Permian Basin 2018

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PERMIAN BASIN: OVERVIEW 8 | October 2018 | In the IHS Markit report, Jim Burkhard, vice president for crude oil markets, said that the infra- structure challenges in the Permian Basin "illus- trate a fundamental mismatch between upstream oil producers and midstream players. The former are focused on fast growth, while the latter require sustained high utilization of infrastructure over decades for projects to be viable." One of the commodities hit hardest by the capac- ity challenge is natural gas. At Hart Energy's Mid- stream Texas conference in June, Bill Ordemann, executive vice president of Enterprise Products Part- ners LP, anticipated a serious problem moving gas if the infrastructure doesn't catch up quickly. "The ball has got to get rolling on these gas pipe- lines because my biggest worry is that gas can strain some of the other production if we're not careful," he said. Already this congestion is being felt on the NGL side, and meanwhile, despite being a world-class play, the Permian Basin has the lowest natural gas prices of any U.S. hub, Jake Fells, senior energy ana- lyst at BTU Analytics, told Hart Energy. The 430- mile Gulf Coast Express, expected to come online in October 2019, will provide a much needed out- let. But it might not be enough. "What's needed is infrastructure," Fells said. "The Gulf Coast Express is under construction, but even when that comes online we're going to need another pipeline right on its heels or else we're going to end up right back in the same situation in 2020." Ironically, a report by McKinsey Energy Insights noted that the region could actually have too much pipeline capacity at some point. "While the fundamentals support additional pipelines (i.e. large quantities of new gas being produced), there is a real risk that the Permian will become over-piped in the medium to long term," the report noted. "As private equity looks to find the next major pipeline project, they will be increasingly drawn to projects linking the Permian to the demand centers in the U.S. Gulf Coast … Combining favorable fundamen- tals, minimal regulatory risk and private equity, there is a real risk that too much capacity will be developed in the long term." Takeaway capacity is not the only issue impact- ing the region. Given the level of activity, labor shortages are bound to exist, particularly in this sparsely populated area. In April the Houston Chronicle reported that data compiled by the Permian Basin Regional Planning Commission indicated a February 2018 unemploy- ment rate of just 2.9%, well below state and national levels. While this sounds like good news, it also means that companies that rely on skilled labor might be coming up short. This is particularly true since many workers left the industry during the latest downturn. One hard-hit area is truck drivers. An article on noted that Trip Rodgers, BP portfolio manager for BP Capital Fund Advisors, said that this labor shortage creates an additional bottleneck in addition to takeaway capacity since trucks are responsible for moving sand to wells and produced water away from them. Additional issues include an aging workforce, a barrier of entry to younger workers due to com- mercial driver's license issues, drug testing and per- ceived health risks. "People have extrapolated higher production growth," Rodgers said. "That's easy to do in an Excel spreadsheet. It's not as easy to do in the field." Added Ryan Duman, principal analyst, U.S. Lower 48 Upstream Oil and Gas for Wood Mac- kenzie, "Managing costs going forward is going to be critical. As the rig count continues to accel- erate, more operators are resorting to spot pricing or getting in on the lower end of deals. This pushes the cost up, and labor and trucking are two huge factors. The sheer number of trucks and drivers needed is unprecedented." Then there is the issue of sand. Hydraulic frac- turing requires vast amounts of sand, and while anyone who has visited the Permian Basin might wonder how there could possibly be a regional sand shortage, it's the quality that matters. "The two major types of sand are the high-qual- ity Northern White, which is more expensive, and the in-basin sand," Duman said. "The in-basin sand is cheaper because of the transportation issues, but it can be lower quality. But some operators are relaxing their standards." While a lower quality

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