Alex Mills
By Alex Mills
Crude oil and natural gas production in the U.S. set records in 2018 and Texas and the Permian Basin of West Texas led the way. As a matter of fact, the Permian Basin became the largest producing oil field in the world in April surging past Saudi Arabia’s Ghawar. The Energy Information Administration reports oil production in the Permian Basin at 4.2 million barrels per day in April compared to 3.8 for Ghawar.
The United States Geological Survey reported recently an increase in technically recoverable resources in the Permian of 46.3 billion barrels of oil, 281 trillion cubic feet of natural gas, and 19.9 billion barrels of natural gas liquids (NGL).
However, all of this added production has created an oversupply in the Permian Basin because the current transportation system can’t move all of the product to processing points.
The downstream portion of the industry plans to spend an average of $13 billion a year on transmission pipelines through 2035 and another $7 billion on processing infrastructure.
The current oversupply, however, has caused prices to decline, which has become known as the Midland discount and reached as much as $18 per barrel less than West Texas Intermediate in 2018.
Natural gas prices suffered, too. Prices at the Waha gas hub in West Texas closed as low as $0.455 per million Btu, about $4 less than gas traded at Henry Hub in Louisiana in 2018. In February, prices fell even further to just $0.085 in spot trading meaning that some producers actually had to pay to market their gas.
Relief will take time. Kinder Morgan plans to have a gas pipeline completed this fall which will move about 2 billion cubic feet of gas per day from the Permian Basin to the Agua Dulce, Tx area. Another pipeline is scheduled for completion in 2020 taking gas from Waha to the Texas Gulf Coast.
Similar take-away capacity expansions are under way for crude oil and natural gas liquids (NGL) with new facilities being finished later this year and the first half of 2020.
Factionators, which are used in the NGL process, take an extensive amount of time to build and has slowed the transmission of NGL to the Gulf Coast.
Crude oil production in the Permian Basin was as low as 850,000 barrels per day in 2007.
The recent increase in Permian crude oil production is largely concentrated in six low-permeability formations that include the Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso, and Delaware formations. Production from these formations has helped drive the increase in Permian oil production despite declining production from legacy wells.
The Permian Basin region encompasses an area approximately 250 miles wide and 300 miles long in West Texas and eastern New Mexico. Although oil production has previously come from the more permeable portions of the Permian formations, the application of horizontal drilling and hydraulic fracturing has opened up large and less-permeable portions of these formations to commercial production. This is especially true for the Spraberry, Wolfcamp, and Bone Spring formations, which have initial well production rates comparable to those found in the Eagle Ford shale formations in South Texas.
Alex Mills is the former President of the Texas Alliance of Energy Producers.
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