,

The Permian Basin Trisha Curtis,

Head Author
Produces Gas,Too Ben Montalbano,
Co-Author
Permian Basin
Oil and Gas Special thanks to
Production Growth: Emily Medina for her
contribution on
A Case Study for Mexico’s infrastructure

Gas Infrastructure Needs

in the U.S. July 2018
ABOUT THIS REPORT
This report is part of the Energy Policy Research Foundation’s multi-year research program evaluating
the scale and scope of the North American petroleum renaissance. As U.S. producers expand production
to meet domestic requirements and the rapidly growing market for pipeline exports and Liquefied Natural
Gas (LNG), it is essential that policy makers have a full understanding of the sustainability of the U.S.
natural gas production platform. This report addresses the range of challenges and opportunities for
expanding U.S. production of natural gas for both domestic uses and export markets through an in depth
look at North America’s most prolific oil and gas basin, the Permian.

ABOUT EPRINC
The Energy Policy Research Foundation, Inc. (EPRINC) was founded in 1944, and is a not-for-profit,
non-partisan organization that studies energy economics and policy issues with special emphasis on oil,
natural gas, and petroleum product markets. EPRINC is routinely called upon to testify before Congress
as well as providing briefings for government officials and legislators. Its research and presentations are
circulated widely without charge through postings on its website. EPRINC’s popular Embassy Series
convenes periodic meetings and discussions with the Washington diplomatic community, industry experts
and policy makers on topical issues in energy policy.
EPRINC has been a source of expertise for numerous government studies, and both its chairman and
president have participated in major assessments undertaken by the National Petroleum Council. In recent
years, EPRINC has undertaken long-term assessments of the economic and strategic implications of the
North American petroleum renaissance, reviews of the role of renewable fuels in the transportation sector,
and evaluations of the economic contribution of petroleum infrastructure to the national economy. Most
recently, EPRINC has been engaged on an assessment of the future of U.S. LNG exports to Asia and the
growing importance of an integrated North American energy market.
EPRINC receives undirected research support from the private sector and foundations, and it has
undertaken directed research from the U.S. government from both the U.S. Department of Energy and the
U.S. Department of Defense. EPRINC publications can be found on its website: www.eprinc.org.

THE AUTHORS
Trisha Curtis is the President and Co-Founder of PetroNerds, a Denver based consultancy. She is also
a non-resident fellow at EPRINC. Ben Montalbano is a Trustee at EPRINC and co-founder of PetroNerds.

© Copyright 2018
Energy Policy Research Foundation, Inc. 1031 31st Street, NW Washington, DC 20007
▶ +1 202.944.333 ▶ eprinc.org

EPRINC: The Permian Basin Produces Gas, Too

TABLE OF CONTENTS
Introduction 1
Key Findings 1
Production from Horizontal Wells and Productivity Gains 3
Geologic Complexity, API Gravity, and Gas to Oil Ratio 10
Understanding the Infrastructure Constraints 13
Centennial Resource Development, Q1 2018 Earnings Call, Seeking Alpha 14
Gas Exports to Mexico 16
A Note Crude Oil Infrastructure 17
Conclusion 18
Appendix 20

FIGURES and TABLES

Figure 1: Permian Basin Oil and Natural Gas Production 2
Figure 2: Permian Basin Vertical and Horizontal Well Counts and Oil Production 3
Figure 3: Gas and Water Production from Vertical Wells 4
Figure 4: Horizontal Oil, Gas, and Water Production 5
Figure 5: Horizontal Oil Type Curves 6
Figure 6: Permian Basin Average Lateral Lengths and
First 6 Month Cumulative Oil Production per Lateral Foot 7
Figure 7: Horizontal Gas Type Curves 8
Figure 8: WTI Midland vs. WTI Financial Futures, NYMEX ($/b) 9
Figure 9: Permian Basin Production by API Gravity 10
Figure 10: Map of Production by API Gravity 11
Figure 11: Map of Production by GOR 12
Figure 12: Waha Basis Futures, NYMEX 13
Figure 13: Permian DUCs 15
Figure 14: Oil Prices and Permian Rig Count 15
Figure 15: Cross-border Pipelines from the Permian Basin to Mexico 16
Table 1: Cross-border Pipelines from the Permian Basin to Mexico 17
Figure 16: Permian Oil Production Forecast and New Well Additions Under Two Scenarios 18
Figure 17: Permian Basin Water Production 20
Figure 18: U.S. Production of Crude Oil 21
Figure 19: Texas and New Mexico Permian Basin Production 22
Figure 20: Horizontal Water Decline Curve 23
Figure 21: Horizontal Gas Decline Curve 24

