Despite the record levels reported by the US Energy and Information Agency (EIA) two weeks ago, many analysts expect oil production from US shale oil producers to contract in the second half of 2018. These predictions are primarily the result of reports that producers are facing infrastructure constraints in the prime producing region—the Permian in Texas and New Mexico. The lack of pipeline capacity will force some producers to refrain from drilling new wells and even to shut down some producing wells until more pipeline capacity is added.
This factor was highlighted at the most recent OPEC meeting in June, when the CEO of Pioneer Natural Resources revealed that his company was planning to curb production due to pipeline constraints.
Now, the problem is hitting oil services companies. Halliburton (NYSE:HAL) stock fell almost 8% last week when it not only reported weaker earnings than expected in the second quarter but also warned investors to expect the same in the third quarter as pipeline constraints mean cancelled or delayed projects for oil services companies.
However, this pipeline issue is not actually a concern for all companies. In fact, some companies have secured sufficient pipeline capacity to continue producing at current rates or even to continue expanding production. Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Noble (NYSE:NBL) say they are not concerned about being able to transport their crude oil out of the Permian. ConocoPhillips (NYSE:COP) says it does not have enough pipeline capacity secured for its crude oil in the Permian, but it expects to delay its expansion in the Permian only briefly. Some companies without pipeline capacity have the cash flow to ship their crude by truck or rail. However, this can add as much as $12 per barrel to companies’ costs.
Some producers will continue to grow production by moving rigs from the Permian to other shale oil regions like the Eagle Ford. These kinds of moves do not show up in data like weekly US rig counts. They are only noticed on a regional basis.
The pipeline crunch in the Permian is real, but perhaps overblown if we consider the toll this news is taking on the share prices of US oil companies, particularly large and powerful companies. The Permian region still has significant growth capacity even if producers miscalculated how soon it would face this transportation crunch. Many producers also see potential for growth in other shale oil regions as pipelines are built and export terminals expanded.
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