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Permian Shows Growth, But is it Enough?

November 10, 2016 | By Charles Nevle

There are 3,108 counties in the Lower 48 United States. At PointLogic Energy, we categorize assign every one of these counties into one of 92 Producing Areas, in which we report natural gas production on a daily basis. That means that if today’s dry production total is 70 billion cubic feet per day (Bcf/d), PointLogic breaks the volume into 92 pieces to allow a highly granular understanding of production trends and dynamics. In this edition of Get the Point, we will examine production trends in the largest of Lower 48 states, Texas, and its impact on Lower 48 natural gas production.

Of the 3,108 counties in the Lower 48, 254 are in Texas. Texas has by far the most number of counties of any state. (Georgia, surprisingly, has the 2nd largest number of counties at 159.)

Texas also has the largest number of Producing Areas of any state: 17. The map below shows the names and county groupings of the Producing Areas that PointLogic uses for Texas.

PointLogic Producing Areas for Texas

Having 17 Producing Areas in Texas allows for a great deal of granularity for analysis. For instance, both Eagle Ford and Permian are each broken into three separate Producing Areas, with the Permian having an additional Producing Area in New Mexico.

While having this level of granularity is helpful for diving deep, it can also obscure the bigger trends taking place. The chart below, which shows Texas dry gas production by Producing Area, is an example.

Texas Dry Production by Producing Area

The chart shows the long, slow decline of several plays and the rise of others, but it is a bit too busy to clearly derive what’s happening with production. By grouping together some of the Producing Areas, a clearer picture emerges below.

Texas Dry Production by Production Group

The chart tells us that for the past few years the only regions with increasing production in Texas were the Permian and Eagle Ford. In addition, it shows that since 2015, the Eagle Ford has been in a steep decline and only the Permian region continues to grow.

The Barnett, the Texas portion of the Haynesville, Gulf Coast and Other areas have all been in decline as operators focused drilling efforts in oil-producing areas, notably the Permian and Eagle Ford. However, when oil prices turned south in 2015, rigs dropped in both the Permian and Eagle Ford, too. As oil prices have recovered somewhat this year the Permian has been the only area to see a strong uptick in drilling activity, which has enabled the region to return to growth after several months of languishing production.

Permain and Eagle Ford Rigs

Productivity improvements are making the Permian the lowest-cost source of incremental oil production. Since reaching a low in May 2016, Permian rigs (including Permian New Mexico) are up by 69, a 50% increase from bottom. However, Eagle Ford rigs are up only two over the same period.

In fact, 52% of all the rigs added in the Lower 48 states since May have been in the Permian. At current oil prices, the Permian is the only oil play with superior economics, hence about 40% of all rigs operating in the Lower 48 are now in the Permian.

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Outside of Appalachia and especially in the Permian, the focus is on oil production, not natural gas. If you browse through the investor presentations of the region’s operators, gas is barely mentioned – in this region gas is truly a byproduct. The economics of the play are driven by oil, and the region produces a great deal of it: about 2.1 MMb/d, or about 25% of all oil produced in the Lower 48. Meanwhile, the region is the source of about 8% of all dry gas produced in the Lower 48.

When oil prices were in the lofty range of $70 per barrel and above, a multitude of plays in the U.S. were in the money, and operators spread their efforts accordingly. However, as oil prices have struggled to stay above $45 per barrel, operators have focused on regions where break-evens make sense in this more disciplined environment.

As is occurring in several plays, operators in the Permian are continuing to drive down costs and improve production efficiencies and thereby advance economics. Tighter well spacing, more frac stages, greater use of proppant and longer laterals have been combined with reduced outlays to service companies.

Pioneer Natural Resources is one of the Permian’s largest producers and has shown the largest production growth for both oil and gas this year. The images below are from Pioneer’s 3rd quarter earning’s release presentation, and they show the types of cost reductions and production efficiencies being noted by many of the region’s operators.

Drilling & Competion Cost per Perforated Lateral Foot

Source: Pioneer Natural Resources

Completion Optimazation Program

Source: Pioneer Natural Resources

PointLogic’s colleagues at IHS Markit place breakevens for average acreage at below $44/bbl West Texas Intermediate crude, with top acreage breaking even near $30/bbl. And of course, the stacked nature of the plays and the overall size of the combined Permian plays provide lots of opportunity for continued growth in the region for years to come. Apache's recent discovery of the Alpine High suggests the region could be poised for continued growth although there is limited data upon which to validate Apache's announcement.

The Eagle Ford is seeing similar improvements in efficiencies and cost savings, but for other reasons the picture isn't as bright. Much of the crude being produced from the Eagle Ford is extremely light (+50o API, otherwise known as condensate) and trades at a strong discount to West Texas Intermediate. According to Flint Hill Resources, the current discount ranges between $11/bbl to $14/bbl, which puts the fortunes of the Permian and Eagle Ford on much different paths.

Eagle Ford Production by Producing Area

If oil prices continue to languish below $50/bbl, it is difficult to see a strong incentive to reverse the Eagle Ford’s fortunes. However, given that the forward curve for crude oil is in strong contango and operators are continuing to drive down costs and increase well productivity, we should see rigs returning to the region over this winter.

But keep the big picture in mind: Texas natural gas production has been in decline. In December 2014, Texas dry gas production averaged over 20 Bcf/d, and now it's below 17 Bcf/d. Growth in the Permian has not been enough to overcome declines elsewhere in the state.

Natural gas production growth in the U.S. Lower 48 has come from associated gas in the South and from Appalachia. Gas supply to Henry Hub is somewhat tight, with associated gas still in decline and delays to pipeline exapansions out of Appalachia. As discussed in an earlier Get the Point, numerous projects are scheduled to come online in 2017 to help de-bottleneck the region, but these projects are not slated to come into service until late in the year, and some of these projects are in real danger of being pushed back a year or more.

In the meantime, incremental demand from U.S. LNG exports continue to climb, with Sabine Pass exports setting new records on a daily basis near 1.5 Bcf/d. U.S. pipeline exports to Mexico have also been increasing, reaching a new high of 4 Bcf/d in August. Rising demand and pipeline projects within Mexico and border crossing projects in Texas to serve that demand over the next few years will compete with regional LNG exports projects for Texas supply and inflows from other regions.

The only gas price responsive play with adequate pipeline capacity to Henry Hub, should Texas production stay in decline and the Northeast remain outflow constrained, is the extremely prolific dry gas Haynesville play. The Haynesville could play an increasingly important role in balancing supply to Henry Hub and the Southeast.

In upcoming issues of Get the Point, we will take a fresh look at the Haynesville and how efficiencies being gained there could help this dry gas play compete in an capital-constrained environment where only Northeast gas and oil plays have attracted significant attention and investment. We’ll look at Haynesville in the same manner as Texas, using county level Producing Area data to examine what has happened and what might happen in the future.

Meanwhile, stay tuned to PointLogic as we monitor the situation on the ground in Texas. With structural demand gains occurring literally in the Eagle Ford’s backyard and the future of the price of oil still uncertain, changes will occur. We’ll be paying close attention to any recovery in gas production in Producing Areas and the state of Texas in general.

The Natural Gas Next agenda and registration information can be found here.

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