The Permian shale play has been attracting so much attention lately it’s started to get a little bit boring. But not for oil investors. The rush to the Permian has continued as everyone forecasts growing production there. The projections suggest strong growth—doubling production over the next three years according to some Permian producers.
But one analyst thinks that this explosive growth is a rather unlikely event.
At a recent event, Michael Hanson from merchant bank Parkman Whaling said that there is a set of conditions that producers in the Permian will need to meet if their vision of doubling production by 2020 is to become a reality. These are all conditions that do not depend on the producers themselves, but on a lot of factors they have no control over, which makes the challenge all the greater.
For starters, despite the Permian’s reputation for being a low-cost play, costs are not equally low across it. If production is to go from 2.2 million bpd currently to 4 million bpd, according to Hanson, international oil prices will need to remain higher for longer. Though the chances of this happening right now look good, nothing is ever certain in oil, and OPEC’s upcoming meeting in Vienna may very well disappoint.
If you think you have your finger on the pulse of the oil market, think again. Even Andy Hall—the oil trader known as “God”—earlier this year shut down his hedge fund, admitting his inability to predict today’s oil markets.
Another challenge for the Permian is cost inflation. For the production boom to happen, it needs to remain low, but like oil prices, this metric is out of producers’ hands. Capital availability is another challenge; many producers have very high debt levels, causing banks to be wary of lending them more, despite the bright-future shale oil predictions of authorities including IEA and EIA. Related: Thanksgiving Travelers Smash Records
Finally, says Hanson, oil needs infrastructure to be transported to its destination.
All these challenges do not mean that production in the Permian will soon slacken. A lot of analysts are very bullish on its medium to long-term development. A recent event at the University of Houston discussed these with a lot of participants that seemed to share the optimistic outlook. Wood Mac research director R. T. Dukes, for instance, compared Permania to the production boom in the Eagle Ford that occurred between 2012 and 2014, only, he said, this one will be bigger, “as much as 50 percent bigger.”
While a lot of observers share this attitude, there are some who question the hype. Oil consultant Art Berman is one notable contrarian. Berman noted earlier this year that the vast reserves of the Permian may in fact be grossly exaggerated and a couple of months ago warned that while some producers in the Permian were making money in the then-current oil price environment, most were not. While he acknowledged the potential of the Permian in terms of reserves and production costs, Berman remains cautious about its ability to turn the United States into a swing producer.
Others note that it’s not all about supply in today’s world. Houston Chronicle’s business columnist, Chris Tomlinson, noted at the UH event that there is a push to move away from fossil fuels altogether on a global scale, and this was bound to affect production trends in the Permian as it reshaped demand patterns in the future.
Tomlinson’s words to the other panelists at the event foretell of some major developments we are likely to witness in the energy industry in the next few years.
“People need your product, but they fundamentally don’t like it,” Tomlinson said. “As much as people in the oil industry may believe sincerely that they are doing a public good, your customer doesn’t see it that way. And they will switch to an alternative at the first chance they get.”
By Irina Slav for Oilprice.com
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