|
|
|
|
||
Permian Basin closes in on its pre-pandemic oil production peakPRIME PERMIANRay, Ryan. Oil & Gas Investor; Houston Vol. 42, Iss. 12, (Dec 2022): 48-50. As the Permian Basin closes in on its pre-pandemic oil production peak, industry adjusts to accommodate variables in play. If Permian Basin oil production were a stock, Wall Street brokers would insist their clients buy it. By almost any measure, the basin delivers. The 55 counties in Texas and New Mexico that make up the Permian account for almost half- roughly 45%-the U.S' oil production, according to the U.S. Energy Information Administration (EIA). The basin's market share is up almost 20% since 2013. There's no other way to put it: The Permian sustains American oil production. But, since the earliest days of the shale revolution, naysayers have warned that its time in the sun will be short lived. The caution has come from many directions; industry insiders ring out some of the loudest supply warnings. Back in 2017, shale pioneer Mark Papa, then-CEO of Centennial Resource Development, cautioned on the play's great expectations. "Even in a constructive oil price environment, I expect the 2018 total U.S. oil growth will be considerably less than the 1.2 million to 1.4 million barrels per day that many people are predicting," he said. The Permian proved Papa wrong. The basin's 20l7 production of 9.3 MMbbl/d was easily bested the next year. By the end of 2018, Permian oil supply added 17%-1.66 MMbbl/d- for a total 10.96 MMbbl/d that exceeded most predictions. At the end of 2019, the Permian's daily output easily surpassed 12 MMbbl, putting the play's two-year growth average at a staggering 1.3 MMbbl/d. Indeed, it took a worldwide virus and its decimation of demand to slow the Permian's trajectory. But more than two years since COVID-19 upended commodity and global economies, demand is back. Is the Permian back, too? Producers that rolled back their growth-in part driven by positive demand signals but also by shareholder demand-remain gun-shy about calling high-number production goals. Demand is heading upward, but the shareholder insistence for returns before growth is firmly in place. And, as the mighty Permian nears its pre-pandemic production high, questions about its sustainability augment the conversation. What's shaking up Permian production? Oil wells aren't drilled in a vacuum. Lateral length and geographic location contribute to drillers' results, best practices matter and the ability to secure the best vendor contracts is important. Successful management of drilled but uncompleted wells (DUCs) is a factor. But there is more that separates one producer's performance from that of another one, and some of those elements may be harder to quantify, such as internal talent pool and recruitment success. Technology has long greased the wheels of oil production. Improved well design, manufacturing-mode drilling and other advancements are present across the Permian's 86,000 square miles. Lateral length Phillips Johnston, senior E&P analyst at Capital One Securities, said in a recent note to investors that, "Oil productivity per well per lateral foot has in fact deteriorated in the core northern counties that now comprise ~60% of all new wells in Delaware and ~70% of all new wells in Midland." Permian investors have raised concerns about the productivity of new wells, he said. "If you look at the basin as a whole, it is hard to determine if there is degradation," Johnston said. "However, you can find some degradation once you start to isolate the wells by region." Stephen Sagriff, vice president of intelligence at Enverus, told Hart Energy that some productivity degradation is present in the Delaware Basin because activity is ramping up in the gassier parts of the play. Conversely, oil production is flat in the Midland Basin while gas production is down. "The biggest difference when it comes to phase window selection or commodity mix between the two sub-basins is the gassier Midland regions (southeast) are far inferior to the [oilier] areas, while in the Delaware, the gassier west is a lot more competitive with the oily central/east, at least on a single well economic basis, particularly with improved NGL and gas pricing over the last year or so," Sagriff said. The Permian is one of the nation's most mature basins, and many companies have pushed the lateral length of their wells to greater depths. Some attribute these longer laterals as part of the problem. You get a slight trade off with longer laterals "The rate of recovery decreases the farther you push your laterals," said Ted Cross, Novi Labs' director of product management. "Looking at production on a per-foot basis can be misleading. At current prices, operators are able to drill with a little more freedom. They can make their cost back in nine months, so they might find themselves drilling a well that, on the margin, isn't producing up to historical stan dārds. But that doesn't necessitate that all of their inventory will fall into that same model," Cross said. "We've seen over the years operators try different drilling techniques to get the most out of their wells. From that perspective, nothing is different." Location Permian giant Pioneer Natural Resources noted during third-quarter reporting that some 2022 wells did not perform as expected. "The delayed targets have underperformed where we would have anticipated," Richard Dealy, president and operations chief, said during a call with analysts. "They still have great returns. It is just we have better locations in our portfolio" As such, Pioneer will "reshuffle the deck" and defer its delayed targets. Dealy said the firm will focus in 2023 on improving well productivity and returning more money to shareholders. "We've got a higher bar, and it's going to increase our program productivity," he said. "It's going to increase our annual capital efficiency and result in higher free cash flow generation." Recent Novi Labs research found the newly combined Permian player, Coterra Energy Inc., has drilled the Permian's strongest wells since 2018, with wells in the western and northern Delaware sub-basin coming in at an average 210,000 bbl of oil flowing first-year production. On the other end of the spectrum, Ring Energy's wells in the Central Basin Platform only produced 42,000 bbl of oil during its first year of production during that same period. DUCs During the tough years of the pandemic, many companies turned to the cheapest wells they had on their rosters: those that were previously DUCs. The Permian's current DUC count of 1,117 is down 70% from the late 2019 total of more than 3,800, according to the EIA. Each DUC brings with it critical questions about its ability to impact overall production. Specifically, a production variable contrary to reliable production could halt the process. So, why drill a well and then leave it uncompleted? Some DUCs are wrongly classified. A producer drills the well and intends to complete it quickly, but other constraints such as the availability of a hydraulic fracturing crew may slow down the process. Or it could be as simple as counting multiple holes on a super pad as multiple DUCs. And, sometimes, companies do start wells only to determine that the well is not as profitable as originally planned, and it becomes a DUC. In those instances, companies may bring them online during a tight capital market or when oil prices hit a certain threshold that makes them profitable enough. Consequently, with a lack of new drilling, combined with bringing online a historic amount of uncompleted wells, it is possible that the DUCs brought online are dragging production productivity trends downward. No cause for alarm The production from some Permian wells this year hasn't measured up to hopes and expectations, but it doesn't appear to be a concern poised to roil the basin's future. Companies such as King Operating Corp. intend to expand their footprint in the Permian. "We aren't worried about the Permian. Our results have been great," said Jay Young, CEO of King Operating. "Furthermore, every 10 years, the Permian seems to reinvent itself. So, whatever problems the industry is facing today will be solved. In fact, we're actively looking for more Permian deals right now." Enverus estimates there are more than 100,000 undrilled locations left in the Permian that break even at WTI prices of less than $40/bbl. Energy analyst David Blackmon too is confident about the future of the Permian. "We have seen predictions of doom about per-well productivity in the Permian region periodically for a decade now, and the result has always been the same: A steady rise in per-well productivity," Blackmon told Hart Energy "With all due respect to the analysts, what consistently tends to go unconsidered in such predictions is the fact that the oil and gas industry is a technology-driven business in which technology and adoption of it advances every day." Sidebar Productivity degradation is present in the Delaware Basin because activity is ramping up in the gassier parts of the play. -Stephen Sagriff, Enverus "The rate of recovery decreases the farther you push your laterals." -Ted Cross, Nori Labs |
return to message board, top of board |