Trey Cowan, Senior Industry Analysts, S&P Global Platts
Source: Rigs and Drilling Analytical Report (RADAR), September 20, 2018
The domestic growth for both drilling and production has been dominated by producers focusing most of their attention on developing their Permian Basin assets this year. Specifically, crude & condensate production from New Mexico and Texas Permian tight oil wells accounted for 69% of the total U.S. production growth, the Permian rig count contributed approximately 57% of the growth in the overall domestic land rig count.
Unfortunately, all this growth has come with a cost. This incremental Permian production is now bumping up against the capacity constraints of getting this growing crude supply to market. As these concerns have intensified with this production growth, we have seen differentials (i.e. the variance between benchmark prices and those realized at the wellhead) to widen significantly.
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Differentials for WTI Midland are pegging these barrels at over $16 per barrel discount to NYMEX benchmark crude prices.
Permian operators who lack firm transportation commitments out of the region or who lack hedges in place that offset these differentials would be logical choices to curtail both rig activity and production in the months ahead. We can see from recent reports is that permits, rigs, and production are in fact beginning to slow in the Permian. Further, we expect that future observations will identify whether producers shifted
their responses to other major plays to adjust to these dynamics in the Permian. At present we are expecting a slight shift of rigs to the Eagle Ford, southeast of the Permian, to reduce some of the slack that may develop in the months ahead.
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