EPRINC: The Permian Basin Produces Gas, Too

INTRODUCTION
Oil and natural gas production in the nearly century-old Permian Basin surged in recent years as
operators transitioned from vertical to horizontal drilling combined with hydraulic fracturing. This
ongoing application of “unconventional” technology, in what was an aging conventional play, unlocked
multiple stacked payzones (reservoirs) and reversed years of production declines. This rapid growth, over
2 mbd (million barrels per day) in just eight years, put pressure on existing midstream infrastructure and
pipeline transportation capacity within the basin. Oil production that has risen to over 3 mbd is setting
new records for the basin and creating bottlenecks in infrastructure for both oil and gas takeaway capacity.
These midstream bottlenecks should not present a long-term threat to growth if infrastructure projects
remain on track, but the Permian may face intermittent hurdles in the coming years as projects roll online.
Rising associated gas volumes with no home arguably present the largest growth constraint. Recent
growth in Permian oil production drove natural gas production from 4.5 Bcf/d (billion cubic feet per
day) in 2010 to over 9.5 Bcf/d at present and associated water production to an astounding 16 mbd.
These associated gas volumes are a byproduct of the oil production process and require large amounts of
infrastructure for gathering, processing, and transportation. Unlike crude oil, which can be hauled away
by truck or train, natural gas must be transported to market by pipeline from the wellhead. The region is
struggling to keep up and without additional infrastructure development, especially for natural gas, steady
growth will be put at risk and operators may be forced to curb production.
The pursuit of oil is driving E&P activity in the Permian, but from a technical perspective the growth
in oil production is driven partly by associated gas. The sharp rise in gas output from oil wells shocked
many analysts in the Wall Street community in 2017 and dinged the equity values of several Permian-
centric operators. As operators have continued to modify and enhance completions techniques, oil output
has continued to rise in tandem with gas production.
This report seeks to explain the rapid rise in oil and gas production in the Permian Basin and need
for natural gas infrastructure both within and outside of the basin.

KEY FINDINGS
• The dramatic rise in oil production, almost exclusively from horizontal wells, brought with it a
surge in associated natural gas production. This associated gas is a byproduct of the crude oil production
process. As crude oil production has risen over 2 mbd since 2010, natural gas production also grew by
over 5 Bcf/day.
• Productivity gains, mainly from longer laterals and enhanced completions, are a relatively new
phenomenon, and are driving large volumes of both oil and gas production from the wellbore. The
continued gains in productivity, increasing the amount of oil output per well, also resulted in increased
gas output. Because lateral lengths still average under 8,000 feet and completion techniques, well spacing,
and asset delineation continue, PetroNerds believes these productivity gains will endure (although
perhaps not on a per lateral foot basis).
• The rise in oil and gas production has created severe near-term bottlenecks in the basin. Both
natural gas and crude infrastructure development have lagged the rapid pace of growth for both products
and the lack of takeaway capacity is pressuring prices at the wellhead. The price of natural gas is less of
a concern for many operators because oil makes up most of the revenue stream, but the need to pipe and
process the gas remains imperative. Operators must find a home for their natural gas and require flow
assurance to keep drilling and producing oil.
• In a hypothetical “maintenance” scenario in which necessary oil and gas infrastructure projects
are delayed and only present-day takeaway capacity is available, Permian Basin activity would decline by
approximately one-third to maintain oil production of 3 mbd until late 2019.

EPRINC: The Permian Basin Produces Gas, Too

Page 1
INTRODUCTION continued

Figure 1
Permian Basin Oil and Natural Gas Production

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 2
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS
Rising oil prices over the past year partially Following the rapid ascent of the Bakken
incentivized recent Permian Basin drilling and and Eagle Ford unconventional oil plays,
completion activity, but prices are hardly the unconventional development quickly took hold
only factor at play. Operators began to noticeably in the Permian. Note in Figure 2 below that the
increase Permian production in 2011 in a $100/b vertical well count, currently over 120,000 wells,
oil price environment. Growth, however, remained declined from its 2014 peak for four years running.
robust in a sub-$60/b price environment following The addition of approximately 18,000 horizontal
the 2014 price crash. This robustness can be wells offset the fall in vertical development. These
attributed to a number factors, including stringent horizontal wells, which account for slightly less
leasing requirements, which require production than 15% of active Permian Basin wells, are
on land to hold acreage. Furthermore, investor responsible for over two-thirds of the Basin’s 3 mbd
pressure and the need to delineate assets also of oil production.
pushed operators to add new wells.

