Its present lull notwithstanding, the Permian Basin has been a production behemoth for years.
This past May, for example, it coughed up 3.2 million barrels per day. Back in February, when the United States produced more than 10 million barrels, the Permian provided about 40 percent of it. This was the highest level of U.S. production since, well, since anyone started keeping records in 1920.
One more statistic: This past April, the 449 rigs in the Permian, according to market-data firm Baker Hughes, were 44 percent of all the rigs drilled that month in the country … and 22 percent of all the rigs filling in the world.
Brad D. Wright, managing director of acquisitions and strategic planning for Plains All American Pipeline, who will be leading a program entitled “Permian Crude Oil Takeaway” at this year’s AAPG Global Super Basins 2019 conference: The Permian, said we have a lot riding on the place.
“The Permian is a significant resource and will be the primary growth driver of U.S. production growth over the next several years,” he said.
More than half of all horizontal rigs operating in the Lower 48 are located in the Permian.
The Permian’s footprint, though, is potentially even be more impressive.
According to Bloomberg Markets, the Permian Basin may become the largest oil patch in the world over the next decade.
Pipeline, Price and Other Problems
The “Permian Crude Oil Takeaway” is not just a metaphorical turn of the phrase that will deal with the lessons gleaned from the history of the giant basin. We’re talking hard numbers here – the actual oil and gas that has and will be taken from the ground.
The future, it seems, is bright, even if the present is experiencing a bit of a hiccup, as infrastructure problems in the Permian are playing a role in the slight decline of productivity in recent months. The main concerns have to do with pipelines – there simply aren’t enough of them, and the existing pipelines are full. It is a serious enough issue that many smaller drillers are sitting out the worst of these problems and are planning to come back in 2019.
Wright said the pipeline problem might be a bit overstated.
“Yes, pipeline constraints impacted growth and price differentials, but the Permian will still have a tremendous amount of growth in 2018,” he said.
Another problem is the increase in DUCs (drilled but under completed), which are the wells companies have drilled but have left uncompleted. As the number of DUCs rise, it looks like all these wells are unproductive. Other problems, too, are cropping up, including issues surrounding rigs, labor, sand and water.
There is also the matter of recent steel tariffs. Companies wanting to build extensions and increasing supply routes are, for the moment, having some second thoughts, especially considering the recent volatility in the market. Overstating supply growth is dangerous enough without the extra cost of steel.
And then of course there’s the price of the oil itself.
“The recent price drop,” said Wright, “may impact activity next year, particularly if WTI (West Texas Intermediate) stays below $50 for a longer period of time.”
Projected Growth
That’s the bad news.
Here’s the good. And there’s plenty
more of it.
For starters, Wright said people are hanging tough.
“Producers are currently in the budgeting cycle but early indications are (they) will stay committed to operating within cash flow,” he said.
And that is because there is quite a bit of momentum built up that supports production growth, including, he mentioned, those DUC wells which will eventually come online
Activity by larger, less price-sensitive producers like Exxon, Chevron and Oxy will also mitigate some of the slowdown.
According to an IHS Markit report, by 2023, Permian Basin oil production will have all these problems ironed out (or most of them) and is expected to reach 5.4 million barrels per day, especially as more of these DUCs are completed. That’s more than any other petroleum exporting country besides Saudi Arabia. Additionally, the report said the growth will come from more than 40,000 new wells and $300 billion in upstream spending during 2018-23. The production of natural gas and natural gas liquids from the Permian is forecast to double during this period, reaching 15 billion cubic feet per day and 1.7 million barrels per day, respectively.
How Far Will the Rocket Go?
The reasons are obvious.
As shale technology has increased, the productivity of existing wells has as well. Consequently, new wells are more productive and old wells originally thought to be dry, aren’t.
In 2011, for example, there were approximately 378 wells in the Permian, compared with 352 in 2014, which, considering the collapse of the WTI price at the time, was impressive.
Back in August, EIA forecast that U.S. crude oil production would average overall 10.7 million barrels per day in 2018 and 11.7 million in 2019. That would surpass the previous record of 9.6 million set in 1970. In its Short-Term Energy Outlook, the agency concluded the increase – more than half, would come almost exclusively from tight oil, in particular, the Permian region in western Texas and eastern New Mexico.
All this, said Wright, is why it is a good time to review current market environment and expectations.
And that environment, while positive, is also challenging, for while the amount of capital invested between now and 2023 is up (from $150 billion in 2012 to $308 in 2017), there are questions about:
- How much Midland and surrounding areas will react and accommodate to such growth, and
- The production itself. As shales mature, companies are discovering how to complete them and where to avoid those wells unproductive or spent.
Wright, at the end of the day, is optimistic about the Permian, as are most observers.
As Raoul LeBlanc, executive director and head of the IHS Markit Performance Evaluator said recently about the potential, “How far will the rocket go and how much rocket fuel will you give it?”