Could the Permian Basin save US oil industry?

 By Chris Dalby

The Permian Basin is truly the gift that keeps on giving…

The mainstay of U.S. oil in New Mexico and Texas began being tapped after World War I. Today, it is still going and is predicted to have reserves for another 100 years, according to new research.
Scott Sheffield, CEO of Pioneer Natural Resources, believes Permian will become the biggest oilfield in the world, even larger perhaps than the Ghawar Field in Saudi Arabia. Permian has yielded close to 30 billion barrels of oil since its beginnings but Sheffield estimates it may have as many as 160 billion barrels. New techniques have even increased oil recovery from 5-7 percent in 2016 to 15-20 percent in 2017.

With oil prices now also rebounding, rigs, hotels and jobs are popping up across the Permian’s territory. Admiral Permian Resources, which focuses on acquiring and developing properties in the neighborhood, obtained a $600 million line of credit in March. Luxe Minerals followed with a $254 million deal. Exxon has doubled its properties there. Chevron has increased its 2020 production target by 35 percent.
While the Permian Basin’s new-found resources are remarkable, it is also inspiring a new slurry of deals in the oil industry that are likely to add a good few years before the industry reaches “Peak Oil.”
This is a rare type of economics in the oil industry. While it has seen rushes on a specific territory, or on a promising new field, it is far rarer for an old faithful of the oil industry to spark such a billion-dollar revival. Even the venerable Energy Information Administration (EIA) has been left breathless. In April, Faouzi Aloulou, an EIA economist, wrote that “the rise in Permian oil production is remarkable. In addition to increases in drilling activity, production has benefited from improvements in drilling efficiency and drilling and completion technology.”
This confidence has led to expectations for a longstanding record being shattered in 2018. In 1970, U.S. daily crude production reached 9.6 million barrels a day, a record that still stands today. It’s estimated that 2017 should come close as it is on track to reach an average of 9.3 million barrels. In 2018, the Permian Basin’s potential should drive that over the top, with an expected 9.9 million barrels. This glut has led companies to rethink their economics. The impact of the Permian Basin’s potential is seen beyond mega-deals, such as those signed by Admiral Permian Resources or Luxe Minerals, but in decisions made at the wellhead. Jesse I. Esparza, a petroleum engineer at the EIA, points to a number of economically sound decisions made, based on evolutions at the Permian Basin.

Selected oil-producing formations in the Permian Basin (Eleanor W Smith, Wikimedia)

Tighter well spacing has allowed more wells to be drilled in the same area, production teams have improved well designs and target zones, a drop in oil prices has refocused oil companies’ attention to their prime assets, and finally, companies are focusing on re-drilling old wells rather than creating new ones.
“Rather than spending capital on drilling new horizontal wells, companies are focusing on drilling and recompleting older vertical wells at a cost of around $1 million per well, compared to new horizontal wells at $5 million to $9 million,” he explains.
This sky-high optimism is being countered, however, by an equally gargantuan gamble. Oil companies have already hedged 25 percent of their future production for 2018, counting on continued increased production and an uptick in prices.
Some have gone further. Pioneer Natural Resources and Parsley Energy have hedged 80 percent of their production, with four other companies having hedged 50 percent or more. Paul O’Donnell, an industry analyst for IHS Markit, warns that, while companies can expect a production increase of 25 percent, “unless oil prices climb back above $50 a barrel soon, they aren’t likely to have the same financial advantage in 2018.”
Producers have already begun to feel the squeeze from low prices, having dipped below $45 for the first time in 2017 in late June. Should this remain the case, those having sold their futures at $50 or more may see the Permian in a very different light.
This slight cloud on the horizon may yet grow darker if calculations suggesting that Permian Basin reserves have been underestimated prove to be true. While Sheffield’s estimation of 160 billion barrels may be a bit enthusiastic, others put them as low as 3.7 billion. The Permian Basin has proven its value as a driving force behind the elusive goal of American energy independence. But just like any gift that seems too good to be true, caution can go a long way.

SEE MORE: US shale oil production continues to increase by Andrew Burger

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about the author
Chris Dalby
Journalist. Editor. China, Mexico, Latin America, Asia, place branding, Olympics, oil and gas, mining, renewable energy, international politics.