Figure 2
Permian Basin Vertical and Horizontal Well Counts and Oil Production

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 3
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
Figure 3 below shows gas and associated water production has not fallen to the same extent as gas
production from vertical wells. Gas production and sits at approximately 8 mbd.
has declined precipitously to just 2.3 Bcf/d. Water

Figure 3
Gas and Water Production from Vertical Wells

Source: PetroNerds, DrillingInfo.

The brief period of growth in oil production per lateral foot than typical unconventional wells,
from vertical wells between 2011 and 2014 came also contributed to output growth. Additionally,
about as operators tested and learned about the stringent leasing requirements and the need to
Permian’s stacked pay zones. Vertical wells were drill and produce to hold acreage also kept activity
inexpensive relative to horizontal wells in other elevated throughout the downturn.
shale plays and employed by some operators as an Production growth is also aided by the
early delineation tool. While many of the larger ability of operators to continually improve well
players already moved into horizontal drilling mode performance and increase productivity across the
by the time oil prices dropped in 2014, smaller and basin’s prolific geology and stacked payzones. The
medium size players quickly switched gears and figure below shows horizontal liquid, water, and gas
began aggressive horizontal drilling and hydraulic production. Natural gas production rose from just
fracturing campaigns to boost output over the under 1 Bcf/d in 2012 to 7 Bcf/d today, comprising
course of the downturn, leading to robust horizontal over 70% of gas production in the basin. While
well growth despite sustained sub-$60/b prices. vertical wells still contribute a significant amount of
Enhanced completion techniques, which involve water in the basin, horizontal wells are producing
the utilization of more fluid and more proppant nearly 6 mbd of water alone. The impressive

EPRINC: The Permian Basin Produces Gas, Too

Page 4
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
completion gains that operators made, enhancing produce more gas than others, but broadly speaking
completions with more sand (proppant) and often gas and water productivity gains now reflect the
more fluid, (water or linear gel) has increased oil, trajectory of oil.
gas, and water output. Certain areas of the basin

Figure 4
Horizontal Oil, Gas, and Water Production

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 5
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
Advances in completions, enhanced year productivity gains in oil output for horizontal
understanding of reservoirs, and longer laterals wells in the Permian Basin. It does not normalize
contributed to productivity gains in Permian Basin for lateral lengths.
oil production. The figure below shows year over

Figure 5
Horizontal Oil Type Curves

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 6
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
Figure 6 shows the average lateral length for young compared to the Eagle Ford and Bakken.
horizontal Permian Basin wells overtime. Some Lateral lengths are still increasing, and operators are
operators still utilize shorter laterals, especially just beginning to employ wide-scale pad drilling,
when there are acreage limitations; however, so efficiency gains are likely to continue within
longer laterals in conjunction with multi-well pads the basin. Figures X. below shows the average
typically offer cost and productivity efficiencies. As lateral lengths and first six-month cumulative oil
an unconventional play, the Permian is relatively production per lateral foot in the Permian Basin.

Figure 6
Permian Basin Average Lateral Lengths and
First 6 Month Cumulative Oil Production per Lateral Foot

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 7
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
Productivity improvements directly 2017 was nearly 1,300 mcf/day. A 2017 horizontal
contributed to the need for both oil and gas well produces twice as much gas in its first year
infrastructure. Just as the oil type/decline curve in production as does a 2014 well. Growth in gas
illustrates year over year gains, so does the productivity combined with relatively inelastic
gas curve depicted below. The average initial development has overwhelmed the Basin’s ability to
production rate for gas from horizontal wells in handle associated gas.

