Texas oil boom outpaces supply, transport networks

Shares fall on higher costs, lower revenue

MIDLAND, Texas, Oct 2, (RTRS): The west Texas drillers that drove the shale revolution have overwhelmed the region’s infrastructure with oil production – driving up costs, depressing regional oil prices and slowing the pace of growth.

The US government continues to forecast the country’s oil output rising to fresh record. But competition for limited resources in Texas is making it harder for shale producers to turn a profit and encouraging some to invest elsewhere.

Texas is home to the Permian Basin, the largest US oil field and the center of the country’s shale industry. In the past three years, production from the Permian has risen a whopping 1.5 million barrels per day (bpd) to 3.43 million bpd.

All that oil means pipelines from the shale patch are full, so producers are paying more to transport oil on trucks and rail cars. Shortages of labor, water and even the fuel used in fracking are driving up production costs.

At the same time, Permian producers are getting less for their oil, which in August traded as much as $17 a barrel below the US crude benchmark. Sellers have to offer the discount to compensate for the higher transport costs.

“We’re our own worst enemy,” said Ross Craft, chief executive of Approach Resources, a small west Texas oil producer which last year averaged about 11,600 barrels of oil equivalent daily output.

“We can drill, bring these wells on so quickly that we basically outpace the market. It is going to take a little bit of time,” he said, for the infrastructure to catch up to producers.

Approach Resources is leaving some wells uncompleted. That means the firm drills the wells, but does not fracture the rock to produce the oil. Other shale producers are also leaving the oil in the ground, waiting for higher prices to make the drilling more profitable.

The number of uncompleted wells in the Permian jumped by 80 percent to 3,630 in August compared with a year earlier, according to US Energy Department data. For the rest of the United States, uncompleted wells are up 10 percent from the same period a year ago.

Some companies are reducing the scope of their operations in the Permian. ConocoPhillips and Carrizo Oil & Gas each moved a Permian drilling rig to another oilfield, and Conoco idled a second, the companies have said.

Noble Energy also has cut back on its well completions and said it is moving some drilling resources to Colorado.

Global Drilling Partners, a drilling contractor based in the Woodlands near Houston, was set to drill seven wells with a Permian operator this July, but that has dropped to two wells starting in December due to lack of pipeline takeaway, said John Hopkins, a managing partner at the company.

“There will be a shift out of West Texas temporarily until they can solve their midstream problems,” he said. Companies are looking to boost their drilling in other fields in Texas, Colorado and Oklahoma, he said.

Suppliers including sand and rail companies say they are hedging their bets by expanding elsewhere.

The price discount on Permian oil has hurt the share price of shale producers such as Parsley Energy, which operates only in the Permian.

Parsley delivered an eight fold-rise in profits in the second quarter versus a year earlier, and boosted output by 57 percent over the same period.

But investors have dumped the stock on concern that plans to increase output by another 5 percent by spending 17 percent more will deliver diminishing returns. Parsley’s shares are down about 8 percent since the company reported results on Aug 7.

Spending plans in 2018 by 53 independent US producers have risen a combined 18 percent over 2017, to $63.2 billion, according to investment firm Cowen & Co.

The US in August produced a record 11 million bpd and continued investment in the Permian should see the country’s total output to hit an average of 11.5 million bpd in 2019.

But rising costs and bottlenecks have already slowed the pace of growth.

Consultancy Wood Mackenzie estimates Permian oil production in 2019 will be 200,000 barrels per day (bpd) less than it could be because of transport constraints.

Permian output will be 3.9 million bpd next year, Wood Mackenzie estimates, but could have been 4.1 million bpd if more pipeline space were available.