End is near for "frac holiday" as Permian readies for 2019 boom

HOUSTON (Bloomberg) -- The oil fields of West Texas don’t sit still for long.

Take Carrizo Oil & Gas Inc.’s operations, for instance. Just three months after moving drill rigs out of the Permian basin because of pipeline shortages, the Houston-based explorer is already talking about bringing them back in the middle of next year.

That’s one of several signs the end may be near for a self-imposed slowdown executives call a “frac holiday.”

The result: Carrizo will reach an “inflection point” in 2019 where both production and cash flow begin to rise together, CEO Chip Johnson said on a conference call Tuesday. In other words, things will soon be booming again.

Carrizo is among many smaller operators forced to slow activity in the U.S.’s biggest oil field towards the end of this year after the Permian’s rapid production growth overwhelmed pipelines. The lack of conduits left oil almost trapped, lowering in-basin prices to almost $18/bbl, or 26%, below the U.S. benchmark in September.

But with at least three major pipeline projects scheduled to come online next year, producers are now seeing the problem as a mere footnote in the basin’s ongoing story of surging production growth.

“It will be a series of events throughout 2019 that occur” to ease the bottleneck, Halliburton Co. CEO Jeff Miller told Bloomberg TV this week. “It’d be easy to see, as we finish the year, things being perfectly normal.”

This year, the number of wells drilled but waiting to be fracked has increased 50% to 3,722, indicating a new wave of production is set to be unleashed once the pipes are ready, spending budgets are approved and frack crews are available.

This matters to world oil markets. West Texas Intermediate has tumbled almost 20% since the beginning of October as fears over U.S. sanctions against Iranian ease. Added production from the Permian would further this trend. Indeed, it bolsters the view that American oil production is in an exponential growth phase.

The U.S. surpassed Russia in August to claim the title of the world’s top oil producer after posting the largest year-on-year output increase in its history. The Permian accounts for about a third of the country’s output and is the world’s fastest-growing major oil field. Consultant Rystad AS sees U.S. production climbing another 45% to as much as 16.5 MMbpd by 2030.

Permian legend Mark Papa, who was a pioneer of U.S. shale as CEO of EOG Resources Inc. from 1999 to 2013, agrees that pipeline shortages “should go away by year end 2019” and may even turn into a surplus.

However it’s not all plain sailing thereafter, Papa, who’s now CEO of Centennial Resource Development Inc, said in an interview last month.

“Some of the other issues like personnel and water handling issues are some of the more long term issues,” he said. There are “insufficient people to get the work done.”