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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Permian Oil Reserves Are Grossly Exaggerated

Permian

We are entering a new age of American energy dominance according to Energy Secretary Rick Perry. President Trump reflected that view in comments he made last week that “…we’ve got underneath us more oil than anybody, and nobody knew it until five years ago.”

Trump was referring to tight oil production and today, that means the Permian basin.

Global energy dominance by the United States is somewhere between aspirational and absurd.

So far in 2017, the U.S. has imported more than 9 million barrels of crude oil per day, and net imports have averaged more than 7.3 million barrels per day. How exactly can the world’s biggest importer of oil become the supplier upon which other countries depend?

The recently released BP Statistical Review Of World Energy 2017 places the United States 10th in the global ranking of oil reserve holders between Libya and Nigeria (Figure 1). That’s not bad but it hardly puts the U.S. in the same league as energy-dominant countries like Venezuela, Saudi Arabia, Canada, Iran, Iraq and Russia that have on average 4 times more proved reserves than the U.S.

(Click to enlarge) 

Figure 1. The U.S. is the 10th Largest Oil Reserve Holder in the World. Source: BP and Labyrinth Consulting Services, Inc.

Perhaps the President and Secretary Perry have been reading John Mauldin’s recent work of magical realism Shale Oil: Another Layer of US Power. It features a chart which shows that the U.S. is the largest oil reserve holder in the world (Figure 2)

(Click to enlarge)

Figure 2. John Mauldin’s Recoverable Oil Reserves chart. Source: Mauldin Economics and Rystad Energy.

The chart is so wrong that it defies explanation.

Its Rystad Energy source data reveals that Mauldin has misrepresented recoverable resources—all oil regardless of commercial value–as reserves—a specific volume that is commercial at today’s oil prices.

It also seems that Mauldin didn’t show Rystad’s data correctly. Saudi Arabia—and not the U.S.—is the largest holder of recoverable resources according to Rystad (Figure 3).

(Click to enlarge)

Figure 3. Rystad Energy Global Oil Recoverable Resource Estimate. The chart shows Rystad’s 2PCX category: proved reserves plus contingent resources plus risked prospective resources in undiscovered fields. Source: Rystad Energy and Labyrinth Consulting Services, Inc.

Related: Ecuador Abandons The OPEC Deal: Who’s Next?

Rystad’s P1 proved and P2 proved-plus-probable reserve estimates put the U.S. behind Saudi Arabia, Russia and Iran.

There are many other errors in Mauldin’s transcription of Rystad’s data that can be seen by comparing his chart as my Figure 2 with Rystad’s data in my Figure 3. That’s what happens when energy amateurs masquerade as energy experts.

Assessing the Growth Potential of the Permian Basin

So much for U.S. energy dominance today but what about the growth potential of the Permian basin?

Pioneer Natural Resources CEO Scott Sheffield claims that output may exceed 160 billion barrels of oil. Even credible sources like Wood Mackenzie believe that Permian Wolfcamp growth alone will add 3 million barrels per day by 2024.

The EIA, however, estimated that 2015 Permian tight oil reserves were only 782 million barrels (Table 1). That seems low and is considerably less than the 5 billion and 4.3 billion barrels attributed to the Bakken and Eagle Ford plays, respectively.

(Click to enlarge)

Table 1. EIA 2015 Tight Oil Reserves. Source: EIA U.S. Crude Oil and Natural Gas Proved Reserves, 2014 https://www.eia.gov/naturalgas/crudeoilreserves/

I estimate that there are approximately 3.7 billion barrels of proved Permian tight oil reserves using 2016 10-K SEC filings for leading operators in the plays (Table 2).

(Click to enlarge)

Table 2. Estimated 2016 Permian Basin Tight Oil Play Reserves. Source: Company 10-K Filings, Drilling Info and Labyrinth Consulting Services, Inc.

All the companies in Table 2 differentiated Permian reserves from other company reserves. Those companies accounted for 47% of all tight oil production in 2016. I used that as a scaling factor to estimate the contribution of companies such as Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 10-K filings.

The estimate is grounded on a reliable base of 1.7 billion barrels from company filings. The assumption that unknown company reserves will follow 2016 production ratios is reasonable but uncertain.

Related: U.S. May Halt Oil Imports From Venezuela

I imagine that an estimate of only 3.7 billion barrels may surprise many who buy into the vision of American energy dominance. Others may accept the estimate but argue that Permian plays have significant growth potential that the Bakken and Eagle Ford do not.

Concho and Pioneer included tables in their 2016 10-Ks that projected future production from proven undeveloped (PUD) reserves. That data indicates that the two leading producers in the Permian tight oil plays anticipate PUD production to peak in 2019 (Figure 4).


(Click to enlarge)

Figure 4. Concho & Pioneer Proved Undeveloped Future Production Expected to Peak in 2019. Source: Company 10-K Filings and Labyrinth Consulting Services, Inc.

Concho’s and Pioneer’s combined peak 2019 PUD production volumes are approximately 25% of their combined 2016 daily production from the Permian basin. That means that the addition of future PUD production may only offset legacy production decline rates.

Anticipated PUD volumes are already included as proved reserves so however we view this data, it does not affect the implied reserves for the Permian basin. 10-K reserve and PUD production forecasts are based on 2016 SEC oil and gas prices. Higher prices would mean higher reserves and PUD production although few now anticipate substantial price changes over the period covered by Concho’s and Pioneer’s estimates.

Tank Theory

Permian tight oil reserves implied by this study are less than accepted estimates for the Bakken and Eagle Ford plays. Permian production, however, has already reached peak Eagle Ford levels and is still increasing (Figure 5).


