By Syed Rashid Husain
Crude prices have stabilized at above $50/bbl. Yet there are growing fears that as a result of this stabilization - courtesy the OPEC agreement - the US shale output would grow and grow resolutely.
“The general perception is that OPEC is cutting production, which is supporting prices, but high stock levels, rising rig counts, and growing US production are capping gains,” Tamas Varga, an analyst at London brokerage PVM Oil Associates, was quoted as saying in the press.
Societe Generale oil analyst Michael Wittner has also been underlining that the US shale oil output was recovering faster than expected. “Rig counts are increasing at an accelerating pace, and given the technological advances of the past three years, this should translate into significant supply,” Wittner told the press. “US shale is coming back, and it’s coming back strong.”
And the Permian basin of West Texas is the real reason behind the ongoing speculation that crude markets may not stabilize and realize the expected boost from OPEC’s output cut agreement. And there are indeed reasons for this. Permian acreage is a prized asset because of its geology that allows drillers to produce oil at low prices. According to some estimates, Permian producers could sustain output while the market crude prices are around $40 a barrel. Some even speculate it could sustain even at $30 a barrel market price. This though needs to be put to test!
Thus Permian dominates the US crude oil industry. As of February 17, out of a total of 597 oil rigs in operation in the US, some 303 oil rigs were operating in the Permian basin only, indicating its dominance.
A significant portion of growing US oil production is, therefore, expected to come from the shale fields in the Permian Basin. The output of the basin is expected to ramp up to 2.5 million bpd by the end of 2017, up from roughly 2.1 million bpd today, according to estimates given by Sam Burwell, an analyst with Canaccord Genuity Inc. If prices remain approximately at today’s levels, that number could reach three million bpd by the end of 2018.
And there is still room for it to grow further. Last November the US Geological Survey (USGS) reported around 20 billion additional barrels of undiscovered, technically recoverable oil in the Permian’s Wolfcamp shale region alone.
OPEC is also conceding the rise in US shale output. In its February monthly market report, it said that the gains in total non-OPEC supply forecasts were “made mainly based on US onshore drilling activities and more announced spending by operators on production for this year.”
By OPEC’s estimate, US oil production in November was 8.9 million bpd, a gain of about 10,000 bpd from October, but still 4.3 percent lower year-on-year. “A move towards higher prices may lead to a resurgence in US tight oil production from the most prolific shale regions.” The Permian shale basin, in particular, has “remarkable potential,” OPEC emphasized.
The Permian has been producing since the 1920s. It hit a peak in the 1970s when they drilled vertically into reservoirs and the natural pressure immediately caused the oil to flow. Over the next 30 years, however, crude output declined throughout the United States, making the country more dependent on imported oil, mainly from the OPEC producers in the Middle East. That also became a strategic concern to many in Washington.
But with the advent of horizontal drilling and fracturing, the scenario has changed. Since 2010, the United States has been in an oil-and-gas boom. In 2015, domestic production was at near-record levels, and the US became the top crude producer of the world too.
Now with the crude prices stabilizing at above $50/bbl and President Trump planning to double down on the oil and gas industry, lifting regulations and drilling on federal land, the chances of a surge in US crude output is a reality.
Today there are more than 900,000 active oil and gas wells in the United States, and out of them, more than 130,000 have been drilled since 2010 only, Drillinginfo, a company that provides data and analysis to the drilling industry, reported.
Drilling companies active in the Permian basin are using a combination of sophisticated hydraulic fracturing and new horizontal drilling techniques to unlock massive untapped oil and gas resources sitting in layers of shale rock. Consequently, in places like Andrews, Tex., within the Permian geologic formation, thousands of new wells have been drilled in the last 10 years.
According to a Bloomberg Intelligence survey, today, Permian is the most attractive play for investors. The Midland and Delaware basins within the Permian helped the oilfield reach a new high of $26 billion in merger and acquisition activity last year.
Mid-January, ExxonMobil announced a $5.6 billion deal with the Texas’ Bass family acquiring companies owned by them that control parts of the Permian in New Mexico. The purchase roughly doubles Exxon’s holdings in the Permian basin, adding acreage with an estimated 3.4 billion barrels of oil equivalent. The assets are located in the Delaware Basin, part of the larger Permian.
ExxonMobil has been adding tens of thousands of acres to its Permian holdings over the past three years, making deals with private landowners like billionaire Autry Stephens, to partner on drilling.
Rex Tillerson, the current Secretary of State in the Trump administration, has been the CEO of Exxon before moving to Washington. He is reported to have himself negotiated the deal with the Bass family. Some believe it as a parting gift by Rex Tillerson to his erstwhile company of 40 years.
The deal is the largest oil and gas acquisition in the United States since crude prices crashed in November 2014, according to Houston-based oil and gas research firm PLS. “This acquisition strengthens Exxon Mobil’s significant presence in the dominant US growth area for onshore oil production,” Exxon Chairman and CEO Darren W. Woods said in a statement. “This investment gives us an exceptional Delaware Basin position ... that can generate attractive returns in a low-price environment.”
The adjusted per-acre price for Exxon’s purchase comes in at about $20,000, “a very good number for New Mexico,” said Andrew Dittmar, mergers and acquisitions analyst at PLS was quoted as saying.
The deal marks the second recent purchase of Delaware Basin assets controlled by a family. In September, EOG Resources bought Yates Petroleum for $2.5 billion. The Yates family’s history in American oil stretches back about a century.
EOG paid about $9,000 per acre in that deal, which was also centered on New Mexico’s Lea and Eddy counties, PLS data shows.
Exxon’s deal also comes just one day after Noble Energy paid $3.2 billion, including debt, to buy Clayton Williams Energy. That acquisition focused on assets in the southern Delaware Basin in Texas, at a price of $33,000 per acre, according to PLS.
Permian basin thus continues to remain the focus of attention today.
