Posted on June 8, 2018
Takeaway constraints may prompt producers to tap the brakes, economist says.
The Permian Basin has learned to do more with less in the aftermath of the crude oil price downturn.
The region’s crude output is at record highs, and oil and gas employment has surpassed its previous highs, though the Texas Permian Basin Petroleum Index remains well below its peak set in November 2014. Still, the index was up sharply from February to March and is 28.2 percent higher than March 2017 levels.
“All industries want to do more with less,” said Karr Ingham, the Amarillo economist who prepares the index. Permian Basin operators took the opportunity provided by the downturn “by necessity” to learn to improve efficiency and turn out more barrels of crude.
Of all the nation’s producing basins, the Permian was the only one to not see a production decline during the downturn, Ingham said. “The rate of growth slowed, but there was still growth,” he said.
That additional production has strained takeaway capacity, widening to almost $20 a barrel the discount between prices paid at Midland for West Texas Intermediate and that sold at Cushing. Ingham said Waha hub gas pricing is suffering the same affliction.
He theorized that the wide differential between Midland and Cushing is the market sending a signal to Permian producers to slow their output.
“That may be the message of these localized pricing discounts, and it’s not happening,” Ingham said. “Producers are adding rigs and production.”
The situation may only worsen before the additional takeaway capacity being planned or under construction comes online late next year, he said. In the meantime, he said the discounts may widen to a point where producers will rein in activity until the situation improves. And then there’s the question of what will happen to all that additional production.
“Something’s going to have to give a little – I don’t know what or when,” Ingham said. “You have a rising rig count, rising drilling permits, rising volumes. Either the dam breaks and production finds its way out of the Permian Basin or there will be cutbacks.”
March crude prices averaged $59.43 per barrel, up 30.6 percent from March 2017’s average of $45.50. Prices averaged $59.42 per barrel in the first quarter, a gain of 23.1 percent from the $48.26 recorded in the first quarter of 2017.
The March rig count averaged 352 rigs, up 33.8 percent from the March 2017 average of 263 rigs. The first quarter rig count averaged 343 rigs, up 37.2 percent from the 250 averaged in the first three months of 2017.
The Railroad Commission issued 771 drilling permits in March, down just one from 772 issued the previous March. The agency has issued 2,000 drilling permits so far in 2018, up 9.7 percent from the 1,823 issued in the same period last year, which is more than double the total from 2016. Ingham said both the rig count and drilling permits continue to lag their highs reached in 2014 but the pace of growth is on the rise.
March oil and gas employment jumped 26.2 percent to 36,715 from the 29,100 of March 2017 and surpassing its previous high of 36,200 set in October 2014. First quarter employment 32,440, a gain of 14.3 percent from the 28,380 recorded in the first quarter of 2017.