wink, Texas, that it acquired last year, ExxonMobil announced a joint venture with Plains All American Pipeline in June, through which it plans to move 1mn b/d of crude and condensate from the basin. The line will start at Wink and links to its 560,500 b/d Baytown refinery and 362,000 b/d Beaumont plant.

And the firm has secured capacity to move liquids from the Permian through 2022 and associated gas through 2020. "We have no concerns about evacuation capacity both in gas and liquids for our Permian business," ExxonMobil senior vice-president Neil Chapman says.