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Permian Springs To Life With $50 Oil

Oil Rig

Last week saw the first significant increase in the number of active drilling rigs in the U.S. since the start of this year, suggesting that optimism is returning, albeit cautiously, to the shale plays, and nowhere did things look better than Texas’ prolific Permian Basin—long regarded as America’s ‘sleeping giant’.

Operators in the Permian added five rigs to their active count during the week, in the latest demonstration that the basin is perhaps the most viable across the shale patch, with its low production costs and abundant reserves.

The Permian is enjoying a lot of attention from the energy industry and from private equity alike. Those with a presence in the basin are upbeat about the future, and those without are trying to step into it in order to share in the riches.

One of the biggest operators in the Permian, Pioneer Natural Resources, just recently indicated its optimism for the short term. Speaking at an industry conference, Pioneer’s executive VP Joey Hall said the company is planning to allocate $1.8 billion—about 90 percent of its total budget—to operations in the Permian. What’s more, the company is ready to ramp up its rig count in its two Permian fields – Spraberry and Wolfcamp – and has revised up its overall production growth projections to 12 percent. A bold move in a still oversaturated oil market that has just seen the re-entry of Iran.

Another of the majors, Occidental Petroleum, is also planning a production increase in the Permian, of 4-6 percent, to be fuelled by capex of some $3 billion. The company is consistently working on lowering its production costs, which last year averaged around $40 a barrel, to ensure its profitability even if prices start sliding again. Related: Niger Delta Avengers Threaten to Take Nigeria’s Oil Production To “Zero”

Occidental Petroleum recently became the object of media speculation that had it buying smaller rival Apache Corporation. Although the report proved unfounded and was denied by Occidental, Apache’s stock shot up immediately, suggesting investors would favor some consolidation in the Permian, where Occidental has acreage of 5.4 million gross, and Apache has over 3.3 million acres.

Pioneer, by the way, was also suggested as a suitable takeover target for Occidental, reinforcing an impression that Permian operators should take advantage of the situation and consolidate to maximize the benefits low production costs and a stable oil price offer them at the moment. Tying up with a peer could indeed bring in synergies that will enhance profitability and resilience in the face of future price slumps. After all, it’s unclear how long this will last, especially after OPEC’s recent meeting ended with no change of the organization’s production policy: members can still pump as much as they can. Related: Colombian Oil Patch Needs $70 Billion To Survive

For now, however, both Occidental and Pioneer seem to prefer to go it alone, as do other players in the Permian, and they all sound relatively optimistic. A recent survey among Permian operators by the local Midland Reporter-Telegram found that there is a general consensus that oil prices will continue to be volatile in the short-term and that the drive to improve efficiency and reduce costs is the surest way to stay profitable in the lower-price environment. The general mood was positive.

Whether or not consolidation will rear its head in the Permian anytime soon, operators there have two things going for them that are unique for the play: the easier accessibility (hence low production costs) of the crude and its prodigious volume. Making the best of these while they last is the only reasonable course of action at the moment.

By Irina Slav for Oilprice.com

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