Figure 7
Horizontal Gas Type Curves

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 8
PRODUCTION FROM HORIZONTAL WELLS AND
PRODUCTIVITY GAINS continued
The surge in Permian oil and gas production discounts from WTI (West Texas Intermediate).
volumes to record levels has left the midstream Figure 8. below shows the spread between WTI
sector scrambling to catch up. Some operators are Midland and WTI Cushing crude oil over the past
still enjoying spare pipeline capacity and can ship year, as reflected in the NYMEX futures market.
incremental volumes to desirable market centers, WTI Midland currently sells at a discount of
but many are currently selling their crude at the approximate $8/b to WTI Cushing, up from a low of
wellhead within the basin, receiving substantial $13/b at the end of April.

Figure 8
WTI Midland vs. WTI Financial Futures, NYMEX ($/b)

-5

-10

JUL SEPT NOV JAN MAR MAY

2017-2018

Source: Tradingview

To overcome this discount, Permian operators bottleneck. Temporary solutions, such as rail and
are clamoring to move their crude to higher truck shipping, are being utilized but are very
value markets such as the Gulf Coast or Cushing costly. For growth to continue, multiple pipelines
hub. Many are also using basis swaps to lock in will need to be built, much of them to the Gulf
differentials in financial markets. Several pipelines Coast, allowing for higher netbacks due to export
are slated to come online over the course of 2019 optionality and access to global markets.
and 2020, providing long-term solutions to the

EPRINC: The Permian Basin Produces Gas, Too

Page 9
GEOLOGIC COMPLEXITY, API GRAVITY, AND GAS
TO OIL RATIO
The Permian Basin’s geologic complexity longer than nearby conventional oil and is therefore
plays a direct role in the composition of products. lighter on an API gravity scale. The Bakken
Abundant amounts of natural gas and water are formation produces relatively consistent crude at
mixed in the crude oil stream. As oil output 43 API. The Eagle Ford deepens and becomes more
has risen, so has natural gas. The Permian thermally mature as one moves north to south and
Basin is composed of the Wolfcamp, Leonard, west to east, transitioning from oil to condensate
Avalon, and Bone Spring formations that contain to dry gas. This discrepancy creates a wide gravity
multiple stacked reservoirs, typically interbedded range for both crude oil and condensate. The
sandstones, shales, and carbonates. Here, like in prevalence of stacked payzones in the Permian
other basins, the geology dictates the type of oil Basin also creates varying pockets of API gravity
operators extract from the reservoir, including ranges. Figure 9 below shows production by API
the API gravity of the crude oil which indicates gravity by ranges. DrillingInfo data, collected from
how light or heavy it is. Typically, tight oil is state data, is missing API gravity figures for nearly
often found in rock that is both deeper and tighter 1 mbd of production, but the chart still illustrates
than conventional sources. This means it has not the growth in production of light crude oils, largely
escaped into a trap and has potentially cooked between 41 to 45 API gravity.

Figure 9
Permian Basin Production by API Gravity

Source: PetroNerds, DrillingInfo Note: API gravity for some volumes is reported as unknown or “0.”

EPRINC: The Permian Basin Produces Gas, Too

Page 10
GEOLOGIC COMPLEXITY, API GRAVITY, AND GAS
TO OIL RATIO continued
The figure below shows a geographic than crude oil at 51+ API gravity (blue region),
distribution of production by API gravity. There particularly on the western side of the Delaware
are regions with production closer to condensate Basin.

Figure 10
Map of Production by API Gravity

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 11
GEOLOGIC COMPLEXITY, API GRAVITY, AND GAS
TO OIL RATIO continued
These areas of higher API gravity tend to also higher API gravity and a higher gas to oil ratio,
have a higher gas to oil ratio (GOR). The figure particularly in the 10 to 50 mcf/barrel range.
below illustrates a geographic connection between

Figure 11
Map of Production by GOR

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 12
UNDERSTANDING THE INFRASTRUCTURE CONSTRAINTS
The abrupt rise in Permian Basin oil and well over a dollar under Henry Hub. Some analysts
natural gas production outpaced infrastructure expect the value of gas at Waha to move to zero
development and created transportation sometime this year, implying that there is so much
bottlenecks. These bottlenecks are ultimately gas in the region that producers will have to give it
evidenced by steep price discounts for crude oil away for free in order to find a home for it. Figure
and natural gas within the Permian Basin. Natural 12 below shows Waha Basis Futures, the discount
gas discounts in Waha, the Permian Basin hub, are for natural gas at Waha relative to Henry Hub.

