Permian watch: America’s hottest shale play is slowing down
HOUSTON (Bloomberg) --The engine of America’s shale boom is beginning to sputter.
Slowing Growth
The almost relentless thrust that has doubled crude output from the Permian basin in three years is showing some signs of waning. Oil flows from the formation spanning West Texas and New Mexico are set to increase by less than 1% in August from July, data from the Energy Information Administration show. So far this year, the monthly rate has only exceeded 2% once, compared with six times in 2018.
Producers are dialing back growth plans due to a manifold of problems, including pipeline jams, slower flows from wells drilled too close together and higher costs for acreage. The dilemmas are killing returns and keeping investors at bay.
Permian explorers such as Parsley Energy are cutting their 2019 growth rates by as much as 40 percentage points below last year’s. The number of rigs in the basin has dropped 10% from a peak in November to 437 last week, the least since March 2018, according to data from Baker Hughes.
Consolidation
More Permian drillers are combining after the blockbuster $38 billion Occidental Petroleum takeover of Anadarko Petroleum two months ago. Callon Petroleum agreed to buy Carrizo Oil & Gas for about $1.2 billion in an all-stock deal Monday.
It’s a move many investors have demanded. Ben Dell, founder of activist investor Kimmeridge Energy Management, said in March that there are 20 shale drillers that should combine. Kimmeridge targeted Carrizo last year, pushing for more asset sales or an outright merger.
Beyond flat-out mergers, producers including Pioneer Natural Resources, Devon Energy and Apache have sold off less-important leases as they seek to tap their most productive acreage. That’s after stock offerings from the shale patch shrank last year to the lowest since at least 2006, down more than 60% from 2017.
Plastics
Meanwhile, a wave of multibillion-dollar petrochemical plants are being built along the U.S. Gulf Coast to take advantage of cheap feedstock from the Permian to make plastic raw materials. The latest one to be announced is an $8 billion partnership between Qatar Petroleum and a Chevron-Phillips 66 joint venture.
Plastics Unleashed
That follows Exxon Mobil and Saudi Arabia’s state-controlled petrochemicals company formally approving construction of a new chemical complex in Texas last month. Demand for plastics is growing more than 4% a year, Chevron Phillips Chemical Chief Executive Officer Mark Lashier said.
Mexico Connection
A dispute between Mexico and pipeline companies threatens the much-needed relief valve for natural gas from the Permian, where the fuel is a byproduct of oil output. The country’s state-run power utility is considering about $3 billion in arbitration against pipeline operators in a tussle that could discourage investments.
Contract Tussle
That’s bad news for American drillers, who have looked forward to conduits coming online on time to haul stranded gas south of the border. Prices in the Permian have dipped into negative territory multiple times this year, meaning producers were paying customers to take their gas so they could keep the oil flowing.
