I’ll Take You There—Permian and Eagle Ford NGL Infrastructure Post-Crash

The recent collapse in oil prices has thrown into question the future levels of crude, natural gas and NGL production in, among other places, the Permian Basin and the Eagle Ford. That will lead midstream companies to take a fresh look at the two regions’ existing and planned infrastructure to make sure they still are in line with pipeline, processing and other needs. Today, we conclude our series on the two regions’ natural gas processing plants, NGL pipelines and fractionators with a look at where we stand, and what’s ahead.

Drilling activity in both the Permian Basin and the Eagle Ford has been driven primarily by the regions’ prolific oil reserves, though associated natural gas and NGL production (and the Eagle Ford’s prolific production of condensate) have certainly augmented the regions’ attractiveness. With oil as the driver, it’s no surprise that the recent free fall in oil prices has prompted Permian and Eagle Ford producers to rethink their 2015 drilling capex. And that, of course, could affect how much oil, gas and NGLs the regions will produce this year and beyond. Our latest drill-down report, It Don’t Come Easy—Low Crude Prices, Producer Breakevens and Drilling Economics, reveals how much things have changed—and how quickly. In the fall of 2014, with oil at $90/Bbl and natural gas at $3.75/MMBTU, the internal rate of return (IRR) for the Delaware Basin portion of the Permian was a strong 40%, as was the oil-focused portion of the Eagle Ford; the IRR for the adjoining “wet gas” part of the Eagle Ford was a still-healthy 24%. Fast-forward to late January, with oil at around $45 and gas at $3, and the IRR for the Permian/Delaware was down to a measly 3%; the IRR for the Eagle Ford/oil area is at breakeven (0%) and in Eagle Ford/wet-gas area the IRR is minus 3%. If, as expected, producers in the Permian and Eagle Ford focus their capex dollars on their highest-yield “sweet spot” wells, the IRR numbers improve significantly. In the Permian, for example, the IRR for a sweet spot well would be 19% with oil at $45, 38% with oil at $60, and 58% with oil at $75—certainly enough to justified continued drilling. The same holds true in the Eagle Ford (though the IRRs are somewhat lower): a 7% IRR for a sweet spot well at $45 oil, 21% at $60 oil and 39% at $75 oil. 

Think that the crude price crash is something new? Think again. Today Keith Bailey, former CEO of The Williams Companies, board member of several leading midstream companies and eminent industry leader posts an op-ed piece that lays it all out from a big picture perspective in Deja Vu All Over Again

As we noted recently in Rig Cuts Deep, Output High!—Crude Producers Cut Budgets But Expand Production, published 2015 capex plans for independent Permian producers suggest they expect higher production levels this year (due to their focus on sweet spots), with expectations in the Eagle Ford leaning toward flat production levels in 2015. Given that midstream companies respond to—and anticipate—producers’ needs, the combination of low oil, natural gas and NGL prices and reworked 2015 capex plans is likely to lead the developers of natural gas processing plants, NGL pipelines and fractionators to take a fresh look at their plans for expanding existing facilities in the Permian and the Eagle Ford or building new ones. After all, the midstream projects now under construction (and the projects announced in the past few months) were developed and announced with the now-questionable expectation that the next few years will be business-as-usual. At the very least, it’s possible that some of the NGL-related projects that have been on the drawing board (but are not yet being built) may be delayed while things sort themselves out.

This seven-part series on NGL infrastructure in the Permian and the Eagle Ford began by describing how rapid growth the past few years put renewed pressure on midstream companies to increase gas processing and NGL take-away capacity. In Episode 2, we reviewed Enterprise Products Partners’ (EPD) infrastructure in the Permian, and in Episode 3 we discussed EPD’s assets in the Eagle Ford and DCP Midstream’s assets in the Permian and the Eagle Ford. In Episode 4, we looked at Energy Transfer, and in Episode 5 we considered Targa Resources, which is in the process of acquiring Atlas Pipeline. And then, in Episode 6, we looked at other companies with NGL-related assets in the two plays, including ONEOK Partners, EnLink Midstream, and Kinder Morgan Energy Partners. Adding up what all these companies own provides a pretty complete picture of what’s there—and what’s planned—in the Permian and the Eagle Ford regarding NGLs. In the Permian, the companies we discussed own about 4.4 Bcf/d of natural gas processing capacity, and have another 1.4 Bcf/d of processing capacity under construction. Targa (with Atlas added in) leads the Permian field, with 1.35 Bcf/d of existing capacity and 500 MMcf/d being built; DCP Midstream is a close second, with 1.3 Bcf/d in operation and 200 MMcf/d planned. (See Table #1 for a company-by-company summary.) In the Eagle Ford, EPD is out front, with 2.6 Bcf/d of existing gas processing capacity (and no public plans for new capacity), followed by Kinder Morgan with 1.5 Bcf/d, Energy Transfer with 1.4 Bcf/d (and 400 MMcf/d under construction), and DCP Midstream with 1.2 Bcf/d of capacity.

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