The Permian Boom Is Coming To An End

Authored by Nick Cunningham via OilPrice.com,

The pressure on shale drillers to throttle back on their aggressive drilling continues to crop up in new places, and there are growing signs that the Permian is slowing down.

Shale companies spent just $5 billion on land deals in West Texas in the last six months, a fraction of the $35 billion spent in the prior nine-month period, according to the Houston Chronicle, citing Wood Mackenzie data.

It’s the latest piece of evidence to suggest that “Permania” might be easing. The hottest shale basin on the planet has suffered from rising costs as too many companies pour money into West Texas. The crowded field has pushed up the price of land, labor, oilfield services, rigs and more. That has led to a rude awakening for a lot of shale drillers. "It's just taken the edge off the Permian," said Greig Aitken, head of upstream oil and gas mergers and acquisitions at Wood Mackenzie, according to the Houston Chronicle.

Many signs suggest that the falling costs of production have stopped falling. In fact, production costs are on the rise again, for a few reasons.

First, the low hanging fruit of cost cutting has ended - there’s no fat left to cut and deeper reductions would mean cutting into bone.

 

Second, as mentioned before, there is cost inflation in a lot of areas, including labor, fracking crews and acreage.

 

But arguably the most troubling development for shale drillers would be if the production figures from the oil well disappoint - and there are pieces of evidence that indicate there is cause for concern.

Over the summer, Pioneer Natural Resources reported a much higher than expected gas-to-oil ratio (GOR), raising alarm bells for investors worried about Permian production problems. The anxiety was compounded by the fact that many consider Pioneer one of the stronger shale drillers in the Permian. The company also revealed that it drilled some “train wreck” wells, although it reassured investors that it had solved the problem.

But as The Wall Street Journal notes, the “solution” added an additional $400,000 to each well. In other words, costs are adding up in many places, which will ultimately push up the breakeven price for shale drilling. Meanwhile, other E&Ps have had to lower their production guidance because of the backlog for oilfield services, which are delaying operations.

There’s a growing consensus that the pace of shale drilling needs to slow down, or else E&Ps will destroy value.

“All these factors are pointing to slower, more methodical development,” said David Pursell, managing director at Tudor Pickering Holt, according to the WSJ.

 

“That needs to happen.”

A shift toward more “methodical” development would likely mean that U.S. shale undershoots growth forecasts. While the EIA expects U.S. oil production to top 10 million barrels per day, the more prudent approach advocated by more and more shale investors would likely mean output remains flat for years to come, never topping 10 mb/d, according to BTU Analytics.

“There are no new shale plays that have come forward,” Mark Papa, CEO of Centennial Resource Development Inc., told the WSJ.

 

“Their ability to spew forth infinite streams of oil is really just a myth.”

The EIA estimates that shale production is still on the rise, but further gains will be much harder to obtain. The rig count is still slowly ticking up, but the large weekly increases in rigs appears to be over. Because there is a lag between movements in the rig count and subsequent shifts in oil production, the recent slowdown in the rig count raises the possibility of oil output plateauing later this year.

Moreover, with several years of data on the books, it appears that while breakeven prices vary from company to company, the industry in the aggregate appears to start and stop at around $50 per barrel. With WTI struggling to hold gains above that threshold, there’s little room to run for shale companies. The explosive growth in the shale patch will need much higher oil prices if it is to continue.

The recognition that the Permian bonanza might be overdone could mark the dawn of a new era in which shale companies feel compelled to take a more cautious approach and live within their means.

Some activist investors are seeking dramatic changes to executive compensation as a way of incentivizing profits rather than simply higher levels of drilling. Pioneer Natural Resources’ CEO Tim Dove recently told an industry conference in Oklahoma City that he was feeling the heat from a “thundering herd” of investors, pressing him to focus on shareholder returns.

Comments

richsob Sun, 10/08/2017 - 18:48 Permalink

The only thing that limits behavior in the oil patch is the availability of money.  As long as some bank/investor/whoever will fork out the money for exploration, the game keeps on spinning.  Remove the money and the game stops.  That is the ONLY thing that enforces discipline in the oil business.

ThrowAwayYourTV Sun, 10/08/2017 - 18:50 Permalink

Everybody standing around the hole holding their hand out while Joe, I mean jos'e, digs the hole.Pretty soon there isn't another spot left to stand around the hole. And Joe, I mean Jos'e, looks old and tired. 