Figure 12
Waha Basis Futures, NYMEX ($/mmbtu)

-0.5

-1

JUL SEPT NOV JAN MAR MAY

2017-2018

Source: Tradingview

Operators face two primary dilemmas with are assuming this window will not be expanded in
associated gas production. One is the difficulty the advent of further bottlenecks and infrastructure
operators face in getting their associated natural constraints. Permian operator Centennial Resource
gas captured and moved to market. The second Development stated the following in their Q1 2018
is earning revenue for their natural gas (this is earnings call:
generally less of a concern right now, which Since the beginning of last year, it has been
depends upon the operator and their share of our goal that we ensure our crude oil production
revenues from natural gas within the Permian will not be curtailed or shut in due to potential
Basin). At present, the primary concern is moving gas constraints. Additionally, we are operating
gas to market so that operators can continue to under the assumption that the Texas Railroad
drill, complete, and increase oil production. If one Commission will not allow us or the industry to
cannot get gas to market, that gas must be flared. flare gas for an extended period when takeaway
Flaring creates several complications, including capacity is full. Therefore, Centennial has put
pressure from the environmental community and several transportation service agreements in place
lost revenues. Texas currently allows operators in order to ensure delivery of its natural gas to
to flare their wells for up to 45 days (with some market.
longer-term exceptions available). Most operators

EPRINC: The Permian Basin Produces Gas, Too

Page 13
UNDERSTANDING THE INFRASTRUCTURE CONSTRAINTS continued
Centennial Resource Development, Q1 2018 Some gas volumes also move north out of Waha
Earnings Call, Seeking Alpha and south into Mexico. A major Mexican pipeline,
The core issue for the Permian is that not El Encino-La Laguna, mentioned below, will come
all companies have adequate gas transportation online later in 2018, helping to move some Permian
agreements in place. Midstream bottlenecks are gas to Mexico. Kinder Morgan’s Gulf Coast Express
not a new problem in oil play development and pipeline is slated to come online in late 2019 with a
plagued essentially every unconventional oil and capacity of 2 Bcf/day. Tellurian, a liquefied natural
gas play in the U.S. over the past decade. The gas exporting company, has planned a Permian gas
Denver Julesburg Basin currently faces oil output pipeline, Permian Global Access Pipeline, which
constraints as operators actively choke back wells could bring gas to the Gulf Coast as early as 2021.
while awaiting gas processing plant capacity to Many other pipelines are in the works and they
come online. Flaring became a contentious issue are expected to bring sizeable volumes of natural
in the Bakken; at one point, over 30 percent gas from the Permian Basin to the Gulf Coast,
of associated gas production was being flared potentially creating new natural gas congestion
and the state of North Dakota faced significant issues in the early 2020s.
environmental criticism. Measures were put in Currently, gas constraints likely pose a more
place and the state significantly reduced flaring immediate short-term threat to overall oil output
through volumetric targets and more accurate growth in the Permian Basin than oil infrastructure
measuring, but mostly the reduction in flaring was constraints. Some operators are in a better position
a result of additional pipelines and processing than others to deal with this over the course of 2018
capacity coming online. Similar growing pains and 2019 due to their commitments with midstream
are being felt in the Permian Basin, but on a much providers for gas. These natural gas constraints, or
greater scale. the ability to move additional and growing volumes
A plethora of projects for both natural gas of natural gas, are more likely to impact crude oil
and crude oil are slated to come online over the production than costly oil transportation options
next couple years, but these timelines could cause (trucking or rail). However, both could impact the
constraints in output in the short-term. Currently, number of drilled but uncompleted wells (DUCs)
Permian natural gas flows into the Waha hub and for individual operators. Note the DUC count has
then onward in multiple directions, mostly flowing been rising in the Permian Basin since late 2016
both east and west out of Texas and New Mexico. along with the rise in the rig count and oil prices.

