Infrastructure Needed In Permian to Move Gas, NGLs

The Permian Basin needs more infrastructure, particularly for moving natural gas and natural gas liquids because production in the region continues to beat expectations, an executive from European major Shell said Feb. 5, Argus Media reports. “Although additional gathering facilities and pipelines have been constructed, more are needed to support the projected growth from the Permian,” said Amir Gerges, Shell vice president for Permian assets at the Argus Americas Crude Summit in Houston. “The flaring and emissions in the Permian have become famous, and it is not something we would like to be recognized for.”

The Permian Basin in Texas and New Mexico has among the lowest breakeven prices of U.S. fields, making it resilient to crude oil price swings, Gerges added, but it is also important for the basin to be environmentally resilient, with the lowest carbon intensity. That’s becoming key as banks and lenders pressure producers to reduce their carbon footprints.

The Shell executive highlighted the Permian Basin’s long-term potential, noting it has 30 years remaining of Tier 1 inventory potential. Shell, which saw output from the region touch 250,000 bbld of oil equivalent last December, plans to invest about $3 billion in shale assets over the next five years. The company sees shale as a business complementing its conventional operations, which take longer to build. Shale has a significantly shorter payback time. Shell’s core operations are in the Delaware portion of the Permian.

Elaborating on the short-cycle nature of the shale business, Gerges said it takes about 140 days from the time a geologist expresses interest in drilling on a three- to four-rig well pad to the time Shell starts seeing cash coming in from the output. Such a short turnaround gives the company the flexibility to ramp production up or down, depending on price swings.

The U.S. shale boom was at first driven by smaller producers, with more than 300 operators in the Permian alone. These companies were lean and nimble, with the flexibility to quickly shift operations from one area to another, nor were they burdened by corporate overhead, Gerges observed. But they could be vulnerable to price swings absent financial resilience, and they faced financial challenges in taking a long-term view on operating plans.

Since then, investor sentiment regarding the U.S. unconventional industry has changed, with a greater focus on returns. Meanwhile, operators face well productivity and spacing issues amid limited access to capital. Against that backdrop, the profile of producers has shifted, with Permian operators being increasingly dominated by the majors and large independent operators. With stronger balance sheets, they are able to take a longer view on operations. Majors like Shell are able to bring more technology and integration, Gerges said.

The next breakthrough to follow hydraulic fracturing will be the use of data to understand and optimize oil drilling plans and strategy, he added. All companies are trying to win on how to use data to arrive at the right well spacing. This is to deal with the drop in pressure between wells and other subsurface challenges. “Whether the answer is consolidation, joint ventures, infrastructure, or investments, creative contracts or a combination, the answers will come,” Gerges asserted.

(SOURCE: The Weekly Propane Newsletter, March 5, 2020. Subscribe for all the latest posted and spot prices from all major terminals and refineries around the U.S., market analysis and commentary delivered to inboxes weekly.)