(Oil Price) – Back in 2017, oil production in the Permian stood at 2.2 million barrels daily. Today, the Permian is producing over 6 million barrels daily, accounting for nearly half of the U.S. total. Predictions of a looming peak have lately multiplied, but according to Wood Mackenzie, the Permian is not done yet—not if prices improve.
To be sure, the boom days seem to be over. Production growth in the most prolific shale play in the United States has been slowing already as production costs climb higher while oil prices slide lower. Most forecasts for the region agree that growth in production is about to slow down further, and Wood Mac is no exception. The consultancy expects output there to add 200,000 barrels daily this year, for a total of 6.6 million barrels daily.
Going forward, growth is about to continue slowing, the analysts predicted, until production peaks at 7.7 million barrels daily in 2035. Yet, while many assume that a peak is inevitably followed by a decline, this will not be the case in the Permian. Output of crude oil in the play will plateau at 7.7 million bpd, and this will more than offset production declines in other producing regions in the country—meaning oil demand will be healthy enough to support such a trend.
Companies with big footprints in the Permian, therefore, can enjoy said footprint even with slower growth. Yet companies tend to seek new growth opportunities all the time to sustain their business, and the prospect of peak growth in the Permian is a real one. The gas-to-oil ratio of output there has been on the rise, as has the water-to-oil ratio in the play. Both trends suggest that some formations in the basin are reaching geological constraints, and more drilling isn’t necessarily proportionate to the oil volumes produced.
Indeed, Big Oil executives have predicted that peak oil supply will arrive in the U.S. before 2035. This does not, of course, mean they are right and Wood Mac analysts are wrong. It simply means that nothing is certain until it happens. And it seems that the slowdown in the Permian is already happening. It also seems that the challenges are multiplying: the latest is concern that toxic wastewater in underground reservoirs could leak and that it could affect seismic activity in the area. In response to these risks, the Railroad Commission of Texas has started imposing restrictions on the amount of wastewater disposed of underground until pressure levels subside.
This will naturally affect drilling, contributing to the overall production growth slowdown. This raises the question of what’s next for the big operators in the top shale play in North America. As Wood Mac’s analysts point out in their report, “The prospect of substantial production growth and low-cost barrels has been a magnet for the US industry for more than a decade. Organic investment complemented by M&A and consolidation have made the Permian a huge store of future value.”
Indeed, the consultancy estimates that 18 companies in the Permian have combined holdings worth over half a trillion dollars in net present value. Of these 18, a handful are the really big players, including Exxon, Chevron, Occidental Petroleum, Diamondback Energy, and EOG. As the biggest players in the Permian, these are the companies most exposed to the ups that the future has in store for the Permian—but not the downs. Per Wood Mac, “The ‘haves’ continue to drive down costs and improve performance trends through scale, repetition and value chain integration.” The smaller players, or the “have-nots”, as Wood Mac calls them, are not doing so well. In fact, many are already having trouble with well performance and rising production prices.
The consultancy’s observations confirm what has already emerged as a clear trend in the Permian: consolidation is shrinking the number of industry players active in the area and now natural processes such as well depletion will reinforce the shrinking. In other words, production in the Permian will be under the control of a lot fewer companies in the future than now. That handful will probably be the ones bringing the Permian’s total output to its predicted peak of 7.7 million barrels daily—before they start diversifying away from it.
Diversification is the path that Wood Mac—as well as most other forecasters—see for the energy industry going forward. As it becomes indisputably clear that oil demand is not going anywhere, those in the business of satisfying that demand are going to find other sources of oil as the current ones get exhausted. For those partial to shale, it’s the Vaca Muerta in Argentina or the Montney shale in Canada. For conventional development, options abound, from the Middle East to Africa and new frontier regions. According to Wood Mac, few of these can compare with the Permian in terms of value proposition. According to real life, the world needs oil and will get it from wherever it can—and Big Oil is well aware of this.
By Irina Slav for Oilprice.com
