In the evening, the outline of the oil pump
Getty
The shale revolution has demonstrably increased the production of crude oil from the U.S. and given the country the title of the world’s largest oil producer, even if it lasted only briefly. The increased output from the Permian Basin, located in West Texas and Southeastern New Mexico, has been the biggest contributor to this growth.
We conducted a recent study on the rapidly growing production from the Permian Basin and the attendant consequences on the energy business in the U.S. The key findings were validated through conversations with members of industry, government and infrastructure leaders. The key implications of this work are summarized here.
A major point: There is no significant domestic customer for the incremental crude projected to come out of the Permian Basin over the next five years. The Permian Basin produced 3.2 million barrels per day in 2018. That production is expected to grow by 1 million barrels per day each year for the next four years, to about 7 million barrels per day in 2022. Permian production was already up to 4 million barrels per day midway through 2019.
For comparison, the U.S. Energy Department reported earlier this month that U.S. oil production had surpassed 12 million barrels per day in April, meaning more than one of every three barrels produced in the United States today comes from the Permian.
U.S. refineries already are buying all the light crude they can use from domestic suppliers; Gulf Coast refineries have not imported significant quantities of light crude since 2015. Most of the additional 4 million barrels per day of crude coming out of the Permian Basin over the next five years will have to be exported .
Pipeline capacity for the crude produced in the Permian has been a major bottleneck, but it will move back into balance with demand by the middle of 2020, if not before. The shortage of pipeline capacity, and the resulting inability for producers to transport oil from the region, has caused a significant discounting of the produced crude oil in the Permian and has also resulted in increasing the inventory of drilled but uncompleted wells.
Plans to build pipelines from the Permian to the Gulf Coast – several to the ports at Corpus Christi, Houston and Beaumont – have been announced in recognition of the need for additional pipeline capacity to move the oil from the Permian, and most are planned to come online between now and 2022. The announced pipeline capacity and timing will be more than adequate for the evacuation of the additional crude oil that will be produced in the Permian.
However, new supply chain bottlenecks will emerge further downstream as the export terminals in Corpus Christi, in particular, are unlikely to be ready to handle the volume, even though the port expansion is being developed for the operation of very large crude carriers (VLCCs). Currently the Louisiana Offshore Oil Port (LOOP) is the only port along the Gulf Coast capable of handling VLCCs, which can carry 2 million barrels of oil. The remaining ports along the Gulf Coast will be capacity constrained for the foreseeable future.
But getting the oil out of the Permian and delivering it to the ultimate customer aren’t the only challenges facing the basin. The major operators, including ExxonMobil, Chevron, BP and Shell, are increasingly consolidating production and resources in the Permian, as well as the supply chain leading to domestic refiners. The announced acquisitions of acreage in the Permian by the majors, along with their part ownership of the pipelines and the downstream assets along the Gulf Coast, means the smaller independent producers still operating in the Permian will have to look for options to export their crude.
That won’t be easy. Independent producers are relatively inexperienced with the complexities of exporting oil, and they are likely to face business challenges in the absence of appropriate intermediaries stepping into the market. If the independent producers don’t – or are unable to – build their export capabilities, they could become targets for acquisitions.
Independents also face additional pressures because of the flight of capital from the Permian because of relatively weak return on investment.
Consolidation by majors and increased pressure on the independents will lead to the gradual erosion and ultimate destruction of enterprise value among many oilfield services companies due to the lack of pricing power.
Nevertheless, there is significant uncertainty regarding when the pipeline and export terminals will be completed, especially the planned expansion of the Port of Corpus Christi, and the ancillary facilities that must be developed alongside the terminals. Some of the uncertainty arises from a significant “not in my backyard” movement in Texas towards the building of pipelines and large-scale infrastructure. There is also the likelihood of a significant shortage of skilled workforce for construction and operations for both the significantly expanded operations focused on exports and new downstream operations being planned along the Gulf Coast.
Lastly, two notable challenges, both for the majors and the independent producers, must be resolved soon to ensure the resources of the Permian can continue to be produced
- The poor consistency of crude quality exported to Asia due to the mixing of different grades (API) of crudes, and
- The continued environmental footprint especially from the flaring of associated natural gas that is produced in conjunction with oil.
Overall, we found a bright future for the likely continued growth of production from the Permian Basin. That future, however, won’t happen without continued planning, infrastructure growth and adjustments to market conditions.
Independent producers, especially, must adapt to market realities and become adept at maneuvering through the export process . Gulf Coast ports and the ancillary infrastructure will have to learn to manage the additional congestion and technical obstacles posed by increased crude oil and LNG exports.
Dr. Ramanan Krishnamoorti is the chief energy officer at the University of Houston. Prior to his current position, Krishnamoorti served as interim vice president for research and technology transfer for UH and the UHSystem. During his tenure at the university, he has served as chair of the UH Cullen College of Engineering’s chemical and biomolecular engineering department, associate dean of research for engineering, professor of chemical and biomolecular engineering with affiliated appointments as professor of petroleum engineering and professor of chemistry. Dr. Krishnamoorti obtained his bachelor’s degree in chemical engineering from the Indian Institute of Technology Madras and doctoral degree in chemical engineering from Princeton University in 1994.
Dr. Suryanarayanan Radhakrishnan is a professor of practice in the Decision and Information Sciences at the University of Houston’s Bauer College of Business. He is also the Managing Director of UH Energy. Prior to joining the University of Houston, he had worked for 36 years at Shell holding various responsible jobs mostly in Planning, Strategy, Marketing and Business Management. Since retiring from Shell in 2010, Dr. Radhakrishnan has been teaching Undergraduate, MBA and Executive MBA courses at the Bauer College of Business. Dr. Radhakrishnan holds a bachelor’s degree in Mechanical Engineering; a master’s degree in Industrial Engineering and a doctoral degree in Business Administration.
