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Falling Permian well performance could pose risk to longer-term growth: Schlumberger

Houston — Permian Basin crude production growth is currently constrained by limited takeaway capacity, and falling well performance in the basin could pose a risk to longer-term growth, oilfield services company Schlumberger said Friday.

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The US Energy Information Administration estimates Permian production to reach 3.55 million b/d in November, up from 2.717 million b/d in October 2017. The Permian currently has around 3.6 million b/d of takeaway capacity, although midstream companies are in the process of adding more pipelines.

Even with the added pipeline capacity, market consensus that annual Permian production growth will continue at 1.5 million b/d is starting to be called into question, Schlumberger executives said.

Analysis: Permian Basin gas constraints on track to ease in 2019

"[W]e do not believe that the temporary offtake constraints are the main issue, as this will likely be addressed in the next 12-18 months. Instead, we believe the main challenge in the Permian going forward is more likely to be reservoir and well performance," company chairman and CEO Paal Kibsgaard said in an earnings call.

"At present, the industry has yet to understand how reservoir conditions and well productivity change as we continue to pump billions of gallons of water and billions of pounds of sand into the ground each year," he said.

Kibsgaard pointed to an increase in the percentage of new infill -- or "child" -- wells in the Eagle Ford.

"Today, the percentage of child wells drilled in the Eagle Ford has already reached 70%. And in the three-year period since this percentage broke the 50% level, we have seen a steady reduction in unit well productivity," he said.

"In the Permian, the percentage of child wells in the Midland Wolf Camp basin has just reached 50% and we are already starting to see a similar reduction in unit well productivity to that already seen in the Eagle Ford, suggesting that the Permian growth potential could be lower than earlier expected," Kibsgaard said.

Assuming oil demand remains high, "we believe that the level of E&P investments must increase both internationally and in North America ... to develop and deploy the new technologies needed to overcome the emerging shale oil production challenges," he said.

S&P Global Platts Analytics is forecasting slower Permian growth as a result of declining efficiencies and poorer rock quality. Production is expected to climb 843,000 b/d in 2018, but that should slow to 320,000 b/d by 2022 and 219,000 b/d by 2023, according to Analytics.

Takeaway constraints in the Permian Basin impacted hydraulic fracturing activity and weighed on North American revenues last quarter, Schlumberger said Friday.

Schlumberger third-quarter profits increased to $644 million, up 49.8% from Q2 2018 and 18.2% from year-ago levels. Higher profits were due in large part to revenue growth in international markets, which outpaced North American revenue growth for the first time since Q2 2014.

North American fracking activity is likely to remain low in the near term, and will present earnings headwinds into 2019.

"It is evident that the rapid softening we've seen both in fracking activity and pricing over the second half of the third quarter is continuing more or less with the same pace in fourth quarter," Kibsgaard said. "This is representing challenges in terms of wide spaces in the fracking calendar."

This week, the West Texas rigs count fell to 473, the lowest since early July, and down 16 from 489 in late September, S&P Global Platts data showed.

"The outlook for hydro-fracking is that there will be a couple of quarters of lower activity, but this is more of a pause than long-term structural issue," Kibsgaard said.

"We aren't going to take any significant actions when it comes to our structural set up in the market, and we will have to absorb some headwinds from the costs that we choose not to do anything with in next couple of quarters," he added. -- Chris van Moessner, christopher.vanmoessner@spglobal.com

-- Edited by Jeff Mower, newsdesk@spglobal.com