February 9, 2018 | By Paul De Ayala & Amol Wayangankar

In this issue of EnSights, the first of a new multi-part series, we delve into the economic trends that are driving hydrocarbon production growth in the Permian basin, analyze historical and current NGL supply trends and investigate the adequacy of NGL midstream infrastructure in the basin.

Growth in hydrocarbon production in the Permian has been very impressive to say the least. Since 2013, Permian crude oil production has increased by 1.4 Million b/d to 2.7 Million b/d by year end 2017. During the same time period, gas production has increased by 4.8 Bcf/d to 9.4 Bcf/d. This represents an impressive compounded annual growth rate of 17% and 16% of oil and gas production, respectively. This growth was despite drastic reduction in crude oil prices post 2014. Lower crude prices forced Permian producers to focus on monetizing core acreage, maximize EURs by implementing better well completion techniques and drilling longer laterals, all resulting in lowering of lease operating expenses (LOE). 

For select producers in Permian, LOEs reduced by approximately $2.50-3.00/bbl between 2015 and 2017. Improved cost structure and well productivity has led to lower breakeven prices for new wells which we estimate to be below $45/Bbl to achieve an after-tax IRR of 15%. Our analysis indicates producers like EOG, Anadarko and Cimarex to be in the top quartile of the cost structure with break-even crude prices of sub $40/Bbl.

Now with Permian’s favorable economics coupled with improved crude oil prices, producers have started to ramp up production even more as is evident from quarterly increases in rig counts, number of new wells, and gas production.With significant economic tailwinds for production, a question arises as to whether the midstream companies can meet the gas processing and NGL pipeline takeaway requirements posed by the upsurge in production?

Almost all of the gas produced in the Permian is associated gas and therefore rich in NGLs requiring processing prior to delivery into the residue gas pipelines. Rich-gas production in Permian increased from 3.7 Bcf/d in 4Q 2017 to 8.1 Bcf/d by 2Q 2017, almost all of that was associated with crude oil production. In response to increasing rich gas production, gas processing capacity in the Permian has grown by 6.4 Bcf/d and stands at 11.4 Bcf/d as of 2Q 2017 (CAGR of 18%). In 2016 alone, 2.0 Bcf/d of gas processing capacity was added in the Permian. On an aggregate basis, the Permian gas processing capacity utilization is estimated to be 72% for 2Q 2017.

Resultant NGL supply in Permian has doubled growing from 402 MBPD in 4Q 2012 to 808 MBPD in 2Q 2017. Despite low ethane prices in Mont Belvieu, the volume of ethane extracted has increased from 147 MBPD in 4Q 2012 to 285 MBPD in 2Q 2017. During the same time period, propane, butane, and pentanes+ all increased by 144 MBPD, 73 MBPD, and 52 MBPD respectively. So, despite the drop in crude prices which has impacted drilling activity and NGL production in other U.S. basins, the Permian basin has been able to sustain NGL growth.

In the next installment of our Permian series, we will cover key midstream companies providing gas processing services in the Permian basin and their market share of NGL supply.