HowardBeale HowardBeale Sun, 10/08/2017 - 20:12 Permalink

But then, that's not the whole story:

Peak Permian Prevents Permanent Partying by the Powers who've Pillaged a Panoply of Peons into Protracted Poverty while Peddling a Plethora of Perfidious Prose, Promises of Prolific Pastures of Piss-Poor Petroleum awaiting Plunder via Plunging a Panoramic Pile of Perfidious Pipe, Piece by Piece, Pole by Pole...thus Parrying a Punishing Penile Path, Profundly Penetrating to the very Pillars of the Planet...Herself.

In reply to by HowardBeale

GooseShtepping Moron Sun, 10/08/2017 - 18:58 Permalink

>> Pioneer Natural Resources’ CEO Tim Dove recently told an industry conference in Oklahoma City that he was feeling the heat from a “thundering herd” of investors, pressing him to focus on shareholder returns.Why doesn't that line of thinking ever apply to Amazon, Tesla, or Uber?

Ignorance is bliss Sun, 10/08/2017 - 19:01 Permalink

The average fracker uses 75% of net income to service the debt. They need way more then $50 oil to make money. When the fracking boom goes bust there will be a lot of fallout to hit pensions, stocks, bonds, banks etc... The counterparties looking for yield and buying Frackkers will be owning literal holes in the ground filled with toxic sludge. No money for cleanups once the frackkers take their dirt naps.

RightLineBacker Sun, 10/08/2017 - 19:41 Permalink

I've lived in Texas for 75 years and have been hearing that the Permian Basin boom is coming to an end for at least the past 50 years.
The Permian Basin's deep geology is one of the most fractured and complicated of any place on Earth. Deep soundings show 100's of years of deep reservoirs of recoverable oil. It is just a matter of drilling technology and market economics.
I won't be around to witness the "Permian Boom end" and doubt that the author will either.

bshirley1968 RightLineBacker Sun, 10/08/2017 - 22:08 Permalink

There's a lot more at play here than simple price per barrel.They can take that shit to $12 a barrel and I bet gas prices drop less than 10%.There are certain legacy cost that are only going higher.  The debt factor is also a consideration. ......a big consideration. Price drops only mean they have to pump more to service their debt.  That shit is coming out our ears now and it is still $50 a barrel. When China completes it's oil futures market and the dollar is used less as a reserve, you can bet prices will be going up on everything. ......priced in dollars.

In reply to by RightLineBacker

Sapere aude Apeon Mon, 10/09/2017 - 02:41 Permalink

Your claims are incorrect In fact we are discovering at a rate that is far less than the speed we are using it. Likewise you are being 'economical' with the truth when you mention Peak oil in the 90'sPeak Oil Theory has actually been proved correct, but of course you close your eyes to that?Peak Oil was based on conventional oil, at a time when there even 'sour oil' was not considered commercial, and it was based and had to be based on known methods of commercial extraction, i.e. no shale, no tar sands, etc. etc.Now, the majority of all oil is 'sour' oil, the majority of oil produced now is utilising enhanced recovery techniques to eek out the extra barrels, and that include the Super Giant fields in the world that have not and are not likely to be replaced by anything like the reserves.It is no good therefore extrapalotating that Peak Oil was wrong, when the opposite is true, and only be redefining what is economical and exploiting techniques that didn't exist are we even surviving, and not even producing it commercially, as is the case with shale.   https://www.bp.com/en/global/corporate/energy-economics/statistical-rev…

In reply to by Apeon

post turtle saver DoctorFix Mon, 10/09/2017 - 00:33 Permalink

this crowd is so busy biting at the ankles of the USA that they'll never get it... the big news has gone right past them and left them in the dust...here, I'll repeat it for them..._the USA controls oil price swings now, not OPEC_ (and, oh by the way, not the motherfucking crooks in Europe who milked peak Brent for all it was worth... that game is OVER)did you catch that?you will next year when the Saudi Aramco IPO results are found to be underwhelming... sure, they'll get money but nothing anywhere close to what you would expect from such an event... they'll burn through that cash in 5 years trying to recapture lost market share and then end up out on their ass for their trouble...they weren't in Russia looking for collaboration on pricing... they were there looking for *** funding ***get it now?

In reply to by DoctorFix

Angry Plant Sun, 10/08/2017 - 23:56 Permalink

Oil price is going up. Were burning through the huge over production of crude in 2014-2015. Once that is gone there is nothing stopping price from double are trippling. Shale is only producer capable of rapid expansion. This is a payola article by people who want to hurt shale now before the oil prices rise. Because shale is only thing that will stop the price from acheaving orbit.