Permian pipeline bottleneck stalls fracking activity

Published: Friday, 22 June 2018

Uncompleted wells soar after pressure pumpers cut back on operations due to limited export capacity.

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 market.

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 2017.

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 local prices.  

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."

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