Can The Shale Boom Avoid These Bottlenecks?

Shale companies continue to drill at a frenzied pace, adding rigs and breaking U.S. oil production levels with each passing week. Yet, the oil production is becoming increasingly geographically concentrated. Not only is the Permian basin accounting for much of the new oil production in the U.S., but a relatively small number of counties within the Permian are home to most of that action. 

The drilling craze in the Permian has been going on for some time, but activity continues to pick up pace. The rig count in the Permian has surged over the past year, and jumped by 18 in the most recent week for which data is available, to 427, the highest total for the basin since early 2015. 

But the Permian encompasses a wide swath of territory, and the rig increases are really concentrated in surprisingly small geographical area. 

The rig count in the sub-basins of the Delaware and Midland has jumped by 54 since last summer, rising to 388. There are 25 counties located within these two sub-basins, but really, 95 percent of drilling activity is located in just 12 of them, according to a research note by Standard Chartered. Digging deeper, roughly half of that activity is located in just four counties — Midland, Reeves, Lea and Eddy. 

Against that backdrop, the shale bonanza “has an increasingly narrow base,” Standard Chartered analysts wrote, growing rapidly in this core area at a time of “sluggish activity elsewhere.” For U.S. oil production, that may not necessarily be a problem, as long as the region can handle the blistering pace of drilling. 

Fourth-quarter earnings will be released in the next few days and weeks, and if the shale industry continues to report strong production gains from this small geographical footprint, “then the Midland and Delaware basins seem set to lead strong U.S. growth in 2018,” the investment bank said. 

However, because so much drilling is concentrated in such a relatively small area, the risk is that bottlenecks will start to crop up. The strain on gathering lines, pipelines, processing facilities, plus a shortage of fracking crews, labor and/or equipment will become a point of focus as production continues to mushroom. If a number of shale companies raise concerns about infrastructure or other equipment and services bottlenecks in these areas, Standard Chartered says the heady growth forecasts for U.S. shale “may disappoint.”