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Gregory Brew

Gregory Brew

Dr. Gregory Brew is a researcher and analyst based in Washington D.C. He is a fellow at the Metropolitan Society for International Affairs, and his…

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How Long Can The Permian Craze Continue?

The two great dueling forces in the world oil market, OPEC and American production, have created an atmosphere of uncertainty, as prices hover above $50. Last week the EIA reported another record inventory and an increasing rig count, while analysts point to a possible crisis as a market held aloft by buoyant predictions of OPEC cuts slowly faces up to insufficient demand.

Crucial to this situation is the state of the U.S. patch, particularly the Permian Basin, which since late last year has been the focus of recovering production. The EIA data for the field is good, with new well production rising sharply and overall production of oil and gas rising sharply in 2017. While some speculate the bubble may burst, prospects for companies already invested in the Permian look positive, even if production costs are rising.

The Permian has seen the highest increase in rig count of any U.S. basin. Six of the twelve rigs added last week went up in the Permian, and its total now stands at 301 rigs, up from 172 a year ago, out of a total U.S. count of 741. In total the count is up 83 percent from May 2016, though it has yet to reach the booming numbers of 2013, when over two thousand rigs were in operation. Even 2015, as the U.S. sector was being squeezed by low prices, saw the total count hovering near two-thousand, according to Baker Hughes.

The increase is coming hot on the heels of the OPEC production deal, and seems to be in direct correlation with the OPEC announcement of nearly 900,000 bpd in cut production this month. For now, markets are happy, but underlying fundamentals remain as they were: cut production in Saudi Arabia and elsewhere will be made up by a resurgent American sector.

Last month, ExxonMobil paid $6.6 billion in order to double its exposure in the Permian, the single largest domestic U.S. oil deal since the price collapse in 2014, according to Forbes. Noble Energy announced in January 2017 it was acquiring Clayton Williams Energy for $2.7 billion, adding seventy-one thousand acres to its holdings in the Permian, specifically in the Southern Delaware Basin. Related: Are Oil Markets Ignoring Demand?

Austin-based Parsley Energy has been acquiring more acreage, amounting to $2.8 billion, and looks set to be a major Permian player, though its acquisitions came in at a steep $37,000/undeveloped acre.

That looks better when compared to other recent Permian purchases, where land is going for as much as $60,000/undeveloped acre, according to Bloomberg. Those prices are ten-times what drillers pay in the Bakken field in North Dakota, where oil production has fallen off, according to EIA data, and the rig count has fallen. Parsley got a better deal than Concho Resources Inc.’s acquisition last year from Reliance Energy, where the price averaged $45,000/undeveloped acre.

Bloomberg is predicting the steep prices in the Permian will drive away some investors and trigger a backlash. Companies without a foothold will look elsewhere. This thinking explains why Exxon and Parsley made such big grabs, before prices really got out of control.

But for those with the wherewithal, the Permian pays off better than any other field. Occidental Petroleum Corp., which thinks of the Permian as its “growth engine,” has indicated its keeping its primary focus on its 2.5 million acres there, where production costs are so low a price threshold below $40/barrel still assures profitability. The Permian’s so rich, one Occidental exec noted to Natural Gas Intel, “It is pretty hard to drill a dry hole there.” With that in mind, however, Occidental has looked to cut its costs in the Permian by as much as twenty-five percent, in order to make up for steep losses in 2016 Q4. Related: Total Going On The Offensive

Other companies that are focused entirely on the Permian, like Diamondback Energy Inc., are not backing out. The company announced its production climbed thirty-eight percent, with Q4 production rising sixteen percent. The late-year boost, the result of the rise in prices on the back of the OPEC deal, helped out other Permian producers. But costs are rising, as running a well per-day rose from $13,900 to $16,000 in the space of a few months last year, according to CNBC.

The high price of getting into the Permian may be offset by the relatively low costs of producing there, as well as the abundance of oil and natural gas that await almost any driller who sinks a well. But if the land rush is in fact over, and attention swings elsewhere, the surge in Permian activity may slacken. That, of course, may be affected if the current bullish swing in prices comes to an end, and if analysts’ predictions of a sharp reduction in prices come to pass.

Some storm clouds related to the high cost of land may inhibit Permian growth, but with production costs low and opportunities bountiful, for those companies already invested the Permian will likely continue to pay off for at least the next year.

By Gregory Brew for Oilprice.com

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