Oil production from the Permian Basin could grow at a "stunning" rate over the next half-decade but will have to overcome water and pipeline capacity issues to reach its full potential, according to a pair of reports.
The Permian, centered in West Texas, is already regarded as the world's hottest unconventional play, with production increasing by more than 1 million barrels per day since the start of 2017. Even though the present shortfall of pipeline capacity for both oil and associated gas is well-known, IHS Markit said in a research report that the Permian will be able to overcome its obstacles to increase production by nearly 3 MMbbl/d by 2023.
The analysis firm called its projections "stunning," saying total production in the Permian could reach 5.4 MMbbl/d, an increase of 116%, in five years. That would mean the play would outproduce all OPEC countries except Saudi Arabia. Production of natural gas and NGLs is also expected to increase considerably, reaching 15 Bcf/d and 1.7 MMbbl/d, respectively. Those totals would represent increases of 114% and 105% over current production levels.
"Nearly 41,000 new wells and $308 billion in upstream spending between 2018-2023 will drive that growth," IHS said. The firm said that if oil prices remain above $60/bbl as projected in the study, the massive price tag associated with upstream spending "will not be the primary challenge." Instead, it will be the lack of infrastructure that holds up the Permian boom.
"The infrastructure challenges in the Permian illustrate a fundamental mismatch between upstream oil producers and midstream players," said Jim Burkhard, IHS Markit's head of crude oil markets. "The former are focused on fast growth, while the latter require sustained high utilization of infrastructure over decades for projects to be viable."
A report by Wood Mackenzie pointed to another possible barrier: a lack of water. With the number of hydraulically fractured wells increasing at a rapid pace, most water unable to be reused and an increased amount of water needed over the life span of a well, readily available sources for the Permian could run dry soon.
"The sheer volume of water is unprecedented. Record drilling activity is compounded by more water used in completions and water cuts from the targeted formations rising quickly in older horizontal wells," the firm said. "In some cases, water-to-oil ratios in the Delaware Basin can reach as high as 10:1 and operators are simply unable to cheaply reinject all those volumes."
Wood Mackenzie said its projections of rising water cuts and growing water management costs indicate a cost increase for oil produced in the Permian's Midland and Delaware basins of $3/bbl and $6/bbl, respectively. Such an increase, the firm said, would be enough to cut its oil supply forecast from the Permian by 400,000 bbl/d by 2025.
"If Permian oil production approaches 6 million b/d by 2025, the average water cut in the region is 4:1, and we assume total water management costs at … US $2/bbl. As a result, the annual water-related expenditure in the region could reach US $17 billion, or nearly 20% of total drilling expenditure this year," the firm said.