Survey: Permian gut check: Correction

Corrects units in 2nd paragraph to b/d.

US midstream companies are pursuing a new phase of long-haul pipeline expansions from the Permian basin despite lower prices and investor pressure that has cooled the region's blistering output growth cycle.

The Permian basin has been a juggernaut for US producers, with output quadrupling from under 1mn b/d in 2010 to more than 4.5mn b/d in October, according to the US Energy Information Administration (EIA). US midstream developers have responded with a wave of new long-haul pipelines to shuttle the torrent of supply to Houston, Corpus Christi and beyond.

The 670,000 b/d Cactus 2 and the 400,000 b/d Epic line went into service in August moving Permian crude to the Corpus Christi area. Phillips 66's 900,000 b/d Gray Oak pipeline is expected to enter service this month, moving Permian basin crude to Corpus Christi, Texas, for export.

The new takeaway capacity comes amid signs that Permian basin growth is slowing. Output has risen by 55,000 b/d a month on average this year, around half of last year's rate. Producers, eager to show they can return profits to investors rather than spend more on exploration, are curtailing their operations in the prolific basin. The number of rigs drilling for oil in the Permian has fallen by more than 15pc since peaking late last year.

Plains All American Pipeline is forecasting a slowing of Permian output growth. Permian output grew by 1mn b/d in 2018 and growth fell to 800,000 b/d in 2019. Plains said it expects Permian output to grow by 500,000 b/d in 2020, about 100,000 b/d less than its prior estimate.

Plains has lowered expectations for growth in pipeline tariff fees as well as earnings from its supply and logistics segment as new Permian takeaway capacity enters service.

"The new takeaway capacity relieves infrastructure constraints, which have supported strong spot volume throughput and high utilization on our Permian long-haul systems," Plains chief executive Wilfred Chiang said on a 5 November earnings call.

A good thing

Midstream developers like Phillips 66 see the slowdown as a good thing, pointing out that the Permian could not sustain its meteoric growth path.

"I do not think we could continue to grow at 1.6mn b/d in the US against world demand growing at 1.1mn b/d," Phillips 66 chief executive Greg Garland said on a 25 October earnings call. "I do not think that is particularly healthy for the industry."

Despite more bearish fundamentals, midstream developers say they have planned their next phase of pipeline developments based on customer commitments that insulate the assets from slowing production.

Phillips 66's joint venture Red Oak project, with Plains All American Pipeline, will transport Permian production and crude from the Cushing, Oklahoma, storage hub to ports along the Texas coast. The Liberty pipeline, a joint venture with Bridger, will move 350,000 b/d of Rockies and Bakken production to Corpus Christi.

"For us, in all of our business segments, we need a strong, viable upstream business in the US," Garland said. "From a high-level standpoint, I do not view the slowing growth as negative."

Enterprise Products Partners said it expects Permian crude volumes to stay strong despite recent drops in the overall US rig count. Enterprise's Permian customers are large producers like ExxonMobil that are not planning to rein in output.

Enterprise chief executive Jim Teague said on a 28 October earnings call that "I do not see someone like Exxon or Chevron slowing down."

While many other clients plan to cut their spending, they will still increase production through efficiency gains and by bringing drilled-but-uncompleted (DUC) wells into service, Enterprise said.

The Permian had more than 3,600 DUC wells as of September, according to the EIA. Though capital expenditures could drop by 10-15pc, volumes could rise by a similar amount, Enterprise said.

Midstream developer NuStar Energy is not expecting Permian production to slow despite recent declines in the US rig count, chief executive Brad Barron said on a 5 November earnings call. "We have not seen any evidence of that in our system." NuStar expects Permian volumes to rise to 450,000 b/d by the end of the year.

But service providers, the canaries in the coal mine when it comes to slowing upstream activity, are less than bullish over their prospects for the rest of this year and next. The top two firms in the sector, Schlumberger and Halliburton, are bracing for drilling operations to decline further, prompting both to rethink their North American strategies.

Schlumberger expects a deeper year-on-year decline in drilling and well completions in the fourth quarter. The "US production growth rate has declined for the last eight months and it is expected to drop further in 2020," chief executive Olivier Le Peuch said. And Halliburton said it idled more equipment in the third quarter than it did in the first half. Firms are slowing activity because "instead of counting [fracking] stages, they will want to make every stage count," chief executive Jeff Miller said.

Differentials for key US basins