Industry Trend Analysis - Permian Natural Gas On The Rise - NOV 2017

BMI View: Production of natural gas in the Permian will rise alongside a continued rise in crude . The majority of growth will come from the Delaware Basin given a growing strategic focus on the western side of the play .

The Permian shale play is becoming a key source for natural gas in the US. Over the past four and a half years, production has increased seven-fold, from 17.7mn cubic metres per day (mcm/d) in January 2013 to 124.1mcm/d as of May 2017. This is particularly impressive given that there has not been a single gas-directed rig in the play since May of 2016, when production reached approximately 100.0mcm/d.

Oil Picking Up The Slack
Permian - Active Rotary Rigs
Source: Baker Hughes data through Sept 15

This is due to high levels of associated gas within the Permian which are extracted alongside crude. The play's favourable production costs and multiple layered pay zones have kept operators keenly focused on West Texas, where crude-focused operations yield significant volumes of wet gas which is later processed to extract natural gas liquids (NGLs).

According to state-level data through the month of May, gas-to-oil production ratios have been consistent over the past four years at 2.8 to 3.3 and have strengthened above 3.0 since the start of 2017. Given our upbeat outlook regarding upstream development within the Permian, we expect natural gas production will rise through 2020 and beyond. Assuming the current pace of drilling and completion continues, natural production will reach upwards of 190mcm/d by 2021.

Midland In The Lead, Delaware Pushing Ahead

The majority of natural gas production will be extracted from the Wolfcamp formation, from which nearly 64.0% of volumes were derived in May. This is followed by the Bone Spring which produced 21.1% of supplies at 26.1mcm/d.

The Wolfcamp is a prolific section of the Permian that stretches across the Midland and Delaware Basins. As of May, a record 5,789 wells were targeting the Wolfcamp, producing 78.8mcm/d. The formation is preferred among producers given its strong well performance and favourable project economics, with half-cycle breakevens at around USD40/bbl.

Wolfcamp Straddles The Entire Permian Play
Map of Permian Basin
Source: Drilling Info

30-day initial production (IP) rates and estimated ultimate recovery (EUR) levels in the Wolfcamp outperform the average of the broader Permian basin, reinforcing its importance within the play. IPs in the Wolfcamp averaged 17,500 cm/d compared to 14,500 cm/d across the entire play in 2017. Average production per well within the Wolfcamp averaged 5.2mcm/d versus 4.5mcm/d for the entire play over the first five months of the year.

The significant proportion of production has come from the Midland portion of the Wolfcamp in recent years, particularly from Irion, Upton and Reagan counties. However, we expect the Delaware Basin will play a more prominent role in the natural gas space given producer's deepening focus in the far west of the play. The top three natural gas producers in the Permian, Concho, Cimarex and EOG, operate more drillsites within the Delaware, suggesting more volumes will be derived from the western portion of the play.