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King Permian

Happy 2019! The shale revolution, marked by the harmonic convergence of horizontal drilling, hydraulic fracturing and an endless supply of oil and natural gas naturally present in the United States, has not only demonstrated incredible staying power, but it has also ushered in nothing short of a geopolitical realignment — all to our nation’s great advantage. Proving that even a seeming negative in this story would be turned into a positive, the crude oil price-bust only five years ago that was prompted by a supply glut became an opportunity for the industry to further refine efficiencies in drilling and operations. The result has been an impressive reduction in the break-even price. Let’s just say neither Saudi Arabia nor any other oil-producing country has made anything remotely resembling that kind of progress.

This past year saw the U.S. set a new crude oil daily production record of 11.7 million barrels. Let that sink in for a moment — after 160 years of continuous growth, the U.S. actually set a new daily-production record. The countless prognosticators of “peak oil” since the Drake well first produced oil near Titusville, Pennsylvania back in 1859 surely are either turning in their graves or throwing up their collective hands in surrender. How can we have produced billions of barrels of oil and trillions of cubic feet of natural gas and still have more confirmed reserves than at any time in the past? The answer, of course, is that the oil and natural gas have always been there; the difference-maker is human ingenuity combined with private mineral ownership and capitalism. Technology continues to improve, but the incentive to pursue that improvement is the opportunity to make money.

This past year also saw the U.S. become the leading crude-oil producer in the world. We were already the world’s leading natural gas producer. Yes, there are many significant contributors to both of these accomplishments — the Marcellus Shale in Pennsylvania and West Virginia, the Bakken Shale in North Dakota, the Utica Shale in Ohio, the SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend, Anadarko, Canadian and Kingfisher) in Oklahoma, and even the offshore production in the Gulf of Mexico. In Texas, we have the prolific Eagle Ford Shale, the Barnett Shale and the Haynesville Shale.

But the undisputed king of them all — a king with multiple lives, no less — continues to be the Permian Basin in West Texas and southeast New Mexico. It accounts for at least 63 percent of total Texas crude oil production and 95 percent of total New Mexico crude oil production. Texas set its own crude oil daily production record last year with 4.6 million barrels. Last September, the Permian Basin produced 3.5 million barrels of crude oil and 11.6 trillion cubic feet of natural gas.

The discovery well started producing in 1920 in Mitchell County, one of fifty-two Texas and New Mexico counties covered by the Permian Basin, which adds up to more than 75,000 square miles. Over the past near-century, the Permian Basin has produced over 33 billion barrels of crude oil and 118 trillion cubic feet of natural gas. Despite that prolific history, not only did the Permian Basin set a new crude oil daily production record last year, but experts are estimating that last year’s record 3.5 million barrels will grow to 5.4 million barrels by 2023. That would mean that the Permian Basin would be producing more than any member of OPEC other than Saudi Arabia.

There are multiple producing formations in the Permian Basin, but one particular formation is really driving the current record production — the Wolfcamp Shale. Last year, that one formation produced one million barrels of crude oil and four billion cubic feet of natural gas daily, which represented one-third of Permian Basin production of both. Oil wells producing from the Wolfcamp have tripled from 2,200 to 7,750 since 2005. The U.S. Geologic Survey estimates that the Wolfcamp Shale alone still contains 19 billion barrels of crude oil, 16 trillion cubic feet of natural gas and 1.6 billion barrels of natural gas liquids in reserves.

But aren’t we just setting ourselves up for yet one more boom-bust cycle that will see companies make another mass exit from Midland/Odessa at the first hint of a bust? This expansion seems to be much different in kind from past booms; in fact, the last bust also seemed much different. Companies that had committed to expansions during the last boom didn’t slow down when the 2015 bust hit. Concho continued building their new campus in Midland, Anadarko continued with their plan to open a new campus in Midland, Pioneer continued with its strategy to sell off all of its assets and focus exclusively on the Permian Basin, Oxy proceeded with their plan to spin off a separate company to focus on the Permian Basin, Apache went forward with their massive “Alpine High” development in Reeves County, and Chevron and Exxon continued with their plans to reassert themselves as major players in the Permian Basin. In fact, during the last bust, Chevron reportedly reduced their headcount in every location but Midland.

Last November, one more major announcement provided additional confirmation that the oil and gas industry has invested, and continues to invest, in the Permian Basin for the long term. Seventeen companies have formed the Permian Strategic Partnership and committed more than $100 million over the next several years to help Permian Basin communities with roads, schools, health care, housing and workforce. On one hand, it’s understandable because these companies need to be able to attract quality personnel to live and work in Midland, Odessa and other Permian Basin communities. On the other hand, that kind of financial commitment has never been made before. It obviously proves that the industry plans to drill wells and produce oil and gas in the Permian Basin for years, if not decades, to come. Of course, that’s not to say that there won’t still be drama in the global and domestic markets. After all, people are involved. Whether it’s the final collapse of Venezuelan oil production, continuing sanctions against Iran’s oil production, the increasing exports of oil and natural gas from the U.S. to China, India, Germany and other countries, more record-setting production rates in the U.S., reductions in production by OPEC to prop up crude-oil prices, or the advent of Democrat control of the U.S. House with their aggressive efforts to shut down the oil and gas industry over the next two years; there will surely be no dull moments. Drill, baby, drill!

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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