Update On The Permian -- March 31, 2016

Updates

March 31, 2016: in the article below, note the prices at which operators in the Permian feel they can still make a profit (the sweet spots in the Bakken are said to be even better with regard to profitability). The numbers presented are $40, $50, and $60 oil. None of that matters to Saudi Arabia. For Saudi Arabia, $60 is better than $40 oil, obviously, but unlike oil companies which can show a profit (barely) on $40 oil in some cases, Saudi needs at least $60 oil to meet their 2016 budget. And that's the yearly average. I can see oil getting back to $60 oil by the end of the year, but it seems impossible for oil to average $60 for the entire year. And with a budget based on $60 oil, Saudi Arabia has cut way back on capital investment in its own country:

This does not include expenditures for the on-going war in Yemen, and foreign aid it provides other Arab countries, notably Palestine. Saudi has deferred/delayed/cancelled its huge plans for solar energy; it has huge desalination needs. And with all that, there is deep concern that Saudi could be a net energy importer in the near future.

But it's not just the price of oil that Saudi is facing; it has lost significant market share for undetermined reasons. I was unable to find any reasons in that article why Saudi is losing market share if deals are made simply on price.

These are the "facts" facing Saudi Arabia when they attend the April 17, 2016, OPEC meeting. I can see Saudi Arabia kicking the can down the road until OPEC's regularly scheduled meeting in June by simply agreeing to a production freeze if others agree but nothing more.
 

Original Post

 

This is a long, long article, but if you are interested in the Permian, this may be the place to start today. Petroleum Economist provides an update on the Permian.

I don't believe Conoco was mentioned in the article: for a note on Conoco in the Permian, see this link.

I track the Permian, Spraberry, Wolfcamp, and Delaware at the sidebar at the right.

This article mentioned Occidental's enhanced oil recovery program in the Permian; for more on that see this link and/or go to Occidental's web page. 

Some data points that caught my attention:

• some folks are worried that what happened to natural gas prices will happen to crude oil prices; experts suggest that is nonsense, based on what they are finding in the Permian
• of the Big Three (the Bakken, Eagle Ford, and the Permian), the Permian was the last to be hit hard by the slump in oil prices
• the Permian reached record production (at the time) of 2 million bopd in the 1970s (following the Arab oil embargo); but by the late 2000s, production had fallen to less than 1 million bopd -- mostly from stripper wells producing 10 bbls/day
• during recent boom, back to 2 million bopd; produces about a fifth of total US production
• EOG estimates well costs at $11.5 million/well; hopes to get costs down to $6.8 million/well this year (compare with Bakken which is clearly in the $7 million/well range)
• productivity rising: new-well production per rig has jumped from around 100 bopd in 2013 to more than 400 bopd now
• operators scaling back: Apache -- one of the three largest landholders in the play, with 3.2 million acres now has 10 rigs but will drop to 4 rigs this summer; Apache will complete a quarter of the wells it completed in 2015; output now at 174,000 bopd will fall off
• Pioneer Natural Resources: 117,000 bopd; has a new $76 million HQ in Midland; will cut all drilling activity in Eagle Ford this year and focus on west Texas; it will pull 6 rigs out of Spraberry and Wolfcamp, bringing rig count down from 18 to 12 by the middle of this year; with all that, Pioneer suggests it will increase production in 2016
• Cimarex: will reduce its six rigs to two by June; will bring in only 31 new wells this year vs 60 in 2015
• Chevron may be leading the new charge: it has amassed a huge 2 million-acre position in the Permian; has identified 4,000 wells it could profitably drill in the Permian at an oil price of $50/bbl; though few would be profitable in the mid-$30s; the figure rises to 5,500 wells with an oil price less than $60/bbl; could see output rise 125,000 bbls to between 250K and 350K boepd by 2020
• Occidental: Permian's biggest producer -- thanks to its huge conventional enhanced-oil-recovery output; sees drilling getting cheaper; at $40/bbl, OXY sees few profitable prospects; but at $50/bbl, nearly 1,200 of the 8,500 identified drilling locations would "return handsomely"; at $6/bbl, it's 3,400; due to falling costs, that's 700 more wells than last year
• Concho Resources: a top-three Permian producer; pumping about 95,000 bopd; at today's costs, 5,400 of its 18,000 potential drilling sites generate more than a 20% rate of return at $40/bbl

From the article, regarding the current price slump and Saudi's perspective:

From Caracas to Riyadh, rival producers assumed that low oil prices would force out the high-cost American upstarts, allowing more space for their own cheaper-to-extract oil. That was a central tenet of the Saudi-led Opec decision of 2014 to let the market plunge. The plan would only work if US tight oil producers – source of the bulk of global output growth in recent years – yielded in their stubborn battle to keep the pumps moving.

It has taken longer than Opec would have liked. But the sharp downturn in this West Texas oil frontier in early 2016 shows that even the mighty Permian is not immune to low oil prices. By 11 March, the number of rigs drilling for oil had fallen to 150, down by 50 in just three months, and down 75% from the 562-rig peak hit in October 2014. The Permian’s top producers are finally scaling back investment – though most of them did so only after cutting to the bone in other areas. Permian capital expenditure cuts in 2016 will be less than the 50% expected across the US, but investment will likely fall by at least a third unless oil prices recover soon. The US Energy Information Administration (EIA) says output has already flat lined. Petroleum Economist expects the Permian’s production to fall by around 30,000 b/d by the end of 2016 – a sharp reversal of annual growth in recent years of about 200,000 b/d.

Its remarkable rise should have been no surprise, because the Permian has long been at the heart of America’s oil industry. It is vast, stretching through West Texas and into southeastern New Mexico. If a driller imagined his ideal play, this was it. The Permian is flat and sparsely populated; its climate is mostly mild; and the community and political institutions have risen up around the industry. Underground is a complex arrangement of oil-producing rock formations, some stacked one on top of the other, spread out over an area covering around 86,000 square miles, roughly the size of Ghana.

Pricing:

Taken together, the data suggest that oil prices have to rise out of the $30s to see the Permian recover, but not by much. Crude prices around $45/b would likely see roughly flat production. Put the market back in the $60s, though, and activity would go full-bore, and production sharply higher.

Those kinds of numbers will keep rival global producers up at night. But pinning down a price at which the Permian would roar back to life is difficult.  

Much, much more at the link.