The Permian Basin, a major driver of shale oil production, may soon face a peak in output due to several factors, with the increasing gas-to-oil ratio (GOR) being a significant, yet often overlooked, contributor.
Key Points
- Shale Output Plateau:
- Production Stalling: The Permian Basin has added substantial oil and gas output over the years, but production has recently flattened around 9.8 million barrels of oil per day (BOPD).
- Factors for Plateau: Several reasons have been cited for this flattening, including declining rig activity, lower completion rates, depletion of prime drilling locations, and lower WTI prices.
- Increasing GOR:
- Rising Gassiness: The gas-to-oil ratio in the Permian has increased nearly 30% since 2019. This trend is seen in other basins like the Bakken, Eagle Ford, and Denver-Julesburg.
- Impact on Production: Higher GOR means more associated gas with oil production, which, without adequate takeaway capacity, can constrain drilling activities.
- Pipeline Constraints:
- Takeaway Issues: Limited pipeline capacity to transport gas out of the Permian has led to reduced drilling activities until new pipelines are operational.
- New Pipelines: The upcoming Matterhorn Express pipeline, expected to start mid-year, will provide an additional 2.5 BCF/D capacity, potentially offering temporary relief.
- Long-Term Solutions: Projects like the DeLa Express, expected by 2028, and other proposed pipelines, will be crucial for long-term alleviation of takeaway constraints.
- Shifts in Drilling Activity:
- Midland vs. Delaware: To manage the rising GOR, operators have shifted from the gassier Delaware sub-basin to the more oil-heavy Midland sub-basin.
- Economic Considerations: The Delaware wells are deeper and hotter, exacerbating the GOR issue and making Midland a more attractive option currently.
Implications for Upstream and Midstream Companies
- Upstream Operators:
- Challenges: Operators in the Delaware basin might face delays and reduced revenues due to higher GOR and insufficient pipeline capacity.
- Strategic Shifts: Companies are adjusting by focusing on more oil-weighted areas and delaying high-gas projects.
- Midstream Companies:
- Opportunities: Midstream companies benefit from higher gas volumes, leading to full pipelines and increased tolling revenue.
- Market Performance: This dynamic has resulted in stronger stock performance for midstream companies compared to upstream operators.
Conclusion
The increasing gassiness of the Permian Basin poses challenges for upstream oil production but presents significant opportunities for midstream companies. The imminent launch of the Matterhorn Express pipeline and other future projects are key developments to monitor for their potential to mitigate current constraints and impact production trends and company performances in the sector.