EPRINC: The Permian Basin Produces Gas, Too

Page 14
UNDERSTANDING THE INFRASTRUCTURE CONSTRAINTS continued

Figure 13
Permian DUCs

Source: EIA data

Figure 14
Oil Prices and Permian Rig Count

Source: EIA, Baker Hughes

EPRINC: The Permian Basin Produces Gas, Too

Page 15
UNDERSTANDING THE INFRASTRUCTURE CONSTRAINTS continued
Natural gas infrastructure must be diligently yet have the infrastructure in place to capture this
developed from the wellhead to the end user if gas and move it to the appropriate demand centers.
the basin is going to keep growing oil production. Three pipelines came online in 2017 to help
Increasing volumes of natural gas need to be moved bring natural gas from the Permian Basin into
out of Waha and to the Gulf Coast where the gas Mexico. Trans-Pecos Pipeline and Comanche Trail
can either be processed and sent to the consumer or pipeline are both operated by a consortium between
exported via LNG (liquefied natural gas). Mexico Energy Transfer and Carso Energy, and their
also plays an increasingly important role here: the capacity is 1.36 Bcf/d each. Oneok, in conjunction
Permian is increasingly dependent on Mexican with Fermaca, also brought online the Roadrunner
demand growth as a means for alleviating natural pipeline with 0.57 Bcf/d of capacity.
gas bottlenecks. Unfortunately, these pipelines are not met
with the necessary infrastructure across the
Gas Exports to Mexico border. These delays are mainly an issue of local
Rising gas production, particularly in the land owner opposition and tedious land titling
southern part of the Permian Basin (Delaware side), requirements. The El Encino-La Laguna, a national
has created an immediate need to push additional pipeline which will have a capacity of 1.5 Bcf/d,
volumes of gas into Mexico from the Waha hub in is projected to come online in November 2018.
the Permian Basin. While Mexico increased its Once that happens, the El Encino-La Laguna
cross-border pipeline expansion in recent years to is expected to connect with the downstream
allow U.S. gas to flow into Mexico and offset its pipeline, Laguna-Aguascalientes, which extends
declining domestic energy supply, there are still 442 km further south and reaches Villa de Reyes-
several obstacles before it can increase its natural Aguascalientes-Guadalajara. These pipelines will
gas capacity in-take. Infrastructure delays within have a total capacity of 3.5 Bcf/d, feeding into CFE
Mexico’s distribution network place a capacity power plants, and additional pipelines, helping to
cap on existing pipelines. Therefore, the nearly better match the nameplate capacity above with
3.5 Bcf/d of nameplate capacity out of the Permian appropriate capacity and demand across the border
Basin into Mexico is misleading as Mexico does not in Mexico.

Figure 15
Cross-border Pipelines from the Permian Basin to Mexico

Source: “Avances en la Apertura del Mercado de Gas Natural.” Comisión Reguladora De Energía, July 11, 2017.
Accessed June 01, 2018.
EPRINC: The Permian Basin Produces Gas, Too
Page 16
UNDERSTANDING THE INFRASTRUCTURE CONSTRAINTS continued

Table 1
Cross-border Pipelines from the Permian Basin to Mexico

A special thanks to Emily Medina with EPRINC for her comments and contribution on pipelines to Mexico. More information
on Mexican natural gas demand and infrastructure can be found in a report from EPRINC on this topic by Emily Medina.

A Note Crude Oil Infrastructure early as 2019. Plains All American has two smaller
As with gas, the Permian Basin will see a expansions in play that will help move additional
pipeline buildout and multiple projects are planned volumes to Cushing and to Houston. Magellan still
and in place to begin moving large volumes of crude plans to move forward with its 600,000 b/d pipeline
as early as 2019. Current providers are increasing to the Gulf Coast and believes it can be in service
capacity incrementally as fast as possible by mid-2019. P66 has a much larger scale pipeline
means of DRAs (Drag Reducing Agents). Multiple planned called Gray Oak that will bring 1 mbd from
midstream providers are moving in to bring online the Permian to the Gulf Coast as early as Q4 2019.
additional capacity for crude oil to the Gulf Coast as

EPRINC: The Permian Basin Produces Gas, Too

Page 17
CONCLUSION
Figure 16 depicts historical Permian Basin an extrapolation of today’s activity levels over the
oil production and monthly well additions (among next two years. In this scenario production reaches
currently active wells) adjacent to two production nearly 4 mbd in early 2020. The hypothetical
forecasts. The reference case forecast carries restrained case, or maintenance scenario, represents
forward current well addition rates and allows a scenario in which needed oil and gas midstream
for very modest productivity gains while also projects are delayed or cancelled, leaving
accounting for declines in producing wells. This is operators to contend with maxed out midstream
not necessarily a “most likely” scenario, but rather infrastructure.

