Permian Gas Processing Plans Hint at Impending Rebound in Production

Friday, 05/17/2024Published by: Housley Carr rbnenergy.com

Excerpt.  Link to full article:  https://rbnenergy.com/up-around-the-bend-permian-gas-processing-pla...

Permian production may have plateaued over the past few months — the shale play’s crude oil output has bounced between 6 MMb/d and 6.3 MMb/d for almost a year now, and natural gas production has hovered around 18 Bcf/d for about as long. But producer-backed plans to continue adding gas processing capacity in the Permian’s Delaware and Midland basins strongly suggest that E&Ps in West Texas and southeastern New Mexico see a lot more production growth “up around the bend.” As we discuss in today’s RBN blog, midstream companies haven’t tapped the brakes on their plans for new gas processing capacity in the Permian — in fact, they’ve been keeping the pedal to the metal. 

A few days ago, in All My Rowdy Friends Have Settled Down, we discussed why Permian oil and gas production growth has been on hiatus lately. Among other things, we cited capital discipline by E&Ps, acreage consolidation and optimization, and gas takeaway constraints, the last of which producers have been dealing with (in part) by reducing their drilling activity and shifting to areas with lower gas-to-oil ratios (GORs). In that same blog, however, we noted that despite the current plateauing of Permian production, midstreamers continue to design and build new gas processing capacity, virtually all of it backed by producer commitments. That suggests that E&Ps and integrated production/refining giants like ExxonMobil and Chevron expect to ramp up their production of Permian crude oil and associated gas over the next year or two.

The development of new gas processing plants in specific counties — and areas within counties — in the Delaware and Midland basins can serve as a sort of roadmap for when and where producers plan to increase their output. Figure 1 above breaks down the completed and planned processing capacity additions over the 2023-26 period by county and by year, with the additions in the Delaware Basin counties to the left and the additions in the Midland Basin counties to the right. (All of the counties are in West Texas except Eddy County, which is in southeastern New Mexico. Figure 2 below maps the 2023-26 additions.) As you can see, 2023 and 2024 were and are big years for capacity additions in both basins. Four new plants with a combined 995 MMcf/d of processing capacity were added in the Delaware in 2023 and an even more impressive six plants totaling 1,380 MMcf/d are scheduled to come online or are already up and running in 2024. In the Midland Basin, five plants with a combined 1,325 MMcf/d of processing capacity started up last year and six plants with another 1,275 MMcf/d are targeted to begin operation this year.

Given the typical lead time for building a new gas processing plant, most — but probably not all — of the new capacity planned for 2025 startups has been announced. By our count, six new plants with a combined capacity of 1,525 MMcf/d are planned to come online in the Delaware portion of the Permian in 2025, with another three plants totaling 775 MMcf/d in the Midland on track to start next year. (Only two projects, both in the Delaware — Durango Midstream’s 200-MMcf/d Kings Landing II plant in Eddy County and Enterprise’s 300-MMcf/d Mentone West II in Loving County — are currently scheduled to start up in 2026, although additional projects are surely in the works.)

The three Midland Basin plants slated to begin operation in 2025 include Targa Resources’ recently announced, 275-MMcf/d Pembrook II processing facility in Upton County, TX — in the southern part of the Midland Basin. When Targa unveiled plans for Pembrook II during the company’s May 3 earnings call, it said the three other Targa plants in the Permian slated to come online over the next 12 months —  the 230-MMcf/d Roadrunner II in Eddy County in June, 275-MMcf/d Greenwood II in Midland County in Q4 2024, and 275-MMcf/d Bull Moose in Winkler County in Q2 2025 — will all be “highly utilized” once they begin commercial operation. During the call, one Targa executive noted that the company already is “looking at when we’re going to need the next plant in the Delaware.”

All in, 3,405 MMcf/d of the Permian gas processing capacity scheduled to be added in 2024, 2025 and 2026 is in the Delaware Basin, with another 2,050 MMcf/d slated to come online in the Midland. These numbers warrant some discussion. First of all, not all wells are created equal. As we said in All My Rowdy Friends Have Settled Down, there are significant differences in the “gassiness” of wells in the Permian, with considerably higher GORs for many wells in the western reaches of the Delaware Basin (aqua, green and yellow dots in Figure 3 map below) and generally lower GORs for most wells in the Midland and the eastern edge of the Delaware (black and blue dots). [Remember that the GOR is the ratio of gas (in Mcf) to crude oil (in bbl).]

The GOR differences between the Midland and much of the Delaware suggest that while about 60% of the new Permian gas processing capacity coming online in the 2024-26 period is in the Delaware Basin, the wells there are generally gassier, so more new processing capacity would be needed there than in the Midland to support each barrel of anticipated crude oil production growth. For example, a typical new well in Reeves County (in the Delaware) has a GOR of 5:1 or higher — sometimes considerably higher — while the vast majority of wells in Midland County (the heart of the Midland) have a GOR of between 1:1 and 3:1.

Once that reality is factored in, the planned buildout of gas processing capacity in the Permian suggests that (1) the Midland Basin continues to be a primary focus of many E&Ps because its new wells generally produce considerably less gas than their Delaware counterparts (and therefore require less processing capacity per incremental barrel of crude) and (2) producers still have a strong interest in the Delaware Basin’s most productive — and, ideally, less gassy — areas (like parts of Loving and Winkler counties) and are willing to invest in the processing capacity needed to support continued production growth there.

One more thing about processing project locations: The four epicenters of recent processing-capacity growth have been Loving and Reeves counties in the Delaware Basin, with 2,525 MMcf/d and 620 MMcf/d of capacity, respectively, starting up in 2023-26; and Midland and Martin counties in the Midland Basin, with 1,945 MMcf/d and 800 MMcf/d, respectively, in the same period.

As all these new gas processing plants come online and their capacity is utilized, there will be an increasing need for gas takeaway capacity. As we said in OMG and several other blogs in recent months, new gas pipeline capacity out of the Permian has barely kept pace with the increasing volumes of gas being produced and processed. In fact, the pipeline space provided in the second half of last year by a 500-MMcf/d expansion of the Whistler Pipeline and a 550-MMcf/d expansion of the Permian Highway Pipeline (PHP) quickly filled up, and many producers and gas processors can’t wait for the next big takeaway addition — the 2.5-Bcf/d Matterhorn Express — to start up in the second half of this year.

All the new gas processing capacity slated to come online in the Permian later this year and in 2025-26 — upwards of 4,000 MMcf/d (or 4 Bcf/d), according to our numbers — will likely help to fill the new Matterhorn pipeline in relatively short order, indicating that another greenfield pipeline and/or pipeline expansion may well be needed by 2026 to enable the Permian production juggernaut to resume its roll after the ongoing pause. Which pipeline projects those will be remains to be seen — see Come Dancing, which explored the possibilities, for more — but we wouldn’t be surprised to see an announcement or two later this year. And our forecast for Permian production shows the need for more gas processing capacity too.