Permian output growth stutters
Sluggish production increases could trigger new wave of bankruptcies among operating minnows
The Permian shale patch is starting to display signs of moving into a production plateau phase, after years of rampant growth which upended the global oil market and transformed the US into a major energy supplier.
Production will unquestionably still continue to climb in 2020—the EIA predicts US output will reach 13.3mn bl/d, up from 12.2mn bl/d in 2019—with incremental volumes primarily from the Texan shale patch. But, while overall Permian production may still be on the up, albeit at a far more gradual trajectory than previous years, a slowing rig count, less than-buoyant oil price and lack of offtake gas capacity could further threaten the business model of many of the play’s smaller independents.
“US shale is going to feel the squeeze in 2020,” says Stephen Beck, senior director of upstream at consulting firm Stratas Advisors. “The age of growth for growth’s sake is over as capital spending discipline becomes the new order of the day. Small independents will experience a bear hug as they decide whether to put themselves up in the market or sell assets.”
No pain, no gain
Falling oil prices and widespread negative cash flow first began to hit independent US oil and gas companies as long ago as 2015. By 2017, collective bankruptcies across the US reached 114 and ratcheted up total owed debt to over $74bn, according to a study from international law firm Haynes and Boone.
But greater capital discipline made between 2017-19 helped slow the rate, falling to a yearly average of just 26 over the period. Technology efficiency gains particularly helped sustain the Permian’s booming growth—topping 800bl/d per rig for the first time in October—as company profits started to rebound and majors flooded into the patch.
As an example, Centennial Resources, who first entered the northern Delaware Basin in mid-2017, managed to reduce time from spud to first production by 45pc. Across 2019, the firm increased average lateral well lengths by 3pc—helping to squeeze more output per well. Combined capex costs were slashed by 27.5pc in 2019 while production improved by over 21pc between the third quarter of 2018 and third quarter of 2019.
Other companies have also benefited from cost-cutting and technology gains. Chevron’s development and production costs have tumbled by around 40pc since 2015, yet output grew by 35pc year-on-year in the third quarter of 2019. For Concho, well costs have declined by 20pc since 2018 and the firm now targets lower sand costs and reduced drilling days.
Water treatment and recycling has been another issue limiting production expansion. Cimarex has boosted Permian frack water recycling by 31pc since 2016 to 52pc of total water usage—helping to save c.$1.54/bl. ConocoPhillips has set an even more ambitious target of reaching 90pc water recycling by the third quarter of 2020.
But, as part of the quest for lower costs, the rig count has been steadily falling since November 2018 and now the drilled but uncompleted (Duc) well count is also declining. And small independent producer bankruptcies began to rise once more in 2019. The US registered 41 bankruptcies across the year, primarily in Texas and New Mexico.
US services firms are also starting to experience a slowdown. Schlumberger reported a 10pc year-on-year loss in revenues in 2019 from North American operations, compared with a 7pc increase internationally. The North American decline was even more marked for Halliburton, at 18pc, versus a 10pc boost internationally. Baker Hughes did not tot up yearly figures, but the same trend was apparent in its fourth quarter operations. North American revenues were down 11pc quarter-on-quarter, primarily the result of the continent’s declining rig count.
Source: company data
“US production growth should slow significantly in 2020 and come well short of last year's growth, due to heightened capital discipline and the resulting drop in activity,” said Schlumberger CEO Olivier Le Peuch during the firm’s quarterly results call.
Cutting costs remains the priority after almost a decade of negative cash flow and weak investor returns. “In North America, we expect drilling and completing spend to decline low double digits versus 2019 as domestic exploration and production continues to restrain spending to generate more cash flow,” said Brian Worrell, Baker Hughes’ CFO, on an earnings call.
Gassy exit plan
Associated gas is another thorn in the side of Permian producers. As crude output increases, operators are forced to deal with greater volumes of by-product gas with challenging economic. The glut and lack of midstream infrastructure has meant gas frequently trades at the Permian’s Waha hub at negative pricing—essentially forcing operators to rid themselves of excess gas at a cost. The net result has been widespread flaring across the shale patch, despite companies pledging to lower their carbon footprint.
The start-up of the Kinder Morgan Gulf Coast express pipeline (GCX), in September, brought some welcome relief to operators. But a further seven natural gas pipelines are still in the offing waiting on FID. Until greater capacity becomes available, smaller independents remain vulnerable to the vagaries of the oil price and gas gridlock.
And, while efficiency gains may be keeping the pace of production growth steady if less spectacular than previously, operators that have targeted the most productive areas of fields may struggle as assets move towards greater maturity. Drilling and development costs will inevitably rise as operators begin drilling more wells further from ‘sweet spots’ to plug production declines.
Source: Petroleum Economist