MIDLAND, Texas—Activity in the Permian Basin has “absolutely” slowed down in what Joel Fry, a principal at private-equity firm Tailwater Capital LLC, called the periphery of the basin in Culberson County, Texas.

Fry, who took part in a panel discussing Permian Basin takeaway at Hart Energy’s Executive Oil Conference on Nov. 7, said the slowdown is the result of the Permian-Gulf Coast basis differential.

Fellow panelist Steve Pruett, president and CEO of Elevation Resources LLC, said he “really hasn’t seen a slowdown in drilling activity” in his area due to takeaway constraint. Rather, he’s seen investor pressure on operators to spend within cash flow—a mandate that took hold beginning in 2017—driving the pace of activity.

Pruett said his company, a producer in the heart of the basin, has paused activity due to changing what type of rig it will use in development, from a “skidding” rather than a “walking.” Elevation’s production moves to refining capacity in El Paso; the Permian Basin has some 500,000 barrels per day (bbl/d) of indigenous refining capacity.

Parsley Energy Inc. (NYSE: PE) is also pausing activity, which Carrie Endorf, the company’s vice president of reservoir engineering and planning, said was “really related to capital discipline” and not due to constraint. The company is working on its 2019 budget, she added.

“At Parsley, we haven’t seen any problems” with the ability to get its crude oil to market, Endorf said during the conference panel. “At this point, we’re looking at 2020,” but, for 2019, “we’re in good shape.”

Pruett added that a great deal of demand capacity for Permian crude is the result of the winning reversal in 2015 of the U.S. oil-export ban in 2015, which he attributed to the leadership of Scott Sheffield, chairman of Pioneer Natural Resources Co. (NYSE: PXD).

Analysts anticipate Permian on-pipe takeaway constraint to persist into the fourth quarter of 2019 and, possibly, become a concern again in 2022. Production in the Permian Basin is some 3.2 million bbl/d currently; takeaway capacity is some 3.2 million bbl/d.

Growth in Permian output “brought the oil-price collapse one year forward,” said Reed Olmstead, director of North American onshore research and business development for IHS Markit, during the conference panel. When visiting clients, Olmstead said: “I can’t speak to any [country] without the first question being the Permian Basin.”

Pruett said there are more immediate concerns to Permian producers. “The risk of NGL fractionating capacity is looming over us,” he said.

Fry, whose firm has investments in both hydrocarbon- and water-handlers, said: “Some folks are projecting 20 million bbl/d of water[-handling] growth.” Both the Midland Basin and, particularly, the Delaware Basin, produce more water than oil. “Houston, we have a problem,” he added.

In addition to needing to dispose of produced water, producers need to source non-contaminated water for fracture-stimulation. (Bio-contamination of in-formation hydrocarbons can create H2S)

Pruett said Elevation’s frack work was delayed this year while the city of Odessa, Texas, needed more water for power-gen. “Power supply is an [increasing issue]. We ended up having to do spot purchases of water at two times our normal rate,” he said.

Elevation and other operators that have completed holding their acreage by production are switching to pad drilling, though, and this will mean they can begin recycling water, he added.

Labor issues are another concern. The city of Midland has been unable to collect garbage, at times, for lack of drivers as a result of competitive oilfield demand for personnel, Pruett said. “It’s chronic,” he said.

Olmstead said his room at the La Quinta the evening before cost more than his room in Tokyo. “That just blew me away,” he added.

The question Olmstead gets from clients is: “What’s the limit to Permian production growth?” The issue isn’t with the subsurface; operators know the rock well, he said. Rather, it’s “how many trucks you put on the road? How many hotel rooms? Where are we going to build the next McDonald’s? It’s congestion ‘above ground.’”

“Yeah, the basin can absorb another 250 rigs. How are you going to move them? What road is that going to go on? Who are you going to pay to do it? Where are you going to find the labor? It’s all ‘above ground.’ It’s the escalating cost of everything,” he said.

Nissa Darbonne can be reached at ndarbonne@hartenergy.com.

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