Dallas Fed: Permian production will continue to rise

Energy markets in the Federal Reserve’s 11th District were “moving sideways” in July, according to the monthly energy indicators issued by the Federal Reserve Bank of Dallas.

Kunal Patel, the senior research analyst who prepared the report, told the Reporter-Telegram he attempts to highlight interesting trends in the monthly reports, the fourth of which was released in mid-August.

“Prices have been moving sideways,” he said by phone from his Dallas office, explaining in part his comment about sideways energy markets.

The average spot price for West Texas Intermediate in July was $46.63 a barrel, up from $45.18 in June.

“Large independents are still making money at that price, with good acreage, primarily in the Permian,” Patel said. 

Hedging contracts will also help carry that momentum through the remainder of the year, he said.

When it comes to the Permian, “activity has been strong, and production has risen consistently,” Patel said. 

July production in the Permian rose 68,100 barrels per day to 2.47 million barrels per day. 

Production in the district’s other major play, the Eagle Ford, has been rising since hitting bottom in November 2016. In July, 41,400 barrels per day were added, for a total of 1.35 million barrels per day.

Patel sees Permian production continuing to rise, aided in part by expansion of the BridgeTex Pipeline from 300,000 barrels per day to 400,000 barrels per day this year.

“The biggest thing I’ve seen is the Energy Information Administration seeing Permian production rising to 2.9 million barrels a day by the end of 2018,” Patel said. “It’s now at 2.47 million barrels; they’re seeing another 500,000 barrels a day by the end of 2018. That’s a lot of barrels.”

Rising drilling activity should help contribute to that prediction, with the Permian’s rig count at 379 in July. There were 76 rigs operating in the Eagle Ford at the end of the month.

Drilling activity has been helping -- -- and should continue to help -- oil and gas employment, a hot topic in the district, Patel said.

Texas oil and gas employment expanded for the seventh consecutive month. In June, 4,300 jobs were added, bringing total employment to 223,300. Gains were largely in what Patel said are support services, where 4,400 jobs were added, while oil and gas extraction companies cut 200 jobs.

Also helping create jobs is the inventory of drilled, uncompleted wells, Patel said. That inventory reached an all-time high in the Permian Basin, jumping to 2,330 from 2,195 in July. There were 485 wells drilled but only 350 were completed.

“It will take to work off that inventory and that will create more jobs,” he said. 

He estimates that if there were no new wells drilled at all in the Permian, it would take six to seven months to eliminate that inventory.

Recent changes to the nation’s crude imports may impact efforts to draw down high crude supplies and support price levels, Patel said.

He said Saudi Arabia is following through on its pledge to reduce exports of its crude, particularly to the United States, with the U.S. receiving 870,000 barrels a day in July, down from 876,000 barrels a day in June. Imports from Saudi Arabia averaged 1,097,000 barrels a day in 2016.

At the same time, imports of crude from Iraq rose to 710,000 barrels a day from 702,000 barrels a day in June. Iraqi imports averaged 417,000 barrels a day in 2016. Patel explained that the rise in Iraqi imports is offsetting the decline in exports, hampering drawdowns from U.S. inventories.

Exports of domestic crude, primarily the light sweet crudes coming from the nation’s shale plays, are helping but Patel said the average daily export of about 800,000 barrels a day is 10 percent of the 8 million barrels the nation imports daily.

He said he looked at the Haynesville natural gas play, which covers parts of East Texas and northern Louisiana, calling it a “forgotten region, but there’s been a little uptick.”

The rig count there has risen to 42, and the play’s share of natural gas-directed rigs has risen to 22 percent. Patel cited better economics in the Haynesville’s “sweet spots” as well as its location close to current and proposed liquefied natural gas export terminals as reasons for the uptick.

The U.S. expects to continue increasing its crude production, and “most of that increase will come from the Permian Basin and longer-lived projects in the Gulf of Mexico,” Patel said.

“The U.S. is really focused on the Permian Basin; it has great acreage and 40 percent of the rigs in operation are in the Permian. So it makes sense the increase will come from the Permian and longer-lived projects in the Gulf of Mexico,” Patel said.