To Many's Dismay, Permian Produces More Gas and Condensate Instead of Oil and Profits

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As oil prices plummet,ย oilย bankruptcies mount, and investors shun the shale industry, Americaโ€™s top oil field โ€” the Permian shale that straddles Texas and New Mexico โ€” faces many new challenges that make profits appear more elusive than ever for the financially failing shale oilย industry.

Many of those problems can be traced to two issues for the Permian Basin: The quality of itsย oil and the sheer volume of natural gas coming from its oilย wells.

The latter issue comesย asย natural gas fetches record low prices in bothย U.S. and global markets.ย Prices for natural gas in Texas are often negative โ€” meaning oil producers have to pay someone to take their natural gas, or, without any infrastructure to capture and process it, theyย burn (flare) or vent (directly release) theย gas.

As DeSmog has detailed, much of the best oil-producing shale in the Permian already has been drilled and fracked over the past decade. And so operators have moved on to drill in less productive areas, one of which is the Delaware sub-basin of the Permian. Taking a close look at the Delawareย Basin highlights many of the current challenges facingย Permian oilย producers.

Delaware Basin Producing More Gas Along With theย Oil

The Delaware Basin is where most of the new oil production is coming out of the Permian.ย As a Bloomberg Wire storyย reported in December, โ€œin recent years investments have shifted to the Delaware, where output is much gassier than in the historic Midland portion of theย Permian.โ€

The last thing a Permian oil producer wants is to have natural gas coming out of the ground with the oil because, as Bloomberg notes, this persistent โ€œnuisanceโ€ย is โ€œundercutting profits for explorers.โ€ That’sย a generous assessment because many explorers have no profits to undercut, only losses toย grow.

Shale wells become โ€œgassier,โ€ or produceย more natural gas,ย as theyย age and oil production falls.ย And this problem hasn’t improved for wells in the Delaware that areย drilled closer together, compoundingย the Permianโ€™s gasย problem.

With natural gas prices often going negative in Texas, producers are turning toย flaring and venting more of the gas, which is mostly the powerful greenhouse gas methane. Public awareness has been rising for this issue,ย due in part toย the work of people like Earthworks’ Sharon Wilson who uses a special camera that can โ€œseeโ€ invisible methane leaks from the oil and gas supply chain. As a result, public pressure has been growing on the industry to deal with its methaneย problem.

Fracking CEOs have been publicly noting that this issue is going to interfere with their โ€œsocial license,โ€ or ongoing societal acceptance,ย to keep drilling and fracking. But if the U.S. shale industry canโ€™t flare or vent its excess methane, those companies willย likely be forced to shut down oil production due toย cost.

Another example of how much pressure has been building on shale companies to address their methane problem: Flaringย is currently the key issue inย an election for one of the seats on the Texas Railroad Commission,ย the state oversight body that in reality hands oil and gas producers a free pass to flare and vent.ย In this election,ย candidates challenging the incumbent have beenย promising to do more to stop flaring and venting.

It also is likely to become a much bigger issue as new satellites come online that can accurately map industry methane leaks from space, such asย the satellite that recently revealed a well blowout in Ohio that created the second biggest methane leak in U.S.ย history.

Much of the Oil Being Produced in the Permian Isnโ€™t Actuallyย Oil

Besides its gassy oil wells, the Permian Basin has another big problem. Fracked oil has always been light oil โ€” often referred to as โ€œlight tight oilโ€ โ€” which is due to the high percentage of natural gas liquids contained withinย it.

There are two types of oil coming out of Permian Shale operations:ย West Texas Intermediate and West Texas Light. The oil is classified based on an industry measurement of aย petroleum product’sย heavinessย compared to water, aย  measureย known as โ€œAPI gravity.โ€ West Texas Intermediate hasย an API gravityย range of 38-44 whileย West Texas Light rangesย from 45-49. At 50ย API and above, the petroleum liquidย is no longer considered โ€œoilโ€ but insteadย classified as โ€œcondensate.โ€ (However,ย some in the industry consider anything over 45 API to be condensate.)

Some in the industry are calling the condensate โ€œsuper-lightโ€ or โ€œultralightโ€ oilย โ€” which looks like another industry effort to obfuscate one of its many problems. As I reported in early 2015, when the oil industry wanted to get around the crude oil export ban (since lifted), it convinced the Obama administration to let it export โ€œcondensateโ€ย because that wasnโ€™t considered crude oil. No one was calling what was coming out of shale basins โ€œsuper-light oilโ€ย then.

Lighter oil is worth less than the heavier oils that U.S. refiners want.ย West Texas Light is worth $1 to $2 less a barrel than West Texas Intermediate. Condensate is discounted even more, and these discounts arenโ€™t helping aย fracking industry struggling with debt and impatientย investors.

This problem was already well known in 2018. That was when independent research consultancy Energy Aspects highlighted the issue with the clever phrase:ย โ€œThe unbearable lightness of the Permian.โ€ย โ€œUnbearableโ€ because whatever producers want to call it, โ€œcondensateโ€ or โ€œsuper-light,โ€ the Permianย is pumping out a productย that is less valuable and pumping out a lot of it โ€” especially in the Delaware sub-basin, where drilling activity isย increasing.

At the time, Energy Aspects noted, โ€œApproximately 70 percentย of new oil produced in October 2018 in the Permian basin was condensate (defined as being >50 API).โ€

Production Costs Areย Unsustainable

In addition to the Permian posing challenges to oil producers, the much-lauded shale basin has been a financial disaster for oil service providers โ€” the companies that do much of the actual work of drilling andย fracking.

The two largest oil service providers recently reported huge losses.ย Halliburton lostย $1.1 billion in just the fourth quarter of 2019, with CEO Jeff Miller saying he believed shale oil production in the U.S. has peaked.ย Schlumberger lostย over $10 billion last year and claim that shale producers suffered from โ€œbudget exhaustion and cash flowย constraints.โ€

And in late January, oil industry analysts at Wood MacKenzie held a webinar titled, โ€œShale service costs in 2020: what is the market telling us?โ€ย toย discussย where production costs โ€” often the money that is paid to oil services companies โ€” were headed in theย future.

The conclusion was that costs have to go up because the current cost structure is unsustainable, a conclusion thatย is relatively obvious when looking at the huge losses in shale by the industryย leaders.


Slide from January 2020 Wood Mackenzie webinar on oil services production costs. Credit: Woodย Mackenzie

2020 Will Be More Difficult for Shale Industry and theย Permian

In 2018 the Wall Street Journal ran a headline predictingย that would be the year the shale industry finally made real money โ€”ย it wasnโ€™t. Earlier this year, the CEO of Parsley Energy made the same claim about 2020. But with oil prices falling and all of the challenges facing the industry, the odds are he too will join a long list of people making incorrectย predictions about the future profitability of the shaleย industry.

Besides those problems outlined here already, there are other ongoing issues facing frackers. Highly toxic fracking wastewater disposal continues to be a challenge, well casing failures that cause costly well blowouts are a growing issue, and the industry still has not figured out how to properly space wells to avoid lower wellย production.

And wells in the Permian are declining muchย faster than the industry models predicted โ€” or at least much faster than the industry promisedย investors.

Right now, there is no good news for the Permian or the fracking industry, and 2020 will very likely be another year of big losses, more debt, and more bankruptcies. Each year makesย increasingly clear that the vaunted shale boom will be one of the biggest financial busts in U.S.ย history.

Main image: Iraan, Texas: Former oil boom town. Credit: Jan Buchholtz,ย CC BYNCNDย 2.0

mikulka color
Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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