Unfracked Wells Growing as Permian Pipe Scarcity Worsens

Unfracked Wells Growing as Permian Pipe Scarcity Worsens
Pipeline bottlenecks in North America's biggest oil field are so pervasive that drillers are quitting new wells at a record pace. And it's about to get a lot worse.

(Bloomberg) -- Pipeline bottlenecks in North America’s biggest oil field are so pervasive that drillers are quitting new wells at a record pace. And it’s about to get a lot worse.

The vast pipe networks that haul crude from the Permian Basin are almost completely full thanks to a production boom in the oil-rich area of West Texas and New Mexico that rivals Saudi Arabia’s Ghawar field in massiveness. Explorers who’ve been drilling feverishly to cash in on an OPEC-driven price rally are now slamming on the brakes to let pipeline owners catch up.

As a result, the number of Permian wells that were drilled but left unfinished surged to 3,203 last month, a 90 percent increase from a year earlier and the highest since the Energy Department began tracking them in 2013. Postponing fracking, the final stage of drilling, reduces the supply a company needs to ship to markets. The jump in unfinished wells is a harbinger of oil producers actually shutting down older wells.

“I think without a doubt you’re going to see shut-in wells,” said Judy Stark, president of the Panhandle Producers & Royalty Owners Association, an Amarillo, Texas-based industry group that represents mostly small, closely held drillers.

Permian pipelines probably will be totally full in three or four months, Pioneer Natural Resources Co. Chairman Scott Sheffield said in an interview Wednesday. Those constraints will compel some drillers to shut off wells, he said in Vienna as OPEC ministers prepared for key cartel meeting later this week.

“Some companies will have to shut in production, some companies will move rigs away, and some companies will be able to continue growing because they have firm transportation,” Sheffield said, using the industry jargon for guaranteed pipeline contracts.

Struggles Ahead

EOG Resources Inc., the world’s second-largest independent oil producer, also sounded the alarm, warning that smaller operators that haven’t already locked in pipeline space will soon feel the brunt.

“Companies that were a little late to the table are going to struggle,” Ezra Yacob, EOG’s exploration chief, said during the JPMorgan Energy Conference on Wednesday. “They’re not going to have a lot of leverage at the negotiating table.”

As for EOG, which estimates almost 60 percent of its untapped crude is resides in the Permian, pipes are not an issue and most of its production in the region is shielded from the steep penalties other producers are paying in the form of higher rail or trucking fees to carry their oil.

“A lot of our Permian oil has firm transportation all the way down to the Gulf Coast, which we’re very proud of,” Yacob said.

The first explorer to publicly announce cutbacks stemming from the pipeline shortage was Halcon Resources Corp., which on Tuesday announced it will idle a quarter of its drilling fleet starting next month. The company didn’t provide an estimated production impact or say how long the curtailment would continue.

On top of curbing production, drillers may stop pumping money into the Permian and put it into other basins like the Eagle Ford in South Texas and the Bakken in North Dakota, Michael Cohen, research analyst at Barclays Bank Plc, said in a research note to clients Thursday.

"We think producers may slow down growth in the Permian and build up drilled but uncompleted wells and/or reallocate resources elsewhere until the constraints are worked out," Cohen said in the note.

C&J Energy Services Inc., which helps explorers drill wells and test reservoirs, halted a planned expansion of its frack fleet on June 11 in response to Permian bottlenecks. Explorers are shying away from signing new fracking contracts, CEO Don Gawick said in a statement.


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