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The Permian Basin’s Looming Bottleneck

By Kurt Osterberg · On April 18, 2018

Permian Basin oil production is booming, but the growth rate is being threatened by rapidly growing volumes of associated natural gas.

In a recent article, I provided a firsthand look at the booming oil production in the Permian Basin. Notably, after 100 years of production, the Permian Basin is pumping record volumes of crude oil.

However, as I also noted there are some looming constraints that threaten to slow this production growth:

“Oil production can expand only as quickly as infrastructure can keep up. And it is struggling to keep up. It’s not just crude oil pipelines that are an issue. Along with oil comes associated natural gas. In some cases, producers have no outlet for this gas, so they flare it. But there are various legal limits to flaring. This week, I heard about a producer who is having to reduce production because they are bumping up against their permitted limits for flaring.”

Since that article published, there have been several more articles highlighting the problem. Platts had perhaps the most in-depth analysis of the issue:

“By summer 2018, Permian Basin gas production will have grown by an estimated 1.2 Bcf/d [billion cubic feet per day], meaning that eastbound capacity is likely to see much higher utilization rates this year compared to last. Looking beyond 2018, limited Permian Basin production takeaway capacity is likely to emerge as the most challenging constraint for producers.”

Bloomberg notes that the infrastructure constraints for the natural gas byproduct (commonly known as associated gas) from the oil boom have created the lowest natural gas price market in the country. They also warn that the problem could curtail oil output from the region and soon drive natural gas prices to zero:

“All that gas production is creating a dilemma for drillers, who may be forced to curtail oil output if they can’t get their gas to market. Producers can burn off some of the gas — a process known as flaring — but state regulators typically won’t allow that to happen indefinitely. And as mild spring weather limits demand for the heating fuel, explorers may be giving their gas away, according to broker Ion Energy Group LLC.”

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