 
(Click to enlarge)

Figure 5. Permian Tight Oil Production Has Reached The Eagle Ford Peak & Is Still Increasing. Source: Drilling Info and Labyrinth Consulting Services, Inc.
 
To many, this implies that Permian production will continue to increase and will eventually eclipse output from the older tight oil plays. That may be true but, without additional reserves from new plays or deeper layers, it may only reflect rate acceleration followed by steep decline once peak production is reached. Concho’s and Pioneer’s future production forecast suggests that peak production may occur sooner than later.
 
This study represents one scenario that may provide context for the claims and expectations about future production potential for the Permian basin.  Aside from weak growth in the offshore Gulf of Mexico, or some return to growth in the Bakken and Eagle Ford plays, it is the only current basis for the crude oil portion of emerging American energy dominance.

For the U.S. to move into the top tier of oil producing countries, reserves must at least double from accepted estimates by BP, EIA and other credible organizations (Figure 6).


(Click to enlarge)
 
Figure 6. The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough. Source: BP, EIA and Labyrinth Consulting Services, Inc.
 
In some upside scenario in which Permian reserves of 3.7 billion barrels somehow double or triple, that still will not be nearly enough for the U.S. to become energy dominant in oil.
 
Engineers commonly think of reserves as a tank—you can drain the tank with the best technology at very high rates, and perhaps make some money along the way, but ultimate production is limited by the size of the tank.
 
I have presented an estimate of tank size using as a basis data from the companies that know most about the plays. If it is even close to correct, American energy dominance should be recognized as just another expression of alternative facts
 
By Art Berman for Oilprice.com 
 
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  • Dan on July 20 2017 said:
    Thank You. It is always the case when the term "depletion" is never used in reports where the oil shorts talk their book. Cheap oil is a political term. When Venezuela nationalizes their oil, at the tantrum of Exxon, cheap oil is over. Could Exxon be trying to drive the competition out of business by holding oil below cost?
  • CAS on July 20 2017 said:
    Did you include the Delaware Basin in your above numbers?
  • zipsprite on July 20 2017 said:
    Don't you just hate it when someone brings actual numbers and data (reality) to the party and ruins everything? You're messing with a popular and fashionable fantasy.... Well done.
  • James on July 20 2017 said:
    I may be missing something but it seems like you are implying reserves will be flat or declining moving forward. 3.7Bbbl may be accurate today but is going to grow over time. When an operator drills an economic HZ well, they can then book offsets on both sides. There are huge reserves remaining to be booked in the Delaware Basin.

    Concho and Pioneer are talking about their PUD inventory at YE, not their projected PUD inventory. They are continuously drilling non PUD locations to add more PUDs and the projected drill year of the inventory will shift every year. Presumably at YE17 you will have the same plot but 2020 will be the peak year as more PUDs are added.
  • Seth on July 20 2017 said:
    Art previously was a peak oil proponent which is nothing to be ashamed about, but has now transitioned to trying to poke holes in the shale revolution - often slicing a tiny downturn in a relentlessly upward chart (rig counts, oil exports, etc) as evidence that shale is in trouble, or exaggerated, or some other temporaty negative indicator.

    In fact, the shale revolution is just getting started with most plays not having taken advantage of big data and many other advances.

    "Oxy is the biggest producer in the region, at 270,000 bpd--half the company's worldwide total. Hollub says it will double that within a decade. "It's pretty hard to drill a dry hole there. We don't have to explore to find it. It's just a matter of engineering the right way to get it out." The geology is so stacked with oil layers that it's like having ten fields in one--a petroleum layer cake. "We know Oxy has more than 50 years of reserves left," she says."
    https://www.forbes.com/sites/christopherhelman/2017/07/18/touring-the-permian-with-occidental-petroleum-ceo-vicki-hollub/#2185540e2ed0

    There are future shale fields yet to be identified and just year, geologists announced the discovery of the mammoth Midland Basin of the Wolfcamp Shale in Texas.
    http://www.cnn.com/2016/11/17/us/midland-texas-mammoth-oil-discovery/index.html
  • lawrence wegeman on July 20 2017 said:
    Oil world needs a new word like ready reserves, defined as the amount of oil that can be lifted profitably at current prices.
    To be a dominant player in oil world one needs more than oil. For one a developed economy enjoying many moving parts.
    Here's a riddle: How can the USA increase oil exports thus lowering its inventory in a world where supply/demand it out of balance and the price of oil rise?
  • Don on July 21 2017 said:
    Art has been right on target and the financial data bears out the reality of the shale production. GAAP accounting allows for well costs to be capitalized and depreciated, which in the short term would indicate profitability, even on wells that may never recover their cost to drill and complete. This is not to say that there aren't sweet spots where the economics are good, but this has to carry all of the other wells that aren't in the sweet spots. This explains why most of the companies cash flow from operations is well below cash expenditures, year after year and sometimes by multiples above 2 x cash flow. It never catches up !
  • este on July 26 2017 said:
    Mr Berman, your story is always the same and always negative. As an actual working interest holder in a tight horizontal Permian Play that has paid out and is profitable at $40/barrel and has greatly diminished our country's dependence on less reliable sources, I realize that some reserve estimates are too aggressive, but many are too conservative. Is your implication that the myriads of intelligent reservoir engineers at companies drilling these plays are wrong and you are correct? Its easy to generalize with big data sets that are not well controlled (such as annual reports) and allow the data to say what you want, however, I believe that you are incorrect, but yu get a lot of articles published and I'm certain drum up a lot of consulting work!
  • John on August 09 2017 said:
    Some of these companies drilling programs are over 50% non-proved reserves. The pud inventory is not a drilling program, it's an inventory.

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