11 Jun How to Best Build Out the Permian
Two panelists offered unique perspectives on the obstacles and challenges in completing the buildout in the Permian Basin. Aubrey Harper, vice president, business development for PLH Group Inc., presented an engineering and construction perspective, while Darrel Hagerman, vice president, business development, Permian Region for Crestwood Midstream Partners, offered a midstream operator’s view.
They were both part of a panel discussion on “Completing the Buildout” of the Permian Basin at the recent Hart Energy Midstream Program held during the DUG Permian Basin Conference and Exhibition in Fort Worth, Texas.
Harper began his presentation with the question: “When will the Permian be built out?” He first answered “who knows?” Read on to learn his real answer.
He explained to attendees that in order to build out efficiently, you need to know the costs and the current crude oil price needs to be factored in. “Many are saying the price of crude is going up to $65 per barrel, and this morning Goldman Sachs announced that it’s going to go to $45 per barrel by the fall. What we do know is the rig count is down,” Harper said.
Harper said the economic benefits of using unit pricing for the midstream company means a one year contract with one contractor, which guarantees resources, offers efficient budget management and saves time from bidding contracts and contract negotiations.
“I’m not saying unit pricing is the absolute best way to go, but the alliance agreement you can create with contractors working together over a period of time can get the price down,” he said.
Aligning with PLH offers the advantage of working with other PLH owned portfolio companies. “Our policy is that if we use a PLH owned company, and we own 14 of them, we do not mark up services 15%. If one of our companies gives me a quote for $1 million dollars, I’ll show that quote to you and invoice you that amount,” he said.
Formed in 2009, PLH Group is a now a $1 billion dollar company with 3,000 employees and presence in almost all the major basins, including the Permian. The company has acquired companies in the pipeline and powerline sectors, including Tessco Energy Services and Sun Electric, both providing electrical services and located in the Permian.
Back to his original question about when the buildout will be completed. Here’s his real answer: “When engineers and geologists figure out how to quit going into zones and doing things and bringing crude to the ground. So, it will never get built out. It will get built out to take care of what is here today. Think about it: producers don’t even need to put a drillbit in the ground, they just have to complete the wells that were never completed, and we’re going to be busier than we’ve ever been,” Harper concluded.
Midstream Operator’s Take
Offering a midstream perspective, Crestwood’s Hagerman is responsible for commercial activities in the Barnett, Granite Wash, Permian Basin, Haynesville, Fayetteville, and other emerging NGL-rich
shale and unconventional plays. He noted for attendees a number of big picture obstacles facing the Permian.
“Gas, NGL, crude oil [prices], they’re all down 40% to 50%,” he said. “Industry-wide, we’re all rightsizing our respective workforces. Our company went through it, and I’m sure your companies are going through it.” Describing it as “limbo-land,” Hagerman said there is a lot of disorganization in the midstream. “It’s hard to figure out how big your pipeline system needs to be, how much horsepower you need if you don’t know how many wells you’re going to drill.”
A concern for Hagerman is the quality of the crude coming out of the Basin. “We’re starting to see more 50 degree + API gravity crudes, more than we’ve seen in the past.” Noting that 50 degree API gravity crude is considered condensate and therefore eligible for export if it meets certain conditions, Hagerman referenced that Pioneer Natural Resources Co. (PXD) and Enterprise Products Partners LP received approval last year from the U.S. Department of Commerce to export minimally refined condensate.
“Whether they [the U.S. government] lift the ban or not [to export crude oil], lifting the ban will eliminate all the uncertainty associated with light condensate. There is a lot of it coming on, and we’re seeing more of the batched pipelines being discussed in order to handle it so it can be exported,” Hagerman said.
The availability of electrical power in the basin is a problem. “There are some places where there is no power at all,” he said. Gen sets are required, and he warned, “power won’t be coming for a long time.”
Other obstacles Hagerman noted include government regulations, saltwater disposal, access to freshwater and right-of-way issues.
Permian On a Roll
However, even in this downturn, investment continues in the Permian, he said. With its prolific infrastructure, expansions of mainly crude oil lines are announced every day, and they are big expansions, he said. He noted Sunoco Logistics’ Permian II Pipeline will be completed in the second quarter, which will supply crude oil from West Texas to Midwest and Gulf Coast markets. “Everyone is looking at these batch crude pipelines to Midland then to the Gulf Coast … to the infrastructure that has been taking care of Eagle Ford producers.” This connectivity will provide a destination for the light condensate, where it can be processed and potentially exported, he explained.
Another export opportunity close to home is selling gas to Mexico. “Between 2010 and 2014, our gas exports to Mexico went from 900,000 million cubic feet per day to 2 billion cubic feet per day and exports are estimated to increase to 6 billion cubic feet per day by 2025,” he said. “We need places to take our gas: LNG terminals and Mexico, and we’re the ones [in the Permian] who should serve these markets,” he said.
According to what Hagerman has heard in the field, Permian output of crude, gas and NGL will increase but level out if commodity prices remain at present levels for an extended period. In the meantime, “producers and midstream companies must communicate and align their interests” to avoid any missteps on any major infrastructure buildouts. And regardless of commodity prices, producers need to depend on good and additional new services from their midstream providers.
“Successful midstream providers must be nimble and have the capability to provide more services than in the past [all commodities and services], crude gathering, saltwater gathering and disposal, gas gathering, compression and processing,” he concluded.