I’ll Take You There—Continued NGL Infrastructure Growth Expected in Permian and Eagle Ford Basins

With prices for crude oil, natural gas and natural gas liquids still sagging, U.S. producers have been shifting their drilling focus to “sweet spot” wells in the nation’s most prolific plays, including the Permian Basin and the Eagle Ford. Capital spending plans for 2015 detailed the past few weeks show that, even with fewer active rigs and fewer new wells, hydrocarbon production in these best-in-class areas will continue to grow this year. As for next year and beyond, that depends. What does all this mean for NGL production—and expanded NGL-related infrastructure in the Permian and Eagle Ford? Today, we preview RBN Energy’s latest Drill Down report, which forecasts NGL production in the two plays and details existing and planned gas processing plants, NGL pipelines and fractionators there.

The new Drill Down report, available to RBN Backstage Pass subscribers, takes an in-depth look at the NGL side of hydrocarbon production in the Permian Basin in West Texas and southeastern New Mexico and the Eagle Ford in South Texas. The two plays have a particular significance in the NGL market, not only for the large volumes of NGLs they currently produce (about 500 Mb/d in the Permian and 700 Mb/d in the Eagle Ford) but for their proximity to the Mont Belvieu, TX fractionation center and to new export facilities along Texas’s Gulf Coast. (Being close by lowers the cost of NGL delivery.) As in all U.S. hydrocarbon production areas, however, uncertainties have arisen lately about how lower prices for crude oil and NGLs (and, to a lesser extent, for gas) may affect drilling and production activity in 2015 and beyond.

In our January Drill Down report, It Don’t Come Easy—Low Crude Prices, Producer Breakevens and Drilling Economics, we discussed how a 50% decrease in crude prices and a 30% decline in natural gas prices in the latter half of 2014 forced producers to rethink this year’s strategy for drilling and production. Our analysis showed that while the average producer internal rate of return (IRR) in even very productive plays like the Permian and Eagle Ford fall to roughly break-even at $45/Bbl oil and $3/MMBTU gas, the IRRs rebound sharply if the producers’ focus shift to sweet spot wells with higher initial production (IP) rates. In the Permian, for example, the IRR in a $45 crude/$3 gas scenario jumps from 3% for the play average to a healthy 19% for sweet spots. (In a $60 crude/$3 gas scenario, the Permian IRR jumps from 14% to a very desirable 38% if the drilling focus narrows to sweet spots.) The same is true in the Eagle Ford. There, the IRR for $45 crude/$3 gas is zero, on average, for the oil portion of the play, and 7% for the sweet spots. For $60 crude, the IRR rises from 12% to 21% when the focus shifts to sweet spot wells. More recently we described how continued productivity improvements and reductions in drilling/completion costs could reduce drilling costs by as much as 25% and increase IRR’s accordingly (see Getting Better All The Time). Given that producers have indicated in their 2015 capital spending plans that they will, in fact, be focusing on sweet spots, it seems likely that, even with crude only slightly recovered to $50/Bbl today, production of oil and associated gas and NGLs in the Permian and Eagle Ford will continue to increase this year and could potentially rise still more in subsequent years depending on the extent of future price recovery.