Figure 16
Permian Oil Production Forecast and New Well Additions Under Two Scenarios

Source: PetroNerds, DrillingInfo

The restrained case reduces monthly transported from the wellhead by anything other
well additions by one-third in late 2018, thus than pipe. This leaves operators with little
maintaining production at around 3 mbd before alternative but to not produce when no takeaway
beginning to grow again in late 2019. This scenario, capacity is available and flaring windows close.
while purely hypothetical, reflects several factors Gas flow constraints are further complicated by
which could ultimately lead operators to reduce economic factors on the oil side. The financial
capital outlays should there be uncertainty spread between WTI Midland and WTI Cushing
regarding both oil and gas takeaway capacity. crude is nearly $10/b. But operators without
On the gas side, a lack of takeaway capacity via pipeline access to markets at fixed rates are subject
pipeline would leave operators with only two to increasing tariff rates or trucking costs. This
options: flare or shut-in/withhold new wells. could exceed the reported spread. Furthermore,
Unlike crude oil, natural gas cannot be readily independent Permian operators are mostly hedged

EPRINC: The Permian Basin Produces Gas, Too

Page 18
CONCLUSION continued
at below $60/b, meaning they are taking a haircut complete stall in production growth. But without
of around $10/b on hedged barrels. Combined, pipeline access for additional barrels, producers
these economic factors may force some operators will have to move to higher cost methods such
to reduce capital outlays and activity levels until as trucking, thus limiting production upside.
transportation constraints dissipate. Associated gas volumes must be dealt with and in
The restrained case effectively works the absence of market access, flaring would be at
backwards to illustrate what a worst case midstream best a controversial and temporary solution.
scenario would look like given a stable $65/b One tangential benefit is that service costs
WTI-Cushing price. To work within existing would likely drop, enabling a more rapid build
infrastructure availability, well additions and most of the DUC inventory. Ultimately the timing and
overall activity levels would need to drop by one duration of infrastructure shortages will reverberate
third. The loss of nearly 1 mbd of growth over the throughout oil markets. U.S. shale is being counted
next two years would significantly impact global on to add significant barrels in the coming years to
prices upwards and reduced activity levels would help meet global demand needs, particularly given
leave a noticeable economic and employment the ongoing collapse of Venezuela’s oil industry and
impact in the US. the reimposed U.S. sanctions on Iran. Infrastructure
In practice, leasing requirements and other constraints can and will be sorted out, but the
non-price-related incentives may mitigate a timing and scale of such fixes remain critical.

EPRINC: The Permian Basin Produces Gas, Too

Page 19
APPENDIX
Like the growth in natural gas production from the remaining water means very high volumes of
the basin, water production also continued to grow. water are being sent to disposal wells. While no
The Permian Basin historically produces high water significant issues have arisen from this to date,
volumes, again, due to the geologic nature of the there are concerns about increased seismicity on
basin; however, horizontal drilling and increased the Delaware side of the Permian Basin. The costs
productivity catalyzed a sharp rise in produced associated with these high water cuts are steep:
water output, along with oil. With produced water higher water production means operators are paying
comes the need for disposal, and many operators more for disposal costs per barrel of oil produced.
do in fact recycle their produced water and use The need for effective water transportation,
it for fracing other wells; however, the volumes disposal, recycling, and handling is critical for
are significantly higher than could be demanded continued oil growth in the Permian Basin.
by fracturing needs. The required disposal of

Figure 17
Permian Basin Water Production

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

Page 20
APPENDIX continued

Figure 18
U.S. Production of Crude Oil

Source: EIA

EPRINC: The Permian Basin Produces Gas, Too

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APPENDIX continued
U.S. production sits at 10.5 mbd as of March the Williston Basin (Bakken), Eagle Ford, Denver
2018. Production continues to rise after a temporary Julesburg Basin, Powder River Basin, and Permian
decline, in the face of low oil prices, largely driven Basin now contribute 6 mbd to U.S. production.
by growth from the Permian Basin in Texas and The figures below show the average water
New Mexico. Production from the Permian Basin production decline curve and average gas
stands at 3 mbd, contributing to roughly half of U.S. production decline curve for horizontal wells in the
shale/tight/unconventional production. Together, Permian Basin.

Figure 19
Texas and New Mexico Permian Basin Production

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

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APPENDIX continued

Figure 20
Horizontal Water Decline Curve

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

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APPENDIX continued

Figure 21
Horizontal Gas Decline Curve

Source: PetroNerds, DrillingInfo

EPRINC: The Permian Basin Produces Gas, Too

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