Oilfield operators in West Texas are
scaling back operations due to a shortage of pipeline capacity
which is slowing oil exports from the region, meaning frac sand
demand there could be limited.
The Permian, the largest US oil basin has
seen an increase in new frac sand capacity in response to
rapidly rising demand from drilling and pressure pumping.
But with abundant local supplies and
limited export capacity, West Texas is seeing an oil glut even
as prices rise globally. And oilfield activity looks set to
stall as a result.
Data from the US Energy Information
Administration showed the number of wells in the Permian that
had been drilled but uncompleted at 3,203 in May, up by 3%
month on month, and a massive 90% year on year. This is a
problem for frac sand miners because each uncompleted well
represents proppant remaining above ground, and in the
Global oil markets have boomed over the
past year, with Brent crude prices rising to nearly $80 in
early June 2018 from less than $50 a barrel in the summer of
Even with growing expectations of a
production increase from Opec, prices were over $74 a barrel at
time of writing.
But prices in West Texas, the largest US
basin, are reportedly lagging. Goldman Sachs in June forecast
the discount of oil in the Permian basin to Gulf Coast crude
prices will rise to $18-22 by the fourth quarter of 2018.
The reason is a shortage of pipeline
capacity. Existing pipeline infrastructure is filled with oil
from wells drilled and fracked since the oil price started to
bounce back in 2016.
With no space in the existing pipelines,
producers are forced to store oil, refine it locally, or move
it by truck or rail out of the basin, all more expensive
options than sending it down the pipe.
On June 11 C&J, a fracking services
provider, announced it would delay the deployment of three
fracking fleets, saying that explorers were unwilling to sign
new fracking contracts due to the bottleneck and depressed
The decision took around 120,000
horsepower out of the Permian. Hydraulic horsepower is a
measure of the total pumping power of truck-borne fracking
equipment, a proxy for the ability of service providers to push
sand down wells.
Industry estimates peg total deployed
horsepower in the Permian at around 15 million.
Don Gawick, president and chief executive
at C&J said the company had made the decision due to
"concerns with take away capacity in the Permian," as well as
completion from other pressure pumpers.
"At this time, we simply do not have the
firm demand and favorable economics for those fleets that we
require, so we will postpone deployment until we can obtain the
utilization, pricing and time commitment needed to justify
those capital expenditures," he said.
Energy company Halcon Resources has also
reacted to the market uncertainty. On June 19 the company said
it would drop its rig count in the Permian, citing lower
near-term oil prices.
"With widening […] differentials,
we have seen our recent oil price realizations decline
significantly," Halcon chairman Floyd Wilson said.
"Accordingly, we have decided to moderate our drilling pace to
three operated rigs for the remainder of 2018."