The Permian Basin looks strong until at least 2025 despite challenges from Biden's alternative energy push, with oil output climbing steadily after its dip during the 2020 pandemic, as companies rush to consolidate their assets while demand remains high.
We are seeing the number of mergers and acquisitions in the oil-rich region of the USA level out as companies vie for the best position while demand and oil prices are at their highest in years.
Firstly, Callon Petroleum announced on 5th August it would be acquiring Primexx Energy Partners for $788 million to expand its Delaware basin assets to over 110,000 net acres. Primexx reportedly produced 18,000 bpd of oil equivalent from its 35,000 acres in the second quarter of 2021, offering Callon a significant production boost.
Then just the next week, Surge Energy announced its acquisition of the leasehold interest and wells from Apache Corporation in Howard Country, Texas, at a cost of $37.5 million. The acquisition expects to boost Surge’s production levels by around 800 bpd, as well as adding 14 drilling locations.
That same week, the U.S. Energy Development Corporation stated it would be investing $21.8 million at the heart of the Permian Basin. The exploration & production firm entered into a joint venture with Midland-based Atlantic Energy Partners to develop and operate three horizontal wells in Ward County, Texas, expected to come online by Q2 of 2022. This builds upon U.S. Energy’s $30 million investment in a three-well pad earlier in 2021.
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Jordan Jayson, CEO of U.S. Energy, stated of the move, "This joint venture comes at an ideal time as we expand our footprint in the Permian Basin and the market continues to recover from COVID-19 with the drilling of new wells."
This appears to be the resounding sentiment of the oil industry in the Permian region, with firms moving quickly to consolidate assets as a means of ensuring they profit from one of the strongest U.S. oil zones before demand falters and green policies create a shift away from oil and gas.
For example, earlier this year, Bonanza Creek Energy and Extraction Oil & Gas announced a $2.6 billion all-stock merger, establishing one of Colorado's largest oil and gas drillers.
In general, it seems major U.S. oil companies are taking the lead within the region, as rumours this summer suggest Devon Energy Corp. and ConocoPhillips are battling it out for Royal Dutch Shell’s portfolio within the region, expected to be worth around $10 billion if sold. Chevron Corp. may also be in the running for the West Texan assets.
This move comes as many international supermajors are being pushed to invest more heavily in low carbon and renewable energy projects, in an eventual movement away from fossil fuels. This has led several major firms to reconsider their investments, focusing on key strategic regions and low-carbon oil and gas developments.
Matthew Kaes Van’t Hof, chief financial officer at Diamondback, stated of changes in the Permian, “Consolidation is important, it’s going to keep happening.” “There’s going to be a few large basin champions in each basin, majors included.”
Further consolidation within the region looks set to continue as oil and gas output has stabilised significantly in recent months, driving energy firms to act quickly to ensure their spot in the region.
In 2019, output in the Permian Basin totalled over 4.3 million bpd of oil, peaking at 4.7 million bpd in December of that year. However, in response to the Covid-19 pandemic, oil production stagnated, falling from 4.8 million bpd between January and March back to 4.3 million bpd the rest of the year. Based on recent changes in demand, production levels are now expected to reach an average of 4.9 million bpd by mid-2022, a figure that could remain stable until around 2025.
As demand eventually wanes and green policies push producers away from high-carbon oil and gas output, the Permian Basin will also play its part in the transition to renewable energy production, particularly through solar and wind developments.
Several new developments are taking the push for decarbonisation into account. For example, the Whistler pipeline came into full commercial operation this summer, allowing for the transportation of 2 billion cubic foot per day of natural gas from the Waha Header in Reeves County to Agua Dulce.
The Whistler pipeline is expected to reduce the quantity of gas flares in the region, which have been criticised for causing major damage to the environment and adding to climate change.
Occidental has already established one large-scale solar project in the Permian, a 16-megawatt solar farm powering oil and gas operations in Texas, and this is expected to be the first of many for Occidental alone. We could eventually see solar panels spreading across the Basin, which is well situated to catch the sun.
In fact, a 2020 report by the Permian Strategic Partnership presented several solar and wind farms across the Basin in both New Mexico and Texas, suggesting they could provide as much as $283 million and $77 million in financial output, initially powering gas and oil operations before they are used as independent power sources in the renewables boom.
The report explains, “With more than 92.3 billion barrels and nearly 300 trillion cubic feet of untapped oil and natural gas sitting below the surface and a limitless supply of wind and solar, energy production in the Permian Basin is expected to continue to grow for decades to come.”
At present, the main commitment in the region appears to be consolidation, getting as many assets in the Permian as possible to make gas and oil operations profitable while demand and prices are high. But as more wind and solar projects are installed, this could power the future of the basin.
By Felicity Bradstock for Oilprice.com
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