Permian crude output hits record high of more than 5 million b/d
Midland gas processing capacity growth of 1.7 Bcf/d by year-end 2022
The booming Permian Basin is churning out more crude oil than ever after recovering from the ongoing coronavirus pandemic, but future growth will depend on the buildout of constrained natural gas pipeline gathering and processing systems within the basin, energy executives and analysts said.
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Register NowFollowing years of massive buildout of long-haul crude pipelines, natural gas infrastructure is proving more critical now. With stricter regulations on eliminating gas flaring, the fates of oil and natural gas within the Permian are more linked than ever and more gas pipelines and processing plants are needed in the near term.
"We're having a lot of these localized gas processing constraints in the Permian," said Zack Van Everen, a senior midstream analyst at East Daley Capital Advisors. "The midstream companies hit the brakes on spending cash, and a lot of that was on the processing side in the Permian. So they got caught off guard by how much oil and gas have rebounded from the pandemic, especially from the privates coming into the basin so heavily."
The Permian is expected to hit record-high production of more than 5 million b/d in January, according to the US Energy Information Administration, and continue to grow in 2022.
Driven by the Permian, S&P Global Platts Analytics counted Texas and New Mexico crude and condensate production at 6.3 million b/d at the end of 2021, including nearly 1.2 million b/d from the Eagle Ford Shale, and projects growth to about 6.8 million b/d by year-end 2022.
That the Permian is over-piped applies only to the long-haul crude networks, Van Everen said. But the good news for producers is that new, in-basin gas gathering and processing facilities can be built in less than a year. So the construction pace should manage to keep up with production, if only barely, he said.
However, a failure to add the necessary infrastructure would slow oil production growth and trigger "heavily discounted" Waha gas pricing because so much gas will be left stranded, he said.
Some of the top gas processing facilities -- such as Enterprise Products Partners' Delaware Basin hub and Lucid Energy's facilities outside of Carlsbad, New Mexico -- are slated to hit capacity close to the end of 2022, Van Everen said, and that is even with a new Lucid expansion.
In order to beef up its in-basin capabilities in the Midland, Enterprise just paid $3.25 billion for the Navitas Midstream gathering and processing network.
Six companies, including Navitas, have committed to expanding Midland gas processing capacity by a combined 1.7 Bcf/d by the end of 2022, according to East Daley. But capacity will remain tight.
Privates step up
While much of the oil production growth is being led by private Permian producers, such as Endeavor Resources and Mewbourne Oil, private players also are leading a lot of the midstream growth.
Billy Lemmons, managing partner at the EnCap Flatrock Midstream, said his private equity firm is focusing on such investments.
"A lot of that long-haul crude pipeline is built out, and it's really about filling out where there's needed capacity," Lemmons said. "We've recently been hearing about people looking for processing plants and seeing some new construction. The business is beginning to flourish again to some extent. It feels like we're coming into a new chapter."
Lemmons said the oil production growth must "work hand-in-hand with the associated gas." If there is a shortage of oil pipelines, you can always truck it, he added.
"Natural gas doesn't work like that. You've got to get the pipelines," he said.
At least one more long-haul natural gas pipeline from the Permian to the Texas Gulf Coast is needed, according to Van Everen. And the timing is such that construction will need to commence by the end of this year in order to keep up with demand, he said, pointing to Kinder Morgan or private companies as likely builders.
Apart from associated gas, demand is also coming from high prices and from the need to feed the new LNG export terminals opening along the US Gulf Coast, said Lucid Energy CEO Mike Latchem. This has driven Lucid to continue expansions at its Red Hills and Roadrunner gas processing hubs in New Mexico. The Red Hills VI plant, with an additional 230 Mcf/d, is under construction now and will come online late this summer or early fall, Latchem said. Another Roadrunner expansion is expected next year, he said.
"We think a plant per year is still a pretty good strategy," he said. "We're going to be filling that up once it commissions pretty quickly."
Stricter New Mexico regulations are creating more demand for gas processing because they require pipelines be in place for associated gas before the oil production is initiated from new wells. So there is more direct planning with the oil producers.
"Without gas capacity, then new oil production can't come online," Latchem said. "That's what's been driving the better communication than we've ever seen before."
Regulations and the investors' emphasis on environmental, social and governance issues are all factoring in, he said.
"Now we're trying to make sure our infrastructure is complete and online well before the producers need it to make sure there's zero flaring," Latchem said. "We've got better visibility than we ever have before on forecast volumes. With the focus from all parties on reducing flaring, it makes our volumes more predictable and more durable."
Much of Permian gas gathering and processing (G&P) nearing capacity by end of 2022
Largest Permian Gas Producers
Primary G&P System
% of Total Volumes
Estimated Processing Plant Utilization YE2022
Pioneer Natural Resources
Targa West Texas
68%
90%
ConocoPhillips
Lucid South Carlsbad
13%
98%
EOG Resources
Lucid South Carlsbad
26%
98%
ExxonMobil
Targa West Texas
17%
90%
Occidental Petroleum
Enterprise Products Delaware
36%
102%
Devon Energy
Devon/Howard Delaware
28%
94%
Chevron
Enterprise Products Delaware
25%
102%
Apache Corp.
Altus Midstream Alpine High
49%
61%
Coterra Energy
MPLX Delaware
54%
86%
Diamondback Energy
EnLink Midstream Midland
14%
73%
Source: East Daley Capital
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