A Crisis At The Heart Of U.S. Shale

Authored by Nick Cunningham via OilPrice.com,

The bottlenecks in the Permian are starting to capture the attention of the oil market, raising the prospect that U.S. shale production does not live up to the hype.

The frenzy in West Texas has predictably led to bottlenecks up and down the supply chain. Oil drillers are facing rising prices for labor, rigs, services and land. The lack of pipeline capacity is starting to force discounts for oil as large as $9 per barrel.

A new report from Rystad Energy points to the bottleneck specifically for pumping horsepower and frac sand. When wells are drilled, companies deploy trucks connected to pressure pumps that inject water, sand and chemicals underground to fracture a well. But the sky-rocketing level of drilling activity is actually straining the market for pressure pumping capacity. There just isn’t enough to go around.

“Capacity is expected to be particularly tight in the Permian in the second quarter before the majority of new equipment comes online in the second half of the year,” Rystad Energy wrote in its report.

“More than half of total U.S. pumping capacity will be in the Permian.” Obviously, that means booming business if you are in the market of selling such equipment.

“We are comfortably behind at the moment, and we are just fine with that,” a VP at an unnamed equipment manufacturer told Rystad.

To be sure, Rystad Energy predicts that 2 million horsepower of new capacity will come online by the end of the year, a nearly 10-percent increase from 2017. That should help relieve some of the strain.

The market for frac sand is also stretched to the limit. But that too should be temporary. Rystad Energy sees the supply of frac sand jumping by a massive 52 million tons in 2018, much of it located in the Permian in close proximity to drilling sites, which is different from the past when much of the sand had to be shipped to Texas from Wisconsin and Minnesota.

Still, moving all that sand around requires a lot of trucks, and the market for trucks is also tight. To top it off, a zillion trucks moving around wears down roads, which ultimately could create bottlenecks for sand. “You’re going to see similar problems as to what happened in the Eagle Ford years back; roads get chewed up and no one wants to have them shut down for repairs,” an official from an E&P company told Rystad.

Another VP agreed, telling Rystad that “it’s not just the quality of roads anymore, it’s the NUMBER of roads. I just don’t think there are enough roads to service this kind of demand without traffic jams of semis all over the Permian.”

However, the most critical bottleneck this year could be for pipeline capacity. Permian oil production is set to hit 3.18 million barrels per day in May, while pipeline capacity is expected to average 3.078 mb/d for the year, according to the Wall Street Journal and Goldman Sachs. The pipelines are essentially full, which is why Midland crude is suffering discounts. Additional supplies might need to be moved by truck, a costly form of transport.

All of these constraints will add costs and likely push up breakeven prices. The WSJ estimates that Permian drillers could see production costs rise by 15 percent this year. 

However, oil producers might ultimately have to throttle back on production growth or even shut in wells. The backlog of drilled but uncompleted wells (DUCs) in the Permian has skyrocketed, jumping to 3,044 wells in March, up 14 percent since the start of the year. E&Ps are opting not to complete wells for a variety of reasons, most of which have to do with a shortage of completion crews or some other supply chain bottleneck. Roughly 87 percent of supplies and equipment used to frack a well in the Permian is booked up, according to Matt Johnson of Primary Vision Inc., as reported in the WSJ.

Finally, there is the gusher of natural gas coming out of all of these oil wells that could spell problems for producers. There are limits to the amount of flaring allowed, and without pipelines to take away all of the natural gas, producers might have to shut down wells.

The bottom line is that a whole series of bottlenecks could act as a significant drag on the growth rate of the Permian basin. And because the Permian is the largest source of supply growth for the entire world, any hiccups will ripple across the global market.

Comments

JuliaS IntercoursetheEU Fri, 04/20/2018 - 13:06 Permalink

Shale is not a scam, but in terms of energy density it's pretty close to a direct conversion. You use up a lot of natural gas, water and electricity and then get some oil back. It's almost like corn ethanol, where resources go into cultivation and the end result is a sum of all your inputs which can conveniently be put into a gas tank.

The fact we're doing shale is an indication that we've already run out of the easy stuff. The viability window for shale is a lot narrower than for sweet crude. If the oil is too cheap, shale won't pay for itself. It it's too expensive, demand collapses. Back to square one.

In reply to by IntercoursetheEU

Mr. Ed Common_Law Fri, 04/20/2018 - 11:58 Permalink

So this is the excuse the US will use to reduce supply, like OPEC does to drive up price.  Cute.

It's illegal for US producers to deliberately throttle production because it hurts stockholders... so this is how they get around it huh?  Everyone starts whining about shortages.  It's not our fault they'll all say. 

Wonder if Tillerson also had a hand in this...

In reply to by Common_Law

shortonoil hector zeroni Fri, 04/20/2018 - 12:39 Permalink

To keep US shale production level over the next 5 years will require the drilling of 1.5 million new wells at a cost of $7.3 trillion. A shortage of frac sand in the Permian is the least of that industries worries. The shale industry will tells us that is not a probable as long as enough stupid people can be found to loan them the money. So far that supply has not appeared to have diminished significantly.

