By Nick Cunningham
Shale companies continue to drill at a frenzied pace, adding rigs and breaking U.S. oil production levels with each passing week. Yet, the oil production is becoming increasingly geographically concentrated. Not only is the Permian basin accounting for much of the new oil production in the U.S., but a relatively small number of counties within the Permian are home to most of that action.
The drilling craze in the Permian has been going on for some time, but activity continues to pick up pace. The rig count in the Permian has surged over the past year, and jumped by 18 in the most recent week for which data is available, to 427, the highest total for the basin since early 2015.
But the Permian encompasses a wide swath of territory, and the rig increases are really concentrated in surprisingly small geographical area.
The rig count in the sub-basins of the Delaware and Midland has jumped by 54 since last summer, rising to 388. There are 25 counties located within these two sub-basins, but really, 95 percent of drilling activity is located in just 12 of them, according to a research note by Standard Chartered. Digging deeper, roughly half of that activity is located in just four counties — Midland, Reeves, Lea and Eddy.
Against that backdrop, the shale bonanza “has an increasingly narrow base,” Standard Chartered analysts wrote, growing rapidly in this core area at a time of “sluggish activity elsewhere.” For U.S. oil production, that may not necessarily be a problem, as long as the region can handle the blistering pace of drilling.
Fourth-quarter earnings will be released in the next few days and weeks, and if the shale industry continues to report strong production gains from this small geographical footprint, “then the Midland and Delaware basins seem set to lead strong U.S. growth in 2018,” the investment bank said.
However, because so much drilling is concentrated in such a relatively small area, the risk is that bottlenecks will start to crop up. The strain on gathering lines, pipelines, processing facilities, plus a shortage of fracking crews, labor and/or equipment will become a point of focus as production continues to mushroom. If a number of shale companies raise concerns about infrastructure or other equipment and services bottlenecks in these areas, Standard Chartered says the heady growth forecasts for U.S. shale “may disappoint.”
Anecdotally, at least, there have been stories of bottlenecks for more than a year. So far, there has been no obvious impact on overall output. Production from the Permian is exploding, and plenty of market forecasts predict the U.S. will add upwards of 1 million barrels per day over the next year; some say more.
Still, there is some evidence that the cost of oilfield services is on the rise. A wider metric that captures total costs for the shale industry also points to cost inflation. This would be consistent with a tighter market for services and equipment. But again, thus far, the production figures continue to climb unimpeded.
One factor to keep in mind going forward is that the U.S. EIA is planning on tweaking the way it reports its production figures. Because the weekly production data — a closely watched figure that has a great deal of influence on short-term fluctuations in oil prices — is only an estimate based on the best available data to the agency, it can’t paint a precise picture of what is going on at the ground level with 100 percent accuracy. The EIA has tried to make this clear, but it comes under fire when the data is revised in subsequent weeks and months as better data becomes available.
In response, moving forward the EIA will report production figures rounded up to the nearest 100,000 bpd. As such, the most recent data, for instance, shows that the U.S. produced 9.919 mb/d for the week ending on January 26. Under the revised system, that figure would appear as simply 9.9 mb/d. That, the agency argues, will make it clear that the figure is an estimate and not intended to be a precise measurement. This may prevent media types (*ahem*) from reading too much into a figure that inherently involves a bit of guesswork.
The flip side is that the data will get more clunky. Standard Chartered argues that because the data will likely stay the same for the next several weeks (at 9.9 mb/d) and then suddenly jump to 10.0 mb/d, it may have a jarring impact on market psychology. “The proposal seems a retrograde step to us, designed more to create a defensive shield of opaqueness around what has unfortunately become a political number, rather than to improve transparency in the market place,” Standard Chartered analysts wrote.
Regardless of one’s view, the best bet is to keep an eye on the monthly figures, which are more accurate, although published on a lag. For that, the EIA reported on Wednesday that the U.S. produced a staggering 10.038 mb/d in November, a massive jump of 384,000 bpd from a month earlier.
Based on that figure, at least as of November, the shale industry was not being held back by any bottlenecks.
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