Benchmarking Permian NGLs

The Permian basin has been the hottest play in the U.S. over the last 6 years. Enkon’s Permian quarterly NGL benchmarking report provides granular insights into Permian NGL supply, infrastructure, logistics, pricing, disposition and outlook. While the transformation and progress of this basin has been fast and furious thus far, challenging times lie ahead…

Where we’ve been to where we are:

Permian producers have fine-tuned drilling and completion techniques as evident from the impressive reductions in lease operating expenses, and low breakeven thresholds to make Permian one of the most productive oil plays in the United States. Permian processed gas production has doubled in the last three years, reaching 15.0 Bcf/d for 4Q 2019. As wet production has increased, so has the processing infrastructure to handle this supply.

Midstream companies anticipated the wave of production and aggressively added processing plant capacity in both Delaware and Midland. Processing capacity in the Permian currently stands at ~21 Bcf/d.

The gas processing landscape has become more fragmented in the Permian. In 2012, in the early days of the Permian growth story, there were approximately 10-15 midstream vs 35-40 gas processors today. The top five players (by processing capacity) as of 4Q 2019 are Targa, Energy Transfer, Enterprise, DCP, and Western Gas with Targa, ET and Enterprise vertically integrated from processing plants to NGL export docks– the whole 9 yards.

NGLs supply in the Permian has tripled since 4Q 2012, doubling in the last three years and now stands at 1.6 million bpd. Driven by a wave of new crackers in the USGC and exports, recovered ethane has grown from 145 MBPD in 2012 to ~665 MBPD in 4Q 2019, accounting for ~42% of the Permian NGL barrel. While 665 MBPD of ethane was recovered, Permian recoverable ethane potential increased significantly to reach 965 MBPD, implying ~300 MBPD of ethane was left in the natural gas stream or otherwise “rejected” from recovered NGLs. Under a full ethane recovery scenario, Permian C2+ supply would be ~16% higher at ~1,900 MBPD during 4Q 2019.

Back in 2012, there were four NGL pipelines with capacity to move 940 MBPD Y-grade NGLs to Mont Belvieu or Sweeny for fractionation. As the build out of the Permian progressed, more pipeline capacity was planned and executed. New pipeline capacity cemented the vertical integration model pursued by the big midstream players for value chain maximization. Fast forward to 4Q 2019, total NGL pipeline capacity out of Permian is 2,600 MBPD operating at an aggregate capacity utilization of 93%! If processing plants operated at max C2 recovery factors, pipeline volumes would exceed capacity this quarter.

Where we go from here:

Midstream companies opened their purse strings in a big way in the past 5 years! As we noted, infrastructure was built with a fever and was able to keep up with the volume growth. But even before COVID19, the pace of drilling activity in the Permian had slowed down. Consequently, Midstream companies had already drastically slowed their plans for further capital outlay on infrastructure in the Permian, even before COVID-19. At the time of this report, there were plans for 10 new processing plants and 4 plant expansions, for incremental capacity additions of ~3 Bcf/d, with planned in-service for 1Q 2020 through 1H 2021 (84% of the capacity is planned for the Delaware basin in the Permian region).

Likewise, there have been numerous plans for additional pipeline capacity from Permian to Gulf Coast fractionation, but many of these plans did not receive adequate support, even before this market collapse. However, we are expecting 340 MBPD of new pipeline capacity in-service by 1H 2020. This additional capacity should keep major pipeline capacity constraints at bay for at least the next few years. Current environment presents a significant bar for new midstream projects due to a combination of reduced drilling and imminent PDP well shut ins. It appears that midstream infrastructure in the Permian is now more than adequate to meet producers NGL needs. The Permian can finally rest for few years…