In reply to by hector zeroni

mscir Déjà view Sat, 04/21/2018 - 00:45 Permalink

Haha, reminds me of a Jack Nickolson character's quote in a movie, can't remember which one, he came into a lot of money, and then he disappeared from his usual haunts for a while. When he showed up again he ran into a friend of his who asked him what he did with the money. He replied something like, "I spent most of it on booze and women, and I wasted the rest."

 

In reply to by Déjà view

VK Fri, 04/20/2018 - 11:05 Permalink

Shale is just scrapping the bottle of the barrel. A huge number of drilling sites are required, very energy intensive process and huge decline rates of 60-70% within 1 year of drilling. And the major shale companies haven't been cash flow positive since the start. It's all subsidized by funny money and ZIRP. This is why the US still maintains a huge military presence in the Mid East, they're not there to perform pony tricks but to ensure future energy flows. 

holmes VK Fri, 04/20/2018 - 11:21 Permalink

Yeah, we've got to put a gun to the head of the arabs so they sell us their oil. I may be out on a limb here, but i guess the arabs like greenbacks just as much as we do. Here's an idea- let's pull all our troops out of the ME, close down all military bases etc. and with the savings promise the arabs top dollar for their fucking oil. Bet that ensures future energy flows.

In reply to by VK

VK holmes Fri, 04/20/2018 - 11:46 Permalink

Petro dollar was created to support dollar demand after Nixon deleted the gold standard. Kissinger set up the petro dollar with the Saudis, this was declassified a few years back. House of Saud got protection from regime change and the dollar has had exaggerated demand ever since as every country needs king dollar reserves to buy oil. No fiscal discipline but the goods keep flowing to the US, a form of tribute. Empires are born from violence, surplus flow from the periphery to the center, by taking resources and labour. Old as the hills unfortunately. The history of mankind is like an anti morality play. 

In reply to by holmes

Theta_Burn wwwww Fri, 04/20/2018 - 11:17 Permalink

When my buds and I were entering our teen yrs. we discovered we could flare natural gas with little or no effort at all....good times.

These bottlenecks and labor cost increase issues will disappear with oil rising another $10-15 a barrel. 

All these US Shale plays should be more of a SPR/domestic supply only, rather than an export business anyway. 

 

In reply to by wwwww

Thom Paine Fri, 04/20/2018 - 11:16 Permalink

I think when oil was at $85 barrel fracking was a viable venture.

But low oil prices from the heady days of $100+ make it a struggle and many viable ventures loss makers.

MrNoItAll Thom Paine Fri, 04/20/2018 - 12:09 Permalink

Nope. Fracking companies were burning cash and living off OPM and debt even at $100 per barrel. NY Times published a bunch of memo and email communications between oil industry financial and engineering specialists when fracking was just getting started, and these guys were comparing fracking to "Enron" and questioning how this could be anything other than a loser. But you know what -- it was a great Jobs Program. Fracking is the last dying gasp of the Age of Oil, a "going away party". What comes next is going to be a whole new world.

In reply to by Thom Paine

CashMcCall Thom Paine Fri, 04/20/2018 - 12:35 Permalink

You don't know jack about Fracking. Fracking gets cheaper over time for extraction. There are older wells that can produce breakeven at $25 a bbl cheapest oil in the world. 

Conventional land wells are $50 at best. Deep water wells are min $75 but have enormous head pressures and what may be unlimited oil taps. 

Canada has lots of shale and one customer the USA. Too bad for them that is always trying to rip them off. They need to build a pipeline to the sea to start selling their own oil competitively. 

Russia has more oil reserves than anyone and the largest as yet untapped Shale reserves. 

Can somebody that is not a green idiot tell me why ethanol is being put in gasoline blends in the US other than to reduce knock and destroy the engines? It has a 70,000 BTU deficit with gasoline. More simply Ethanol costs more in diesel fuel to produce than the amount of BTUs it produces per gallon. Welcome to crony MERICA.

In Russia and parts of Canada, they don't mix ethanol in the blends. On an antique car with injectors, ethanol screws it up. Even Al Gore says its a crappy idea. But Crony Merica wants to kill the food productive capability of the American Farm. 

Another good question for the moron Greens. With unlimited oil reserves how come the government is pushing electric cars, who batteries are an ecological hazard with Taxpayer credits so some schmuck can have his car subsidized by some welder in Indiana? Also, Electric power plants use coal and nat gas so there is no real efficiency in electric cars over a good clean running diesel. 

 

In reply to by Thom Paine

Sapere aude CashMcCall Sat, 04/21/2018 - 03:40 Permalink

the poster might not know jack shit about fracking, but I certainly do. I've been in the oil and gas industry for decades and you are spouting garbage about fracking gets cheaper over time for extraction...ABSOLUTE GARBAGE. Why do you think there are so many incomplete wells?

The only reason fracking became cheaper for a short while was when the oil price plummeted, and put services in a real predicament, including fracking, and the already loss making shales had one option push for cashflow even making losses along the way and that still happens.

