Energy producers and analysts alike have said the Permian Basin’s shale industry is in its early innings.
But the industry is rapidly maturing, and a new study cautions that transition means an industry shakeup is looming for the Permian Basin.
A paper commissioned by Hastings Equity Partners, in partnership with the University of Houston Energy Research, notes that in the early days of the shale revolution, independent producers were able to acquire leases, assets and mineral rights more nimbly than the majors, and were profitable.
Today, the majors are on the rise and are projected to produce more than half of the Permian’s oil over the next four years. They are able to speed up production and decrease margins by consolidating production, resources and supply chains. ExxonMobil and Chevron each have announced plans to increase their Permian production to more than 1 million barrels a day in the coming years.
The paper notes that the majors’ ownership stakes in pipelines, refineries and petrochemical facilities will force smaller independents to develop international export markets.
The paper also cautions that, despite more than $90 billion in construction projects along the Gulf Coast for terminals, liquefied natural gas, refining and petrochemical facilities, and another $200 billion planned for the next 10 years, those projects can’t keep up with the amount of oil that will be coming out of the Permian Basin.
And the paper contains warnings for service companies, whicj will be impacted by the expected consolidation among producers. But the paper also sees opportunities in the growing supply of natural gas being produced alongside crude oil. Capturing, marketing and delivering that gas to customers will provide new revenue streams, the paper said.
Tanner Moran, managing director of Hastings Equity Partners, provided additional insight into the research’s findings by email with the Reporter-Telegram.
Q. This sentence in the executive summary discussing the majors transforming the supply chain caught my eye: ‘This will lead to the gradual erosion and ultimate destruction of enterprise value among many oilfield services companies due to the lack of pricing power.’ What exactly does that mean or could mean?
A. As independent producers merge to compete with major oil operators, there are fewer customers for service companies. As demand for service companies falls, they will have limited pricing power and will see increased competition for work, which will result in long-term value destruction. Only scaled, well-managed service platforms that have the technology, service quality, and safety culture required to support major operators will survive.
Q. Do you see independents willing to band together to develop export markets? What do you think that should look like?
A. Independent producers will continue to merge with their industry counterparts. The opportunity to combine balance sheets, streamline operations, enhance the reserve base, and develop export capability are a few of the key factors driving these mergers. We expect that activity to continue. If companies combine, they can cut operational redundancies and pool those savings to hire marketing expertise to build name recognition with sophisticated foreign customers with whom they have no established relationships.
Q. Amid all the talk about the pipeline constraints in the Permian over the last year, concern was raised that the bottleneck would merely be moved from the Permian Basin to the Gulf Coast, as you stated in your paper. Do you see it as a temporary thing as the port(s) build out their export facilities? What suggestions can you offer producers to cope in the meantime?
A. The bottleneck in midstream takeaway capacity is moving to the Gulf Coast. The downstream market is not able to keep pace with the production growth. It will take at least a decade to establish sufficient capacity along the Gulf Coast. The comfort for the producer is that there is strong demand for their barrels internationally and significant margin in those barrels being sold. Producers need to tap the creativity and innovation that has been a hallmark of this industry in order to accelerate the construction timeline to capitalize on international demand.
Mella McEwen is the Oil Editor and covers the latest business and energy news. Read her on our news site, MRT.com. |mmcewen@mrt.com|
Read it from MRT – Photo as publised on MRT (Callaghan O’Hare/Bloomberg/
A new paper from Hastings Equity Partners and University of Houston Energy Research cautions that a shakeup looms for the Permian Basin energy industry as majors like Shell, ExxonMobil and Chevron begin to dominate activity in the region. )
