It may be too soon to assess the total impact of falling global crude oilprices on the US oil patch, but the lower price will likely slow the recentfast pace of pipeline buildouts and focus attention on regions where theproduction plays are most economic.
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Many oil industry analysts expect to see a slowdown in new midstreamprojects as production begins to wane, which is expected by the middle of 2015as drilling slows and many of the hedges producers put in place to manageprice risk expire.
"In the midstream, in general, there will be some slowdown," said JohnHill, CEO of First Reserve, a global private equity investment firmexclusively focused on energy.
Reductions in producer capital spending point to slowed drilling goingforward, he said. But he notes there will be an "awful lot of Bakken" comingonline from current drilling, and that no producer there has cut production,despite a slowdown in 2015 spending from big producers like ContinentalResources.
Rather, Hill expects explorers will be "very selective" in where theydrill, looking to "pick the most economic" spot and "reallocate based on therate of return," which in turn will slow the flow of crude from some plays.
The slowing of future crude production will stifle the growth of newinfrastructure projects in both pipeline and rail, but some shale oil playswill stay economic, Hill said.
He sees viable basins which show promising rates of returns, includingthe Permian and Eagle Ford due to their proximity to Gulf Coast refining heftas well as the Bakken where there is enough infrastructure already in place tocarry the crude to refiners via rail and, to a lesser extent, pipeline.
Hill said there are good parts of these basins, such as the Permian'sDelaware Basin and Wolfcamp plays, which are viable at $40-50/barrel.
The general consensus is that the Permian Basin, one of the oldest andmost prolific oil-producing basins located in west Texas and eastern NewMexico rejuvenated by new horizontal drilling techniques, will continue to bean active production area.
"Many large Permian producers that have announced drilling plans for 2015have indicated that they still intend to grow production in the basin,especially in the Delaware Basin, where Bentek expects producers can stillrealize a 27% internal rate of return on new wells at $60/b oil prices," saidNicole Leonard, energy analyst with Platts unit Bentek Energy.
Current Permian Basin takeaway pipeline capacity is 1.2 million b/d, withan additional 780,000 b/d due in the next six months, according to data from Platts and Bentek.
Bentek estimates the Permian currently produces about 1.84 million b/d ofoil, and that is expected to rise to about 2.36 million b/d by 2019.
Marginal plays could include some parts of the Niobrara and Powder RiverBasin in the Rockies region as well as the Mississippi Lime, straddling theborders of Kansas and Oklahoma, where lack of infrastructure, regionalrefinery demand and harsh conditions make it difficult to produce.
However, some think the pipeline buildout is slowing simply due toreaching a saturation point.
"The industry has done a great job responding to the production growthand the pipeline capacity needed to move that supply to the refining sector,"Bentek's Anthony Starkey said. "We imagine there will be less growth ininfrastructure going forward, simply due to a decreasing need for morecapacity."
--Janet McGurty, firstname.lastname@example.org--Edited by Jason Lindquist, email@example.com