Drillers quitting Permian wells due to pipeline bottlenecks

Permian unfractured wells
The number of Permian unfractured wells is rising at a record pace as pipeline bottlenecks in the Permian Basin could result in completely full pipelines out of the shale-rich region within three to four months.  Pioneer Natural Resources photo.

The number of unfractured Permian wells is rising at a record pace as pipeline bottlenecks in the Permian Basin could result in completely full pipelines out of the shale-rich region within three to four months. Pioneer Natural Resources photo.

Permian wells drilled, but unfinished reaches 3,203 last month

Some drillers may be forced to shut in some of their Permian wells because pipelines carrying the oil out of the region are full and some analysts say the problem is about to get worse.

The Permian, North America’s biggest oil field is rich with shale oil and has been ground zero for the steady expansion in the US oil industry,

But the vast network of pipelines that move crude from the Permian to the US Gulf Coast are almost completely full.

According to a report by Bloomberg, the number of Permian wells that were drilled but left unfinished hit 3,203 in May. That is up 90 per cent over last year and is the highest seen by the Energy Department since it began tracking them in 2013.

“I think without a doubt you’re going to see shut-in wells,” Judy Stark, president of the Panhandle Producers & Royalty Owners Association, told Bloomberg.

Pioneer Natural Resources Chairman, Scott Sheffield told Bloomberg that Permian pipelines will be completely full within three to four months.

As a result, “some companies will have to shut in production, some companies will move rigs away, and some companies will be able to continue growing because they have firm transportation”, said Sheffield said.

Ezra Yacob, exploration chief with EOG Resources says smaller operators who have not already contracted pipeline space will be impacted.

“Companies that were a little late to the table are going to struggle,” said Yacob at the JPMorgan Energy Conference on Wednesday. “They’re not going to have a lot of leverage at the negotiating table.”

Yacob added that EOG has secured transportation for its crude.

“A lot of our Permian oil has firm transportation all the way down to the Gulf Coast, which we’re very proud of,” Yacob said.

Halcon Resources Corp., has announced that it will shut down a quarter of its drilling fleet next month.  The company did not say how much production the move would affect or how long the wells would be shut.

Don Gawick, CEO of J&J Energy Services says his company which helps explorers drill wells and test reservoirs, has frozen a planned expansion of its fleet this month due to the pipeline capacity shortage.

He added that oil exploring companies are hanging back from signing new fracking contracts.

Companies like Occidental Petroleum have been big winners in this scenario.  The Houston-based company controls about twice as much pipeline capacity as it requires for its own production.

Occidental has been selling some of its space, or filling it with oil bought at a discount from its rivals and then selling the crude in higher-priced markets, including Houston and Corpus Christi.

Bloomberg reports Occidental has seen a $350 million windfall because of these moves.

But, the pressure on Permian drillers without firm transportation will continue to grow as the local glut expands, Gabriele Sorbara, an analyst at Williams Capital Group told Bloombert.

“The worst is going to be” in the fourth quarter and “maybe you’ll see it spill into” the first three months of 2019, said Sorbara.


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