|ENTERPRISE PRODUCTS PARTNERS L P filed this Form 10-K on 02/28/2018|
Crude oil, natural gas and NGL prices were significantly higher in 2017, compared to 2016 and 2015, although far below peak levels seen in 2014. Nonetheless, U.S. exploration and production (“E&P”) companies have shown that they can grow shale production at a crude oil price of $50/bbl. Oilfield service and E&P companies continue to improve technologies to drill and complete non-conventional wells more efficiently. Some of these improvements include faster drilling, longer horizontal laterals, and higher density fracture treatments. Improved technology has enabled E&P companies to realize higher returns on capital from developing non-conventional resources at lower energy prices.
Rig counts increased rapidly in the first half of 2017. As more wells were drilled, most basins experienced a shortage of completion equipment and crews, forcing producers to defer completions and build their inventory of drilled but uncompleted wells (“DUCs”). The DUC count grew by over 2,000 wells from December 2016 to December 2017, to a total of nearly 7,500 wells, as reported by the U.S. Energy Information Administration. This represents a significant potential volume which we believe could be brought into production starting in 2018. NGL volumes will likely grow proportionately faster than either crude oil or natural gas volumes, as the mix of drilling has continued to shift to crude oil wells and richer natural gas wells.
While changes in drilling rig counts (as reported by Baker Hughes) have historically been a reliable leading indicator of future production growth or decline, recent developments in technology, high grading of drilling locations and the large inventory of DUCs have reduced the correlation between changes in rig counts and changes in production. We believe this to be especially true when comparing current rig counts to those prior to 2015. Rig counts continue, however, to be a reliable indicator of overall E&P activity and investment.
U.S. E&P company sentiment continued to improve in 2017 as the OPEC production freeze had a high level of compliance and storage levels indicated a return to global supply-demand balance. Since May 2016, total U.S. drilling rig counts have increased by 542 rigs, or 134%, to 946 rigs as of February 2018. The crude oil rig count increased by 449 to 765 rigs, an increase of 142% from the low in May 2016. Likewise, the natural gas rig count increased by 100 rigs, or 123%, from the low in August 2016. Not all regions have reacted equally to the recovery in rig counts, with the largest increases seen in the Permian Basin and SCOOP/STACK play in Oklahoma. In the second half of 2017, rig count growth stabilized, however, we believe the current rig count is enough to continue to grow production, even without completion of a significant number of DUCs or further increases in productivity.
The Permian Basin in West Texas and southeastern New Mexico has experienced the largest increase in drilling activity in the country, with the number of active rigs increasing from 134 in April 2016 to 427 in February 2018. The Permian Basin is an oil prone basin with many attributes, including stacked pay zones, light sweet crude oil and a long history of support for the oil and gas industry. The current level of producer activity provides support for the construction of incremental midstream infrastructure in the basin. An area of focus for us has been the development of midstream infrastructure serving producers in the Delaware Basin, which is part of the overall Permian Basin. The Delaware Basin historically has been a relatively lightly drilled area due to a lack of conventional targets. With the introduction of horizontal drilling and identification of stacked targets of tight-rock and shales, Delaware Basin drilling has accelerated over the past five years. These drilling targets have proven to produce not only light crude oil but also lighter and gassier hydrocarbons such as condensate and NGLs. These gassier hydrocarbons have presented to us a large number of midstream opportunities to provide services to producers in the Delaware Basin. We are diligently working to identify attractive midstream prospects from these opportunities to complement our current asset infrastructure.
During 2017, we completed and placed into service two natural gas processing facilities (South Eddy and Waha) and are constructing three additional plants near Orla, Texas in the Delaware Basin. Two of the Orla plants (Orla I and II) are expected to start up in 2018 and one (Orla III) in 2019. When the Orla plants are completed we will operate approximately 1.3 Bcf/d of processing in the Permian Basin, which are all highly integrated with other Enterprise natural gas and NGL assets, including our Shin Oak NGL pipeline that is currently under construction. In addition, we placed into limited service a major crude oil pipeline system, the Midland-to-ECHO Pipeline System that serves producers in the Permian Basin and originates at our Midland, Texas crude oil terminal and extends to our Sealy, Texas terminal and on to our ECHO terminal near Houston, Texas. We are also evaluating several other natural gas, NGL and crude oil projects in the Permian Basin.