June 2022

The Last Barrel: The fabulous Permian basin

Early oil and gas developers considered the Permian basin a graveyard. However, this changed in 1923, and set off a series of major oil and gas discoveries that ultimately led to the development of greater Permian basin.
Craig Fleming / World Oil

Early oil and gas developers considered the Permian basin a graveyard. Shallow drilling with cable tool rigs resulted in a many dry holes and marginal producers. However, this changed when the Santa Rita #1 blew in on May 28, 1923, and set off a series of major oil and gas discoveries that ultimately led to the development of greater Permian basin. The well was christened Santa Rita, the Patroness Saint of the Impossible by a group of Catholic investors to help ensure the success of the operation. 

The tendency of oilmen to name wells after female landowners or family members is a long-held tradition. When I was working as a geologist in the 1980s, my company hit four good oil producers on the Ida Mae lease and completed two commercially viable wells on the Yvonne lease. A well named after the owner’s son, the Jay W., was a dry hole. Anyway, back to the Permian. 

Surging production. Total oil output from the Permian, from conventional and unconventional sources, is forecast to grow by approximately 1 MMbpd this year, climbing from 4.7 MMbpd to 5.6 MMbpd. Growth is forecast to continue and projected by some analysts to hit 6.5 MMbopd by the end of 2023. In 2023, the Permian is on track to account for half of all U.S. oil output of 13.2 MMbpd, up from about 42% in 2021. The amazing geological structure’s total oil production will outpace the combined output of Norway and Brazil in 2022, which together produce just 4.8 MMbopd. 

Permian Delaware. Hydrocarbon output in the Permian Delaware basin, the top-producing play in the Permian, will hit a record 5.7 MMboed average in 2022. Spurred on by high oil prices and appealing economics, total production is set to grow by around 990,000 boed. Investments in the basin are also expected to jump, surging more than 40% from 2021 levels to reach $25.7 billion this year. A significant contributor to this growth is the majors, which last year cut Permian Delaware investments 33% vs. 2020. This year, the majors are expected to raise investments in the basin 60%, bringing their total to $7.4 billion. Private operators’ share is also set to balloon in 2022, rising 50% from $5.8 billion in 2021 to $9 billion in 2022. The forecasts are based on a scenario in which WTI futures average $106/bbl in 2022 before dropping to $70/bbl next year and to $50/bbl toward 2025. 

Private operators will be a significant driver of the record growth, as they have reacted quickly to the elevated market, increasing activity and output. Private companies more than doubled their collective rig count in the basin, from 30 to 73 between January 2021 and April 2022. Private players are also less focused than their public counterparts on well optimization and environmental objectives, which have emerged as significant play-level trends in recent years. 

This production growth may seem like a reaction to the U.S. government’s call for increased supply, but most of the drilling and capital expansion was already guided by the companies at the end of 2021, before Russia’s invasion of Ukraine. Public operators have been reluctant to chase higher production growth and remain focused on capital discipline in the face of cost inflation and labor and equipment shortages. 

Private operators are contributing significantly to drilling activity in the play. The total number of spudded wells increased 33% last year, with private operators making up 46% of the total. The well count is estimated to grow another 32% in 2022 and, based on current activity levels, private players are likely to contribute about 43% this year. However, their contribution is expected to decrease toward 2030, as many of these companies hold relatively small acreage positions and, consequently, may start to run out of locations at the current pace of activity. 

Lay of the land. The Permian Delaware play extends across Lea and Eddy counties in southeastern New Mexico and into counties in western Texas. Acreage in the Delaware West sub-basin, including Culberson and western Reeves counties, tends to have higher gas content. Estimated ultimate recovery can be relatively high in this region, which helps explain a temporary shift in activity from several producers toward gassier areas in 2020, when oil prices were low. While acreage in Texas and New Mexico is being developed actively, New Mexico has gained momentum over the last several years. 

Activity in the basin before 2014 was primarily dominated by vertical drilling, but the share of horizontal drilling has since picked up rapidly, fueling the growth. Production additions in 2019 reached nearly 1.2 MMboed, year-over-year. Even when the Covid-19 pandemic battered the shale industry, the Permian Delaware delivered between 300,000 and 400,000 boed in growth during 2020 and 2021. 

However, the play’s production dynamics have changed since the pre-Covid-19 era. The majors largely dominated the growth trend before 2020, along with other public companies that focused on meeting their aggressive production growth targets and investing cash flow. This time around, public players are maintaining capital discipline and prioritizing returns to shareholders while keeping reinvestment rates between 30% and 40%. High oil prices have incentivized large producers to increase activity further from last year’s fourth quarter and still deliver on their reinvestment objectives. 

Other U.S. shale plays. And it’s not just the Permian that is forecast to grow production this year, with increased output expected in all U.S. shale fields. Total growth from key plays is estimated to increase by approximately 1 MMbopd, the highest level seen since 2019. After experiencing production losses in 2021, the Bakken, Eagle Ford and DJ basin are expected to post modest growth into 2023. Total production for these plays could approach 9 MMbopd.  

About the Authors
Craig Fleming
World Oil
Craig Fleming Craig.Fleming@WorldOil.com
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