Fracking costs are shooting up again because of the demand, and the nature of shale means there is always MORE demand for fracking because of legacy oil declines, so you have to continually drill and complete more wells to make up for the 60-75% decline rate in the first year! So for every two wells you drill, you have to drill another 1 well within six months to make up for the dramatic decline just to keep producing the same amount.

This carries on until the amount of drilling and completions cannot match the decline, leaving thousands of wells that you seem to think produce oil at $25, costing more to keep pumping than any of the stripper well status oil they produce, and where being shale and heavily fracked with multiple laterals, and no maintenance they leak all sorts of crap into the geology.

For your information too, the U.S. even if it produced oil at $25 would be nowhere near the cheapest oil in the world. The cost of producing oil should be separated from the social cost of oil. The Saudi's produce oil at around $10 a barrel!!!

You are also wrong about Russia having the largest oil reserves....ironically Venezuela does, which is why so much pressure is being put upon it so it collapses and allows others to usurp its oil.

Your total costing for oil production is way off, and shows the nearest you get to oil is putting diesel in your vehicle.

Also your comment about 'older wells that can produce breakeven at $25 a bbl cheapest oil in the world" this demonstrates you have no knowledge at all about the oil industry, let alone US oil costs.

The U.S. can sell the cheapest oil in the world, as it has done by introducing shale, but the only problem with that is whilst telling people they can make a profit at $30 oil they've all failed to make a profit instead making massive losses, taking on massive amounts of debt and tapped stockholders, as well as selling assets, to prop up Ponzi shale.

On the green argument, with you all the way!!!

 

In reply to by CashMcCall

DipshitMiddleC… Fri, 04/20/2018 - 11:43 Permalink

shale bubble is just like the tech bubble

 

funny money lets these companies exhist. 

 

from what i read..all of these new companies have to hedge the price of oil as part of their financing. its just like the mortgage ponzi

 

 

3-fingered_chemist Fri, 04/20/2018 - 11:48 Permalink

Natural gas is the future for powering cars. If the cars are actually designed to use it, you're talking extreme efficiency. Octane rating of natural gas is 130 so you can really jack up the compression ratio. Every landfill and waste water treatment plant is a gas station. It's such a shame that we are dumb. 

D503 3-fingered_chemist Fri, 04/20/2018 - 12:25 Permalink

Except none of that is true.  Propane trucks get terrible mileage and have no power.  Which is unsurprising when you look at the energy density. 

Not to mention the lag in converting the fleet, the higher maintenance (ask a mechanic), the higher risk of explosion in accidents, the lack of infrastructure for collection, distribution,  and last mile fueling supply, human aversion to change, total volume available/need, increased complexity of partial market revision while maintaining gas fleets, etc.

You quite simply have no clue. 

In reply to by 3-fingered_chemist

21st.century 3-fingered_chemist Fri, 04/20/2018 - 13:59 Permalink

not cars , at first. But the US must convert the truck fleet to NG-- a much easier under-taking. That would divert 1/3 away from demand. Just imagine how freeing that would be?  

http://media.navistar.com/index.php?s=43&item=541

Already seeing more NG, city delivery trucks.

also, add in these to the mix:

https://nikolamotor.com/one

Things are changing, we can only have hope for the

21 st. century !

In reply to by 3-fingered_chemist

fbazzrea Fri, 04/20/2018 - 12:08 Permalink

family in Wink and Odessa report water wells now either contaminated or running dry.

trucks wearing out the roads. labor driving up real estate/rents. used fracking water/chemicals polluting the environment. gas flares... 

yipppeeee! oil sands are saving the world!

but ruining local quality of life.

new lyrics. same tune.

BIG OIL. BIG POLITICS. BIG MONEY.

the little people and our poor planet carrying the burden

electric cars/trucks are no better... maybe worse. humans sitting on top of surging EMF source? manufacturing expense? new source of industrial waste: depleted batteries. tires already massive toxic problem.  

our culture is based upon false technologies. need a reboot.

or planet is going to give US the boot--for good.

FringeImaginigs Fri, 04/20/2018 - 12:23 Permalink

And of course we wouldn't dare mention the supposed implications on climate now would we. We don't much care if any, none or all of the Co2 and other supposed greenhouse gasses get into the air surrounding our planet. We just want to pump as much as possible. Damn those torpedos. Oh and continue flaring gas that we really don't need - now or ever. We can just find some more for the kids of our kids. And do I want to change the way I live, and not drive my Escalade to the 7-11 for another big slurpie.  I look down at my 54" gut and it couldn't possibly be that I am the lazy self-satisfied slob I so worried about years ago.

BitchesBetterR… Fri, 04/20/2018 - 12:30 Permalink

lots of folks forget that Shale Oil is in deep massive underwater debt during the oil price crash from few years ago, in order to stay afloat....... 

now there are 3 massive impending issues for the Oil to solve:  Its massive debt, its low price to sustain cost production & <<the Dollar>>

 

gas prices are painfully going up not for the benefit of the Shale Oil industry, but for the consumers wallets....