The research found that major oil operators are projected to produce more than half of the oil in the Permian over the next four years, representing a historic shift in economic power. These large companies are consolidating production, resources and supply chains that will meet the majority of domestic needs. Their acquisitions of acreage in the Permian, as well as ownership stakes in the pipelines and downstream refineries and petrochemical facilities, means that smaller independent producers who traditionally sell to the majors will now need to market internationally and export overseas.

In the early days of this oil revolution, the independent oil and gas companies were nimble and profitable. They acquired leases, assets, and mineral rights with more alacrity than their major counterparts. As the industry matures, major companies like Exxon and Chevron are speeding up production and decreasing margins and pushing out the independents. “The Permian Basin used to be a place where wildcatters reigned and now, with technology, the economy is being driven by manufacturing,” said Patton. Independents are facing new limitations from the investment community to limit production volume to what can be achieved with cash on hand. At the same time, Exxon and Chevron have each announced plans to produce one million barrels a day. “The inevitable result will be consolidation by independents in an effort to survive,” he added.

With major producers owning their own refineries and petrochemical facilities, they no longer need to purchase crude from independent producers. Finding new, foreign customers has become the priority for independents. The findings of the study are clear: independents must combine balance sheets to buy downstream assets, or form a combined marketing organization to sell their product internationally.

“While refineries have increased processing to keep up with production, supply of crude oil will soon outstrip demand and the producers will need to find new customers,” said Dr. Ramanan Krishnamoorti, chief energy officer at the University of Houston and co-author of the research. “Even though there is more than $90B in construction projects for terminals, LNG, refining and petrochemical facilities along the Texas and Louisiana Coast right now, and another $200 billion planned for the next decade, construction can’t keep pace with the supply of oil coming out of the Permian.” The majority of the recent incremental capacity is, and will continue to be, directed at the Port of Corpus Christi.

An existing obstacle forecasted to persist for the next three years is the ability of Very Large Crude Carriers (“VLCC’s”) to navigate Gulf Coast waterways to refill for export. Waterways along the Gulf Coast don’t provide the 75 feet of depth needed to accommodate fully-loaded carriers, requiring ship-to-ship transfers (known as “lightening”) offshore. The demand for U.S. crude has highlighted the need for deep-water terminals off the coast of Freeport, Texas City, Corpus Christi, Brownsville and Louisiana. These projects have been proposed, but permitting and execution permissions will delay progress, thereby creating additional bottlenecks.

While the report presented many challenges being faced by the dynamic oil industry, it also presented emerging opportunities.

As crude production creates more natural gas, the ability to capture, market and deliver it to potential customers will provide new revenue streams from this byproduct for both producers and service providers.

“Commodity service providers will face continued margin erosion in the fact of customer consolidation and ultimately witness the destruction of enterprise value. However, differentiated service providers will thrive as long they are able to demonstrate either cost savings or incremental production for their customers. These companies provide the rigs, pressure pumping equipment, wireline, wellhead, cement, chemicals and delivery services, and the need is not forecasted to diminish,” concluded Patton.

About UH Energy
UH Energy is an umbrella for efforts across the University of Houston to position the university as a strategic partner to the energy industry by producing trained workforce, strategic and technical leadership, and research and development for needed innovations and new technologies.

About Hastings Equity Partners
Hastings Equity Partners is a private equity firm focused on investing in lower, middle-market energy and industrial service businesses. Hastings' approach is to leverage the extensive operational experience of the firm's managers and investors, many of whom are active or former CEOs of Fortune 1000 companies. In addition, due to the firm's expanding portfolio of industrial services companies, it is able to share best practices, technology trends and contacts across its platform to ensure that all of its investments benefit. Hastings strives to help its portfolio companies create sustained value for their employees, customers and investment partners.

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