Permian Basin 2018

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PERMIAN BASIN: PRODUCTION FORECAST 80 | October 2018 | opportunity to realize efficiency improvements. During the past 18 months, companies increasingly shifted to two-well pads and zipper fracks in efforts to drive down completion expenses. The benefits of a zipper frack are derived from the ability to cycle completion equipment and resources between pairs of wells during fracking. One more thing on completions and rigs. The move to zipper fracks has tilted the balance between rigs and spreads in several basins, including the Permian. In response, some operators are adding rigs, while others are releasing completion crews. Regardless of which direction a company takes, the fact remains that demand for completion spreads has eased on a normalized basis. A clear positive development in all this is the alignment of interests between completion crews and operating compa- nies. There are examples of contractual structures that encourage cost reductions for the operator while providing uplift opportunities to the fracking company. Mechanisms like this spell a win-win for oil and gas development. Returning to the infrastructure discussion introduced in the Wolfcamp Delaware section, the investments highlighted include buildouts of water infrastructure and infrastructure for gathering, processing and distribution of products, and the construction of local sand mines. These actions were taken to address operational constraints, ris- ing costs and pressure to live within cash flow. The aforementioned infrastructure solutions were a direct response to all three concerns listed. With respect to operational constraints, the water and processing facilities go a long way in preparing a company to supply, treat and dispose of water at lower cost and without the need for as many trucks. With respect to oil and gas processing and treat- ing facilities, regional treatment of products opens access to pipelines. Treated crude products meet pipeline specs, thus reducing the need to transport product by truck. By now, it is probably clear that trucks and trucking are a major bottleneck in the Permian. With respect to field ops, water is huge. During drilling and completions, water is needed for mud, completion fluids and general purposes. Trucks are a primary mover of water in oil fields. His- torically, trucks hauled freshwater in and hauled flowback and produced water out. Enter central- ized water treatment and infrastructure. These facilities and pipelines enable water to be handled and treated in ways that dramatically reduce road loads. Other options also presented themselves. For example, operators increasingly experimented with brine and recycled water with good results. Consequently, numerous operators have plans to increase their use of recycled water, and this trend will likely continue. Truck transportation serves many other roles around oil fields. Completions equipment, rigs and materials all make their way to pads via trucks. The number of trucks is huge. Consider a standard drilling rig: a double or triple with walking sys- tems, high volume mud pumps, AC power with all the bells and whistles configured in modular form. Moving that rig from pad to pad will likely require 22 tractor-trailer loads. That doesn't sound bad until you consider that the Permian has averaged about 450 rigs week-in and week-out this year. So, time for a little napkin math: 22 trac- tor-trailer loads times 450 rigs equals 9,900 truck- loads. Assuming a rig drills 18 wells per year on pads comprised of three wells each leads to six moves per rig through the year. Multiplying 9,900 truckloads by six moves equals 59,400 truckloads, and this is just for rigs. Completion spreads and materials shipments exert even greater demand than rigs. Hence, operators who are able to find alternatives to trucks and trucking stand to benefit. It's now time to bring it all together under a sin- gle umbrella. Drilling and completion of wells are now mostly optimized, procurement of materials has been in-sourced and localized where feasible, and infrastructure is being leveraged to reduce exposure to volatile costs. That covers the key cost concerns. With all the emphasis for companies to reside within cash flow in recent years, and with excess costs already driven out, companies are left with few options for working with sub-optimal assets. Therefore, we see the transition to longer and lon- ger lateral lengths. Over the span of many years, we have observed a consistent response by operators when faced with lower performing rock: Drill a big- ger well. This is tried and true. Based on reviews

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