Fascinating Twist in the Permian Basin

IL N’Y A PIRE EAU QUE L’EAU QUI DORT

No clue what this means? Well, try this (an Afrikaans saying):

Stille waters, diepe grond – onder draai die duiwel rond.

In essence, this means placid, calm water may seem safe on the surface, but what lies below is often deep and where the devil does his thing.

This growth in oil production in the Permian looks calm and safe to extrapolate into the future.

But beneath calm waters…. from a recent podcast with Adam Rozencwajg:

At about the 25-minute mark:

Now I’m going to tell you something that I think is really, really fascinating. It’s a little bit out there, so you have to bear with me, but I think it’s kind of neat. So, there is one, actually two, but one major basin that’s growing in the United States’ gas supply and that’s the Permian. And most people think about the Permian as an oilfield, but it actually produces quite a bit of gas as well.

Now, there are some shales, where you only produce oil, there’s some shales, where you only produce gas, there’s some shales where you have a window that’s oil, and then you move into a different area, and it becomes gas. Then you have a field like the Permian, where you produce oil and gas together, it’s called a mixed medium reservoir, and the gas is actually dissolved into the oil.

The easiest analogy that I like to think of is a can of soda that has gas (the carbon dioxide), there’s obviously a little bit on top, but there’s a lot of carbon dioxide in the liquid itself, and that gas will stay in the liquid so long as the pressure in the container remains high. If the pressure is relieved, if you open the can or open the bottle and put it to atmospheric pressure, all of a sudden, that gas immediately liberates and comes out of the liquid and it bubbles up to the top. Eventually you’re left with flat soda. So, the same is true in the Permian Basin.

The pressure (the can, if you will), is the reservoir, downhole under the ground, 6000 feet deep or whatever it is. The way it’s been working to date is that the oil with the gas inside comes into the horizontal well into the vertical well, still the pressure’s high, and then it starts to come to the surface. And as it’s coming to the surface, the pressure lowers and the gas and the oil separate. One is processed differently and eventually sold.

Now, there’s always been a worry that when you deplete the Permian Basin, you will actually lower the pressures not in the wellbore. But in the reservoir itself. When you do that the gas is going to come out of the solution in the reservoir. And it’s going to create two things. First of all, it’s going to create preferential gas flow. So gas is going to flow a lot more easily than oil. Before, the oil was carrying the gas up. Now the gas can just flow on its own. And secondly, it could potentially lead, in theory if not in practice, we’ll have to wait and see, to a degree of catastrophic well failure because that oil is then dead. It’s your flat soda, if you will, and it has difficulty being driven to the top of the wellbore and be produced. Fine.

So, what do we see now from the Permian? What we’re seeing in the Permian is, for the first time in a long time, we’re seeing really preferential gas growth out of the Permian. The Permian gas, I think, is growing like 20% per year and oil is 10%. (Those numbers, don’t hold me to those numbers.) The gas growth rate, year on year, is twice the oil growth rate. We haven’t seen that really, in the life of the field.

Now what it’s doing, for your listeners who have just listened to my speech, if they believe it will say, “Okay, well maybe this is a sign that the Permian is beginning to degrade and actually deplete. And that’s really, really bullish.” Ironically, the market could take it as a bearish sign in gas markets because they’re saying, “Oh look, for all these doomsday sayers that say gas supply can’t grow, we’re seeing really, really good growth.” And so this could literally be like a swan song where you get this beautiful surge right before it kind of rolls over.

Again, it’s a little bit too early to tell. But wouldn’t that be ironic, if the last gasp of bearish sentiment in the gas market comes from perceived high supply growth in the Permian, which is really actually telling you, “Wait a second, guys, we have a major problem here.” So, you have to wait and see on that. You have to take a little bit more time. But that’s something that our research has sort of told us more recently. And I think it’s quite interesting.

Time will tell, but experience tells us that calm waters breed complacency and lead to the mother or all delusions — extrapolation.

Perhaps the Permian is in trouble, seemingly a victim of its own success. If so, then it will have huge implications for offshore oil.

We remind folks of the significance of the Permian — without Permian production growth, US oil production is in trouble.