One of the most prolific “new” crude oil plays is the Permian Basin. Funny how things work out. After the oil price bust of the mid-1980s there was a bumper sticker on every Midland-Odessa pickup: The oilman’s prayer “Please lord, Just Give Me One More Oil Boom. I Promise Not to Blow It Next Time.” Twenty-five years later those prayers have been answered. Permian production broke above 1 MMb/d in March. It’s the biggest shale oil, a.k.a., tight oil play out there. The region is expected to grow by at least another 50% over the next 3-5 years.
This is quite a turn-around for a basin that has been producing since 1921, and has yielded more than 35 billion of barrels of crude oil. So you would think that the region would have the business of crude gathering down pat. But the good ole Perm is having growing pains, just like the Bakken and the Eagle Ford.
[Russell Hencke coauthored this post and is our newest RBN contributor.]
All of these plays are facing similar shortages of manpower, equipment and services. In the Permian, these issues are aggravated by the long distances involved. The Permian Basin is a big place. The new Permian oil patch is extending out beyond the existing (and mostly antiquated) infrastructure. Pipelines and tank farms can be 60 to 100 to 120 miles away from well locations. So all the volume must be trucked, and the trucks can’t get more than a couple of runs in a day. That translates to the Permian needing more trucks per 1 M/d bbls per day of production + more drivers = higher transportation costs.
Adding fuel to the fire, new Department of Transportation standards for hauling crude oil restrict traditional trailers from being used. New standards require the use of DOT-407 tankers, and the supply of that equipment is tight. Costs for a tractor-trailer combo are north of $200k. (BTW, the same situation is happening in rail cars, where the supply of new cars is well behind demand.)
There is intense regulation of the HazMat industry, and there are hefty insurance requirements. Environmental protection rules are also over-complicated, and new emissions standards on the horizon will add to the cost of trucking operations.
All of this has translated to transportation constraints, especially in the new, sometimes prolific fringe areas of Permian tight oil plays. We hear reports of storage tanks filling so rapidly that operators are being forced to choke back production. Not a good thing when crude oil prices are $107 in Cushing.
This has created a lot of tension between Permian producers and truckers. Producers want the problem fixed. Truckers (some of whom are old enough to have seen this movie before) are not rushing headlong into new infrastructure investments. On paper, the economics to handle one of these Permian step-out plays don’t look too bad. A five truck fleet of freightshakers, storage tanks, and some offload equipment will set you back about $3 million + operating expenses. The payback can be as little as 2-3 years, if everything happens according to plan.
But what if the shale decline curves turn out to be steeper than what producers expect. What if shortages of drilling and frack crews constrain growth. What if fracking gets dialed back by regulators. And the big daddy of them all – What if crude oil production increases to the point where it crushes prices. Don’t tell truckers in the Perm it can’t happen. A price crash in 1986 killed the economy of the whole region. (Thus the bumper sticker.)
Consequently, truckers are asking for high rates, five year plus commitments and other contractual bells and whistles. If the producer doesn’t like it, he has two alternatives. #1 don’t produce the oil (never a good solution for a producer), or take matters into his own hands ---setup dedicated trucking operations for the producer’s own facilities. Increasingly that is what is happening in the Permian.
This situation could last for a while. A very long while. In many of these areas, the distances are too far for a pipeline gathering system to ever make sense.
If you are a trucking company, there are significant opportunities in the Permian if you can get the right commitments from producers. If you are truck driver, it is a great way to make some serious money for an extended run. If you’re a natural gas marketer, you might consider getting a Texas CDL… Who is the doo dah man?
Sometime your cards aren’t worth a dime, if you don’t layem down.
