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Scarcity of pipelines forces drillers to stop fracking oil wells

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World Pipelines,

Bloomberg is reporting that the vast pipe networks that haul crude from the Permian Basin are almost completely full thanks to a production boom in the oil-rich area of West Texas and New Mexico that rivals Saudi Arabia’s Ghawar field in massiveness. Explorers who have been drilling feverishly to cash in on an OPEC-driven price rally are now slamming on the brakes to let pipeline owners catch up.

As a result, the number of Permian wells that were drilled but left unfinished surged to 3203 last month, a 90% increase from a year earlier and the highest since the Energy Department began tracking them in 2013. Postponing fracking, the final stage of drilling, reduces the supply a company needs to ship to markets. The jump in unfinished wells is a harbinger of oil producers actually shutting down older wells.

“I think without a doubt you’re going to see shut-in wells,” said Judy Stark, President of the Panhandle Producers & Royalty Owners Association, an Amarillo, Texas-based industry group that represents mostly small, closely held drillers.

Permian pipelines probably will be totally full in three or four months, Pioneer Natural Resources Co. Chairman Scott Sheffield said in an interview this week. Those constraints will compel some drillers to shut off wells, he said in Vienna as OPEC ministers prepared for key cartel meeting later this week.

“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,” Sheffield said, using the industry jargon for guaranteed pipeline contracts.

Struggles ahead

EOG Resources Inc., the world’s second-largest independent oil producer, also sounded the alarm, warning that smaller operators that have not already locked in pipeline space will soon feel the brunt.

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

As for EOG, which estimates almost 60% of its untapped crude resides in the Permian, pipes are not an issue and most of its production in the region is shielded from the steep penalties other producers are paying in the form of higher rail or trucking fees to carry their oil.

“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.

The first explorer to publicly announce cutbacks stemming from the pipeline shortage was Halcon Resources Corp., which on Tuesday announced it will idle a quarter of its drilling fleet starting next month. The company did not provide an estimated production impact or say how long the curtailment would continue.

On top of curbing production, drillers may stop pumping money into the Permian and put it into other basins like the Eagle Ford in South Texas and the Bakken in North Dakota, Michael Cohen, Research Analyst at Barclays Bank Plc, said in a research note to clients.

"We think producers may slow down growth in the Permian and build up drilled but uncompleted wells and/or reallocate resources elsewhere until the constraints are worked out," Cohen said in the note.

C&J Energy Services Inc., which helps explorers drill wells and test reservoirs, halted a planned expansion of its frack fleet on 11 June in response to Permian bottlenecks. Explorers are shying away from signing new fracking contracts, CEO Don Gawick said in a statement.

For Occidental Petroleum Corp., the bottlenecks have been a US$350 million windfall. That is because the Houston-based explorer controls about twice as much pipeline space as it needs for its own crude. It has been selling some of the space, or filling it with oil bought at a discount from rivals and making a killing by selling those barrels in higher-priced markets like Houston and Corpus Christi.

The pressure on pipeless Permian drillers will continue to grow as the local glut expands, said Gabriele Sorbara, an Analyst at Williams Capital Group.

Millions barrels

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

Exxon Mobil Corp., which sees the Permian Basin as one of its cornerstones of global growth, is urgently taking steps to ensure it can haul oil from its wells to far-away markets. The world’s biggest oil explorer by market value signed a deal last week with Plains All American Pipeline LP to build a conduit that will handle 1 million bpd.

“That’s a pretty strong signal that the problem is real and infrastructure is needed,” said Christine Ehlig-Economides, Professor at University of Houston’s Cullen College of Engineering.

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