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Permian crude producers work to reduce exposure to deep price discounts

Washington — Permian crude producers are working on ways to reduce their exposure to deep price discounts, company executives said Tuesday.

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* Noble pricing more crude in Gulf Coast

* Encana sees wider Midland discounts ahead

* Permian production grows in Q1

Noble Energy aims to sell less than 20% of its US onshore oil at the Midland, Texas basis this year as it works to move more crude to the US Gulf Coast, executives said on the company's first quarter earnings call.

Noble's EPIC pipeline to deliver an initial 590,000 b/d of Permian and Eagle Ford crude to Corpus Christi is still slated to start up in the second half of 2019.

Gary Willingham, executive vice president of operations, said the company is negotiating final agreements for long-term firm transportation on EPIC.

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"Along with providing flow assurance, these agreements will secure access to premium-priced markets with refining and export opportunities at an attractive transportation rate," Willingham said. "Ultimately we feel secure both in our ability to get our volumes to market and to maximize value."

Midland WTI crude averaged at an $8.25/b discount to Houston WTI crude in April, widening from a $2.82/b discount in February, S&P Global Platts assessments show.

The discount has widened as Permian crude production is outpacing pipeline takeaway capacity.

While Noble did not give exact figures, an earnings presentation graphic showed more than one-third of Noble's US onshore oil being priced at the Gulf Coast by 2020, from around 10% this year. The share of crude priced off Cushing, Oklahoma would fall to less than half in 2020, from more than half this year.

WTI priced at Cushing averaged at a $3.11/b discount to Houston WTI in April.

In a separate earnings call Tuesday, Encana said it was also working to reduce its exposure to Midland prices.

"In the Permian, we used a combination of gathering systems, physical sales of crude from the basin and takeaway capacity on long haul pipelines to mitigate our exposure to the Midland price differentials and realized prices of $63.27/b," Renee Zamljak, executive vice president for midstream and marketing fundamentals, said.

That would put Encana's prices at roughly 77 cents/b above the average price of spot Midland WTI for the first quarter, although $2.69/b below the spot price of Houston WTI.

Encana has deal to use midstream player Medallion's crude gathering network in the Permian, and also has capacity on long-haul pipelines that allows it to ship barrels to the US Gulf Coast and fetch higher prices, Zamljak said.

"We saw this [shortage in pipeline takeaway capacity] coming for quite some time and are now concerned the Permian Basin will need trucking and rail to take the barrels to the market," said Encana CEO Doug Suttles on the call, adding Encana is expecting the WTI Midland discount to Houston to widen to as much as $14/b to $15/b over the coming few months.

"We will see the pressure on this until 2019 end and will wait to see what 2020 brings to us," Suttles said.


Both companies reported production growth in the first quarter. Noble said its US onshore oil output increased 30% year on year to 103,000 b/d, driven by the Permian basin.

As a measure of greater drilling efficiencies, Noble increased drilled footage per day in Q1 by 10% in the Delaware/Permian, 7% in the Eagle Ford and 3% in the DJ Basin, compared with last year.

Willingham said Noble's multi-well/multi-zone development in the Delaware/Permian added one rig and one frack crew in Q1 for a total of six operated rigs and three frack crews. Sales volumes increased 18% from Q4 to 45,000 b/d of oil equivalent in Q1.

"Volumes will continue to grow each quarter as we bring online approximately 20-25 wells per quarter for the rest of the year," he said.

Willingham said Noble's expansion of its water management system puts it at a significant competitive advantage in the Permian. The system transports water via pipeline across contiguous acreage, which reduces truck traffic, the need for disposing produced water and the need to use freshwater in drilling.

"By the end of year, I'd expect over 30% of the water used in our fracks to be recycled produced water," he said.

Encana saw a 49% year on year growth in crude and gas output in the Permian to 83,000 boe/d in Q1.

The company produced 54,200 b/d of crude oil and is now targeting an annual growth of 30%, with a bulk of the 2018 increase in output coming towards the back half of the year as Encana drills and completes new wells, Suttles said added.

The latest eight wells in the Midland area of the Permian Basin delivered 30-day IP (initial production) rates of 1,150 b/d of crude oil, while 10 wells at the Martin County in the same basin resulted in 90-day IP rates of 1,000 b/d, Encana said in its earnings release. --Meghan Gordon,, with Ashok Dutta in Houston

--Edited by Jeff Mower,