Appears as if some of the first movers overplayed their hand a bit.
“Is there a parent-child relationship? Absolutely. Has it been there since time immemorial? Absolutely,” Diamondback Energy Inc. CEO Travis Stice said at the conference. “It’s our responsibility to account for the economics of the degradation between a parent and child well, and it’s our responsibility to dial that into our forecast.”
Stice said Diamondback hasn’t had to cut back its activity in response to those issues, like some of its peers who have had to widen spacing after production failed to live up to expectations.
“I think what you’re seeing is reserve reports coming out at the end of last year with a lot of negative performance revisions in there,” he said. “That’s really the first tell as an industry that you’ve overcapitalized your assets.”
Well, more than one maintenance event appears to have coincided with the cratering prices, so we’ll start with those. On March 18, the same day that negative prices emerged yet again, Kinder Morgan’s El Paso Natural Gas (EPNG) pipeline announced a force majeure that reduced capacity by about 200 MMcf/d on its Line 2000, which flows west out of the Permian. While this event was widely cited as a culprit, our analysis of flow data indicates that the gas previously flowing on Line 2000 has been largely re-routed to EPNG’s other two legs that flow west: Line 1600 and Line 1100. Re-routing gas sometimes requires producers to acquire additional transportation capacity to move their gas, which can mean that supply prices have to be bid lower to cover the additional cost of transport.
Two side to every story.
An extension to the Sunrise Pipeline added an estimated 120,000 barrels per of takeaway capacity from the Permian region earlier this year, boosting pipeline capacity to Cushing, the EIA said. Another pipeline delivering natural gas liquids from the Permian to the Gulf Coast, the Seminole-Red pipeline, was repurposed to deliver crude oil. Seminole-Red is expected to be fully operational by April, adding an estimated 200,000 barrels a day of takeaway capacity.
Although Permian production is expected to grow, the additional pipelines will prevent Permian prices from falling to the same steep discounts that occurred in second and third quarters of 2018, the EIA said.