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Commodities 2021: Despite current macro conditions, Permian Basin has plenty of life

Highlights

A few hundred billion barrels of oil likely still in place

But demand, price unknowns linger in near term

Additional geologic zones may be be explored in future

Houston — Any centenarian expects to be questioned about her longevity, and that's especially true of the US' biggest, most prolific oil reservoir. And like human centenarians, the Permian Basin's long life span comes with a price.

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Scientists say the giant play, which straddles West Texas and southeast New Mexico and has produced for about 100 years, likely has decades of life left, both economically and geologically. But practically speaking, it all depends on oil prices.

Purely at a resource level, the basin's oil reserves likely amount to a few hundred billion barrels, Robert Trentham, research associate for the Department of Geosciences at the University of Texas Permian Basin, said.

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"The figure industry used for years before the shale revolution was 100 billion barrels in place, of which we had already produced 30 billion," Trentham said. "But that number didn't include unconventional oil, which probably amounts to a couple of hundred billions of barrels more in place."

Figuring a conservative 6%-7% of that as recoverable with today's technology lowers the available total but still adds up to a lot of oil. And of course, that doesn't take into consideration the future, when advanced technologies may be able to extract larger volumes oil in place – or extend the productivity of of the play.

"The question is how much are you willing to pay for the oil," said Trentham. "Has production peaked at $40/b? Probably. At $60/b? No."

"We're in a maintenance position right now," with WTI oil prices in the mid-$40s/b, he said. For growth and new projects, "the economics don't fly. It's a question of price."

The Permian produces about 4 million b/d, down from its 5 million b/d peak in April, owing to lower demand caused by the coronavirus pandemic.

S&P Global Platts Analytics sees the basin's production falling a bit more in 2021 and remaining lower until 2023 when it will begin to rise. By year-end 2024, it is projected to climb to around 6.6 million b/d, according to Platts Analytics' current forecast.

Untapped horizons

The basin also probably has the most prolific multilayered rock of any explored domestic play – possibly 30 producible horizons – about a dozen of which are being exploited currently. The most common are the Spraberry, Bone Spring and Wolfcamp. Within each of those horizons are multiple sub-zones.

Others, such as the Strawn, Atoka and Barnett, are largely untapped because they lie several thousand feet below the more developed intervals – too deep to be economic at today's prices, sources say.

The US Geological Survey estimated in 2018 that in the Wolfcamp and Bone Spring horizons jointly contained 46.3 billion barrels of oil, as well as 281 Tcf of natural gas and 20 billion barrels of NGLs. That is unconventional oil – although the Permian also has some conventional production, mostly from small private operators – and represents technically recoverable resources.

The big numbers, however, may be moot for now given the industry's current capital limits and the profound changes that have occurred in the last 10 months of the pandemic. Going forward, demand for oil may permanently be impacted by new work-at-home patterns and the energy transition trends.

In the early months of the pandemic historically low oil prices forced upstream operators to slash capital budgets and cut activity. The US rig count plunged nearly 70% within a few months and while it has recovered some, drilling remains below pre-pandemic levels.

As a result, E&P operators, which also had tightened their belts in 2015-2016 when a global oil glut caused a severe drop in crude prices, became even more efficient.

Initial well rates climb

Their efficiencies continue, as initial well production rates keep climbing, Platts Analytics analyst Andrew Cooper said.

For example, in 2013-2014, average well IPs were 300 b/d or 400 b/d. Those rates have doubled or, in the case of New Mexico wells, which are especially prolific, tripled, Platts data show.

"The amount of economic resource produced in the Permian has only scratched the surface," Cooper said. "Over the next few decades you will see various stages of development where different benches receive attention."

"The stacked pay potential of the basin ... means its different zones don't necessarily communicate with each other while operators frac the formation," he added. "This helps the Permian from having to deal with complications in well spacing or frac stage optimization problems commonly seen in regions like the SCOOP/STACK and Eagle Ford" plays in Oklahoma and South Texas respectively.

"Therefore, the Permian will remain more resilient than any other shale basin," said Cooper.

But as prolific as the play has been or will be, operators must still cope with fallout from the pandemic and the potentially permanent changes that will result for the oil patch.

Peak Permian?

Adam Waterous, managing partner and CEO of North American private equity firm Waterous Energy Fund, has argued that the Permian Basin is peaking, largely because of a lack of capital.

"More broadly, we think we're at peak investable oil; supply coming from investor-controlled companies in the world has peaked and is in decline," Waterous said.

At year-end 2019, the world consumed about 100 million b/d of oil, 27 million b/d of which came from investor-controlled oil businesses, Waterous noted.

"By 2030 we think that will decline to...20 million b/d," he said, with 3.5 million b/d of that decline coming out of the US.

Wells returning at higher rates

Some of this year's production loss in the Permian – from older wells with negligible economics – may be permanent.

However, some wells appeared returned at higher rates than before they were shut in, Duane Dickson, US oil, gas & chemicals sector leader for consultants Deloitte, said.

"Restarting a shut-in well has surprised some people in terms of how much more productive those wells can be when they restart them," Dickson said. "We may learn some things about Permian productivity from this period" of uncertainty.

In any event, for the next two to three decades, the Permian is likely to remain one of the key US oil suppliers, analysts say.

"Until we have renewable sources of energy that are capable of 30% of the total volume for energy requirements in the country, we'll need the strategic resource that is the Permian and shale," Dickson said.