Permian Basin threatens OPEC and Canada
CALGARY Amid concerns in Canada over the resilience of the U.S. shale industry, one region presents a particularly imposing figure: the Permian Basin of West Texas and southeast New Mexico.
Major producers have continued to refocus their operations around the Permian, where break-even costs can be about US$10 lower than the current price of oil, which has remained locked in the low US$50 range.
A significant portion of growing U.S. oil production is expected to come from its shale fields, and in particular the Permian Basin.
Production there is expected to reach 2.5 million barrels per day by the end of 2017, up from roughly 2.1 million bpd today, according to estimates by Sam Burwell, an analyst with Canaccord Genuity Inc. based out of Houston. If prices remain approximately at today’s levels, that number could reach three million bpd by the end of 2018 — a nearly one million bpd jump in two years.
There is plenty where that came from. In November, the U.S. Geological Survey (USGS) released a report that estimated 20 billion barrels of undiscovered, technically recoverable oil in the Permian’s Wolfcamp shale region alone.
Permian production growth is at the centre of wider fears that prices may not realize the expected boost from OPEC’s output agreement signed late last year.
Private equity groups have begun injecting an increasing amount of capital into the Permian, which is widely considered the cheapest per-barrel play of any oily shale field in the U.S.
“The clear hierarchy is that the Permian breaks even at the lowest oil price, then the Eagle Ford, then the Bakken,” Burwell said.
As a result, Canada’s oil industry could face the brunt of an ongoing reallocation of capital toward the shale fields in West Texas.
Reuters cited anonymous sources on Friday saying that ConocoPhillips Co. was considering selling US$2 billion worth of natural gas assets in Canada as it shifts more money toward U.S. oil plays.
The company, which owns numerous oil and gas assets in Western Canada, is moving away from longer-term developments toward “these shorter cycle, high return, low cost of supply investments,” ConocoPhillips chairman and CEO Lance Ryan said in a Feb. 2 conference call.
Similarly, other major producers have sharpened their focus on Texas and New Mexico. In January, Exxon Mobil Corp. announced that it was doubling its holdings in the Permian through a series of acquisitions totalling US$6.6 billion.
Royal Dutch Shell Plc said during its most recent quarterly conference call that it would invest the bulk of its planned US$3 billion shale program on its Texas assets. Meanwhile, Chevron Corp. said it plans to spend the majority of its US$2.5 billion shale and tight oil budget for 2017 in the Permian.
Part of the appeal for Permian operators is the layered nature of the basin, which boasts successive stacks of resource that can be drilled from a single well. Due to its long history of development, the region is also well endowed with a competent labour pool and plenty of pipeline capacity. Unlike producers in the Bakken or Marcellus plays, Permian operators are expected to build enough new pipeline capacity in recent years to meet growing production demands.