It was certainly a good year for U.S. oil companies in 2018. On the strength of surging shale oilfield production, the United States became the world’s largest producer of crude oil. It also became a net oil exporter for the first time in decades. As if that weren’t enough, the United States Geological Survey announced in December that it had assessed the largest continuous oil and gas resource ever found: the gigantic Delaware Basin.
Needless to say, business has been booming. So much so, in fact, that the U.S. Energy Information Administration projected American oil production to eclipse 12 million barrels per day by the summer of 2019. However, these heady days also raise a serious question: are we ready for that much oil? Even as production surges across the nation’s major oil basins, cracks are already beginning to show. Are these just temporary growing pains or will the next Great American Oil Boom ultimately become a victim of its own success?
The Pipeline Pinch
Producing a great volume of oil is difficult. Transporting it from the field to its destination can be even trickier. The problem is that the midstream infrastructure responsible for transporting oil frequently lags behind the rate of production. Of course, this is hardly a new issue. Texas’ Permian Basin, North Dakota’s Bakken formation and many other major oil plays have had takeaway capacity issues for years. Some companies have sought to add more trucks and oil trails, but those methods are potentially hazardous and offer relatively limited capacity.
Instead, most of the oil in the U.S. travels by pipeline. Many of those pipelines, especially in states like Texas and North Dakota, are quickly nearing their maximum takeaway capacity. There are expansions and new pipeline projects in the works that will eventually add millions of barrels in capacity, but most of them aren’t scheduled to come online for another year or more. In the meantime, many producers are faced with deciding whether to temporarily shutter some of their rigs or turn to expensive and problematic transport by rail and truck.
Struggling to Supply the Demand
The shale revolution that’s helped to supercharge the current American oil boom is resource-intensive. In particular, it requires immense amounts of water and frac sand. With so many rigs working over such a wide area, these important supplies have become decidedly scarce. Inflated prices and ever-increasing demand have made it difficult for some producers to secure the steady supplies they need to support operations.
This demand has also created another bottleneck, as frac sand producers and water suppliers struggle with transporting the sheer volume of materials. Sand companies have been busy opening a whole host of new mines, but it remains to be seen whether the output can keep pace with oil production and keep prices low enough for producers. Additionally, frequent droughts in key oil-producing areas may further exacerbate the growing water shortage.
Making things even worse, it’s not just a matter of acquiring water for use in operations. Once the water has been used in the extraction process, producers must then deal with the contaminated results. The water, which is trapped deep underground, is usually disposed of by being put into underground disposal wells or trucked out of the area entirely. In either case, the rapidly rising flood of water has proven difficult to dispose of in a timely and cost-effective manner. Some companies have invested in processes that may allow them to recycle and reuse this water, but the short-term problem still remains.
Insufficient Infrastructure
A modern oilfield is often a place of constant, frenetic activity. Equipment and heavy machinery must be brought in and moved around. Sand, water and other supplies must be trucked in with startling frequency. The area often swarms with oil workers and other personnel. It’s all enough to take a toll on even the most robust infrastructure. Unfortunately, considering the remote nature of most oil plays, the infrastructure is often anything but “robust.”
Not surprisingly, many of the major production areas constantly struggle with infrastructure issues. Roads frequently crumble under the weight and strain of activity, slowing or even disrupting transportation in key areas. Unreliable and underpowered electrical grids lead to frequent outages and insufficient capacity. Producers have scrambled to build out improved power grids, but these large-scale projects often take years to become operational. In the meantime, some companies have explored solar power, wind turbines and other alternative energy sources to help fill the gaps.
Poor roadways and limited road options have created another problem as well. Travel has become far more hazardous with so many trucks and other vehicles streaming in and out of drilling sites. In fact, the Texas Department of Transportation estimates that fatalities from traffic accidents in the Permian Basin increased by 30 percent between 2016 and 2017.
Help Wanted
In addition to all the materials and machinery and infrastructure, it takes a considerable amount of manpower to keep America’s many drill sites up and running. As it turns out, it’s not always so easy to find that manpower when it’s needed. There’s already a shortage of workers across the entire industry, but this problem is expected to worsen just as the pipeline bottleneck begins to ease. In the Permian alone, there are currently nearly 4,000 wells that have been drilled but not opened. As more takeaway capacity comes online, shale companies are expected to begin bringing these rigs online. To do so, they’ll need to find many hundreds of workers over the coming months.
Despite the substantial pay most companies can offer, however, workers are hesitant to buy in. The mass firing of well over 400,000 workers that began in 2014 is still fresh in the minds of many. The industry is strong at the moment, but that’s hardly enough for those who’ve experienced its inherently volatile nature in the past. It’s also not just workers in the field. Oilfield services companies, trucking and logistics operations and other companies involved in the industry are struggling to hire enough employees as well.
At the end of the day, American oil production likely isn’t going anywhere. There’s simply too much oil and too much money for producers to be dissuaded by issues with infrastructure and supply and manpower. The issues will ultimately be solved and production will continue to grow over the long term. In the short term, however, many producers are already planning to take a hit as they work through these growing pains. The question, as ever, is how painful the process will be before it’s through.
