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US Shale Producers Battle To Meet Iran Shortfall

Financial Times

As President Donald Trump’s decision to reinstate sanctions on Iran sends oil prices higher, consumers and the administration might hope that US producers could come to the rescue with increased production.

But logistical constraints, in particular insufficient pipeline capacity at the heart of the US shale boom in west Texas, are limiting how quickly American companies will be able to replace any lost Iranian crude exports taken off the global oil market.

The difficulties being experienced in shale country help explain why the US has talked to large oil producers abroad about ways to increase supply and offset any impact from its exit from the Iran nuclear deal. The talks were revealed by Steven Mnuchin, Treasury secretary, hours after Mr Trump’s announcement on Tuesday.

Oil produced in the Permian Basin of Texas and New Mexico, the white-hot centre of the shale boom, is becoming trapped with no easy route to a refinery or an export terminal.

The hectic pace of drilling and the productivity gains have boosted output from the Permian Basin by 60 per cent in the past two years, to 3.2m barrels a day. The problem is that the pace of the boom is straining the ability of the region to keep up, with workers, with equipment and with pipelines.

“There is a huge capacity issue,” says John Zanner of RBN Energy, a research firm. “For all intents and purposes, pipelines are full.”

The favourable economics for shale producers created by higher prices and lower costs mean that US oil output is already rising fast, and is expected to average about 1.4m barrels a day more in 2018 than in 2017.

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