Midland TX (5/4/09) - Sunrise in the Permian Basin see pump jacks along with a new well being drilled in west Texas. Energy Minute In The Oil Patch

Booming Out of the Bust

Well, here we go again. It’s not hard to see why oil and natural gas prices are inherently volatile. They are among the most important, if not the most important, commodities in the world. As author Alex Epstein says, energy is the industry that powers every other industry – and oil and gas provide most of that energy. First-world nations need oil and gas to maintain their first-world status and keep up with the “Republic of Jones.” Third-world nations are still waiting for their opportunity to have access to cheap, abundant energy and graduate to join the first-world club. World prices ebb and flow on the daily whims of geopolitical events, on economic recessions and expansions, on increasing demand and on expanding supply. While the wealthy and comfortable wrangle over computer models on climate change, the impoverished and energy-deprived millions living in less comfortable circumstances long for a taste of the cheap energy the computer-modelers take for granted.

With a hefty dose of cautious optimism, it does look like we have emerged from the last bust ready to produce even more in volume, and with even more efficiency. However, as with most busts, this last one left its share of bodies behind. The Dallas-based law firm of Haynes & Boone tracked industry bankruptcies during the bust, and the total number of industry-related companies that had to seek bankruptcy protection reached 144; 66 of which were in Texas. Only six companies have had to seek bankruptcy protection so far in 2018, so it would seem that the bust has ended, and we are now looking at the next expansion. It remains to be seen whether it will be slow and steady — or something else.

Toward that end, companies are pursuing drilling programs and are, once again, investing in exploring for and developing their reserves. The Oil & Gas Journal reports that overall oil and gas industry capital spending in the U.S. will increase by 15 percent this year. Most company budgets are assuming $50-55 a barrel for oil (a level that actual prices continue to surpass) and $3.00/mcf in natural gas (a level that actual prices haven’t quite achieved yet).

There is always the ever-present worry that, once industry cranks up production again because prices have risen enough for it to make sense, the increased production will cause another price collapse because supply outstrips demand (the continuing cause for depressed natural gas prices). However, this time around, there are interesting aspects that might help prevent an abrupt drop in crude prices. OPEC continues to voluntarily restrict their production, having finally given up on running the U.S. shale production out of business. Domestic producers spent the bust improving efficiencies so that now they enjoy a much lower break-even price. Venezuela is on the verge of turning off their crude supply altogether. Iran might have their crude supply sanctioned back into timeout. On the natural gas front, U.S. LNG export terminals are coming on-line, and countries like China are becoming big customers. Overall, global demand continues to increase.

The economic picture looks promising. In 2008, the U.S. had a daily production of five million barrels per day (bpd) of oil and 63 billion cubic feet (bcf) of natural gas. In 2018, we are expected to produce 10 million bpd of oil and 80 bcf/d natural gas. That is astounding. Every semester, I tell a new crop of unaware law students that, not only are we not running out of oil and natural gas, we have more now than we have ever thought we had over the 159 years we have been commercially producing crude oil.

One of the principal reasons the picture looks so rosy for the U.S. is a little area known as the Permian Basin. It has been continuously and prolifically producing oil since 1923; and, even after having produced for almost 100 years, it is predicted to become the world’s largest producing area in the next few years. This month, it is estimated it will produce 3.18 million bpd. If the Permian Basin were its own country in OPEC, it would rank number four in total production; and it will likely pass Iran by the end of this year and so would become number three.

Compared to just two years ago in May 2016, when there were only 133 active drilling rigs in the Permian Basin, there were 463 active drilling rigs (and growing) there in May 2018. However, the Permian Basin is not the only area enjoying renewed activity. As reported by Baker Hughes in The Wall Street Journal, using the same dates for comparison, the Williston Basin rig count has gone from 24 in May 2016 to 57 in May 2018; in the DJ Niobrara, from 12 to 24; in the Granite Wash, from 3 to 13; in the Cana Woodford, from 27 to 70; and, in the Eagle Ford, from 27 to 66.

Running the Energy Law program at Texas Tech School of Law, where the Permian Basin is our backyard, compels me to say just another word or two about this incredibly vast treasure chest of hydrocarbons. The three primary producing regions of the Permian Basin are the Delaware Basin, the Central Basin Platform and the Midland Basin. That part of the Permian Basin is 300 miles long and 400 miles wide — about the size of the state of South Dakota. The Permian Basin also has a dozen productive intervals — a veritable layer cake of hydrocarbon-producing formations. Another way to describe the vastness of the Permian Basin is to realize that the entire basin covers 102,000 square miles and produced 815 million barrels of oil in 2017.

It would not be surprising, and might even turn out to be correct, to predict that the current measured euphoria will, like every time before, eventually crash and burn into the next bust. However, during the most recent bust, I was struck that companies not only didn’t pack up and leave Midland but they doubled down and invested even more heavily in their presence in Midland and the Permian Basin. Those decisions, if wrong, could prove to be doubly, if not more, expensive. The fact that so many companies chose to spend more money on the Permian Basin during the bust is testament to the future of the Permian Basin.

The strange-but-true coincidence of the Permian Basin is that it is, not only the king of oil-producing basins in the world, but it has also become the wind capital of the world and is quickly becoming a major area for generating solar energy. It is a true energy triple threat.

About the author: Bill Keffer is a contributing columnist to SHALE Oil & Gas Business Magazine. He teaches at the Texas Tech University School of Law and continues to consult. He also served in the Texas Legislature from 2003 to 2007.

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