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Permian production tops 1m b/d

Production at the Permian basin is in danger of overtaking processing and transport capacity from the region

The Permian basin, one of the oldest oil-producing regions in the US, has seen a significant boost in output, with production so far this year steadily climbing to top 1 million barrels per day (b/d) for the first time since 1998.

According to the US government’s Energy Information Agency (EIA), Permian production is threatening to overtake processing and transport capacity from the region, which straddles the border between New Mexico and Texas.

Data from the Texas Railroad Commission and the New Mexico Department of Energy show the number of active rigs has grown from 100 rigs in mid-2009 to over 500 in May 2012.

Though the numbers indicate that new technology can help increase output from older fields. the EIA notes that rising US output is wreaking havoc with traditional pricing mechanisms, resulting in wide regional price spreads.

Combined with surging output from the Eagle Ford, Permian oil has traded at significant discounts to benchmark West Texas Intermediate (WTI), which averaged $5 a barrel in June. Permian oil is priced at Midland, Texas, while WTI is cleared at Cushing, Oklahoma.

The situation is prompting “a need for Texas oil to serve more distant refineries”, the EIA said. But the Permian is being squeezed from other emerging basins that are experiencing similar production gains.

Total volumes from the Williston, Western Gulf of Mexico and Permian basins, which include the Bakken and Eagle Ford, increased by 300,000 b/d in 2010 and an additional 500,000 b/d in 2011, contributing to price discounts relative to waterborne crudes such as Brent. The EIA expects those gaps to persist well past 2013.

The EIA expects total US crude oil output to average 6.3 million b/d in 2012, an increase of 600,000 b/d from last year, and the highest 1997. It anticipates an additional 400,000 b/d in 2013, to 6.7 million b/d. That’s on top of another 500,000 b/d from Canada in the same period, which is pushing south into the US Midwest and butting up against north-bound Permian flows.

The growing disparity between WTI and Brent, as well as other domestic sources, prompted the EIA to change its methodology for determining the actual prices US refiners pay for crude.

Starting in July, it will now come up with a blended price that takes into account those differentials. In its most recent short-term energy outlook, the EIA expects WTI to average $8/b  in the second half of 2012, compared to an average refiner acquisition cost of $93/b.

“The divergence between WTI and other world crude oil prices over the last two years has made WTI a less reliable indicator of US average refiner crude oil costs and petroleum product prices,” the agency said.

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