Crude-Oil Production Gains in Delaware Basin Drive Expected Growth From Permian Basin

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil production from the Delaware Basin is expected to more than double over the next five years, to over 1 million barrels per day (BBL/d) by 2022, Rusty Braziel, president of RBN Energy LLC (Houston, Texas), recently told an Oil & Gas conference in Denver.

The Delaware Basin is part of the Permian Basin, where Oil & Gas production has soared in recent years. The Permian, which straddles West Texas and Southeastern New Mexico, is producing about 2.5 million BBL/d right now. Braziel predicted production from the Permian could grow to between 3.5 million BBL/d and 4.5 million BBL/d by 2022, depending on crude oil prices. He spoke August 23 at the 29th annual energy summit held by the Colorado Oil & Gas Association (COGA) (Denver, Colorado).

The Delaware Basin has emerged as a hot play inside the Permian Basin, one of the country's more durable unconventional formations. The Delaware Basin encompasses six counties, but most of the crude production has come from only two counties, Loving and Reeves. Going forward, Braziel said he expects production growth to be concentrated in those same two counties.

Industrial Info is tracking about 64 Oil & Gas Production, Pipelines and Terminals projects under development in the Delaware basin, with an aggregate value of about $9 billion.

In his August 23 talk at the COGA conference, Braziel proposed three crude-oil pricing scenarios that could unfold over the next five years:

• In a slow demand-growth scenario, crude oil prices would average $50 per barrel by 2022 -- just a few dollars higher than they are today
• If demand grows moderately, crude oil would rise to about $57 in 2022, and,
• A rapid demand-growth scenario would lift crude oil prices to an average of $67 per barrel in five years

On a national basis, a high demand-growth scenario could push overall U.S. crude oil production to about 12.5 million BBL/d by 2022, Braziel said at the COGA event. A more moderate increase in demand would result in daily production of about 11.2 million BBL/d. And a slow-growth setting would result in domestic production of about 9.9 million BBL/d in 2022.

Turning to the Permian Basin, Braziel predicted production there would rise to about 3.5 million BBL/d by 2022 in a slow-growth scenario. If crude oil demand grew at a moderate pace, production from that basin would be about 4 million BBL/d by 2022. And production from the Permian would rise to 4.5 million BBL/d in 2022 in a rapid growth environment.

"Production from the Permian is going to grow in nearly any scenario," Braziel told the COGA conference attendees. He noted there was about 1.8 million BBL/d of pipeline takeaway capacity projects under development in the Permian, with most of that capacity going toward the Gulf Coast.

Reflecting more broadly on what he called the "U.S. oil market's non-recovery recovery," Braziel noted the current price environment, where crude oil fetches about $45 per barrel and natural gas sells for about $3 per thousand cubic feet (Mcf), "is very different from any we've seen." Echoing a point made by others during the COGA conference, he noted the U.S. currently is using far fewer rigs to produce more oil and gas than it was in the run-up to the late-2014 price collapse. Today, about 946 rigs are operating in the U.S. compared to an average of about 1,900 rigs during the third quarter of 2014, according to data from Baker Hughes (NYSE:BHGE) (Houston, Texas), which is now a unit of General Electric Company (NYSE:GE) (Boston, Massachusetts).

The U.S. needs far fewer rigs because its per-rig productivity has risen so dramatically in recent years, as operators and drillers become more knowledgeable about the specific factors affecting production in each basin and develop better expertise with different completion techniques and hydraulic fracturing cocktails, the RBN Energy president said.

Since 2011, rig productivity has risen by 6.5 times in the Eagle Ford, 5 times in the Bakken, 12 times in the Niobrara and 9 times in the Marcellus/Utica shales, Braziel said.

Today, a new rig in the Eagle Ford Shale produces about 1,450 BBL/d of oil compared with about 216 BBL/d in 2011, he continued, citing data compiled by the U.S. Energy Information Administration (EIA) (Washington, D.C.). In the Bakken Shale, current per-rig production of 1,147 BBL/d is a dramatic increase over 2011 production levels of 234 BBL/d.

The current rig count is a sharp improvement over the nadir of last summer, when only about 400 rigs were drilling for oil or gas in the U.S., he noted.

Braziel noted investors expect prices for crude oil and natural gas to remain flat for a prolonged period of time--at about $50 per barrel of crude and $3 per Mcf of gas. "The NYMEX forward curve is a flat line for the next five years," he commented.

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