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Why The Permian Just Got Even Hotter

Fracking rig

The U.S. Geological Survey just published an assessment of oil reserves for a section of the Permian Basin, revealing the largest estimate of continuous oil that the agency has ever assessed.

The Wolfcamp shale in the Midland Basin, which is part of the Permian Basin, is one of the most prized shale formations in the United States, and for good reason. The USGS estimates that the West Texas shale formation could hold an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids. Those figures are the largest for any single continuous pool of oil the USGS has ever surveyed.

(Click to enlarge)

Other areas of the country have seen oil booms and busts over the past half-decade. The Eagle Ford in South Texas and the Bakken in North Dakota each had their heyday, but they pale in comparison to the Permian basin right now. Output from the Bakken has dipped below 1 million barrels per day (mb/d) in recent months, dropping to a two-year low of 971,000 barrels per day in September. The Eagle Ford has seen an even more dramatic decline – it is expected to fall below the 1 million-barrel-per-day mark next month, down from a peak of 1.7 mb/d reached in March 2015. Meanwhile, the Permian is going in the other direction, having seen output steadily rise over the past several years to break through 2 mb/d this year.

 

(Click to enlarge)

And there is still more potential for the Permian. The USGS believes that the oil sitting in the Wolfcamp is almost three times larger than what is located in the Bakken-Three Forks, according to a 2013 assessment of the region. Not only that, but the current estimate only covers a portion of the Wolfcamp located in the Midland Basin; the USGS did not look at the Wolfcamp in the neighboring Delaware Basin.

Related: Does A Link Remain Between Inflation And Oil Prices?

“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” Walter Guidroz, program coordinator for the USGS Energy Resources Program, said in a statement. “Changes in technology and industry practices can have significant effects on what resources are technically recoverable, and that’s why we continue to perform resource assessments throughout the United States and the world.”

While this report shows a staggering volume of oil in the Wolfcamp, the reserves are “undiscovered, technically recoverable,” which does not mean that they are necessarily economically viable, just that they probably exist and could theoretically be produced.

Nevertheless, the Permian is undoubtedly the hottest shale play in the country. Land prices are soaring, and more and more shale companies are divesting from other basins and moving to West Texas. The rig count is rising strongly in the Permian while it remains moribund elsewhere. The West Texas shale basin now has about as many rigs as the rest of the country combined, including offshore. And crucially, actual production in the Permian is at a record high, over 2 million barrels per day and rising. The Permian never really dropped off even during the more than two years of low oil prices.

Related: Oil Guru Sees OPEC Dissolve If Deal Fails

One of the main reasons that the Permian is so attractive, aside from the fact that it has such vast oil reserves, is that shale formations are stacked on top of each other. All a driller has to do is drill down and it will drill through multiple formations. This increases the production on a per-rig and per-well basis, ultimately improving profitability. Put another way, the Permian has much lower breakeven costs than pretty much every other shale basin.

Oil prices trading at $50 per barrel and below, while damaging profits, also have a way of weeding out competition. Drillers are diverting capital from all over the country – cutting spending and selling off assets in North Dakota, for example – and funneling it into West Texas, where breakeven prices are often well below the prevailing oil price in the market.

With little prospect of oil surging above, say, $60 per barrel in the near future, the Permian will likely continue to be where all the action is at, and will continue to play an outsized role in the trajectory of U.S. oil production going forward.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Michael on November 18 2016 said:
    How much is profitable at $40 per barrel? My guess is 10%.
  • Lee James on November 19 2016 said:
    This sounds like very good news. A lot of the news coming in these days is about oil industry layoffs.

    Not sure enough of a distinction is being made in the article between technically recoverable oil and economic oil. What really counts is what we can practically and realistically bring to market. We are increasingly pumping "tough oil" -- at a high cost to produce, while the cost of alternatives becomes less. How will it all shake out, especially after fully pricing-in pollution as part of the cost of doing business? After-all, we burn most fossil fuel, and it even leaks into the soil and water.

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