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The Unintended Consequences of The Shale Oil Boom

The Law Office of C. William Smalling, P.C. Dec. 10, 2018

The shale revolution in the Permian Basin has helped trigger an energy production boom in the U.S. This development has far reaching, positive implications -- from mitigating the nation’s dependence on foreign oil to reducing the trade deficit to fostering economic growth. There is a downside, however, as the region has been saturated with oil production, which has driven up production costs and depressed the price of oil in the region.

Oil Production in The Permian Basin

Since 2015, oil production in the region has risen by 1.5 million barrels per day (bpd) to 3.6 million bpd, but the pipelines from the shale patch are at full capacity. This has forced oil producers to rely on truck and rail to transport West Texas crude oil to refineries and export terminals on the Gulf Coast.

As such, producers are paying more to ship the flood of oil while getting less money for their oil because they are forced to discount their prices to cover the higher transport costs. Meanwhile, production costs face pressure from shortages of labor, water and the fuel used in hydraulic fracturing. As producers outpace the market, some are leaving wells uncompleted while others are leaving oil in the ground until higher prices make drilling more profitable.

Until producers resolve their midstream problems, oil production could shift from the region to other fields in Texas and neighboring states, while suppliers such as sand and rail companies are also expanding elsewhere. At the same time, sand suppliers have opened new operations, adding 15 sand mines to the Permian in the last year.

On the other hand, rail capacity in the region will remain static as producers shy away from entering into long-term railcar leases, waiting for new pipelines to be built. Forecasters believe that planned pipelines will add about 3 million bpd to production in the region by later 2020. At this juncture, smaller producers without pipeline contracts are being hit the hardest because they have no choice but to use trucks and railcars. This in turn, is leading to consolidation as smaller producers are forced out of the region. 

The Takeaway

Some observers believe that the midstream stream issues currently impacting production in West Texas are temporary and that continued investment in the region could boost the nation’s output to an 11.5 million bpd in 2019. Nonetheless, transport constraints will continue to hamper production as producers continue to compete for pipeline, truck and railway access. Whether the region’s infrastructure will be able to bear the weight of increase oil production remains to be seen. In the meantime, the best way to protect your interests in this environment is to enlist the services of an experienced environmental and energy law attorney.