Rising US shale output undermining Opec
TORONTO: A realisation is gripping the energy world: The growing US shale output is undercutting Opec.
Societe Generale oil analyst Michael Wittner has been underlining that the US shale oil output was recovering faster than expected. â€œRig counts are increasing at an accelerating pace, and given the technological advances of the past three years, this should translate into significant supply,â€ Wittner told the press. â€œUS shale is coming back, and itâ€™s coming back strong.â€
And the Permian basin of West Texas is the real reason behind the ongoing speculation. Permian acreage is a prized asset today because of its geology that allows drillers to produce oil at low prices.
According to some estimates, Permian producers could sustain output while the market crude prices are around $40 a barrel. Some even speculate it could sustain even at $30 a barrel market price. This, though, needs to be tested.
Today, the Permian basin dominates the US crude oil industry. As of Feb 17, out of the total of 597 oil rigs in operation in the US, some 303 oil rigs were operating in the Permian basin only, confirming the dominance.
A significant portion of growing US oil production is thus expected to come from the shale fields in the Permian Basin. The output of the basin is expected to ramp up to 2.5 million barrels per day (mbpd) by the end of 2017, up from roughly 2.1 mbpd now, according to estimates given by Sam Burwell, an analyst with Canaccord Genuity Inc based out of Houston. If prices remain approximately at todayâ€™s levels, that number could reach 3 mbpd by the end of 2018.
And there is still room for further growth. Last November the US Geological Survey (USGS) reported around 20 billion barrels of undiscovered, technically recoverable oil in the Permianâ€™s Wolfcamp shale region alone.
Opec is also conceding it. In its February report, Opec said that the gains in total non-Opec supply forecasts were â€œmade mainly based on US onshore drilling activities and more announced spending by operators on production for this year.â€
â€œA move towards higher prices may lead to a resurgence in US tight oil production from the most prolific shale regions.â€ The Permian shale basin, in particular, has â€œremarkable potential,â€ Opec emphasised.
Since 2010, the United States has been in an oil-and-gas boom. In 2015, domestic production was at near-record levels, and the US became the top crude producer of the world too. Now with the crude prices stabilising at above $50 a barrel and President Trump planning to double down on the oil and gas industry, lifting regulations and drilling on federal lands, the chances of a surge in US crude output is a reality.
Today there are more than 900,000 active oil and gas wells in the United States, and out of them, more than 130,000 have been added since 2010 only, Drllinginfo, a company that provides data and analysis to the drilling industry, reported.
According to a Bloomberg IntelliÂgence survey, the Permian basin is the most attractive play for investors. The Midland and Delaware basins within the Permian helped the oilfield reach a new high of $26 billion in merger and acquisition activity last year.
Mid-January, ExxonMobil announÂced a $5.6 billion deal with the Texasâ€™ Bass family acquiring companies owned by them that control parts of the Permian in New Mexico. The purchase roughly doubles Exxonâ€™s holdings in the Permian basin, adding acreage with an estimated 3.4 billion barrels of oil equivalent.
The assets are located in the Delaware Basin, part of the larger Permian. ExxonMobil has been adding tens of thousands of acres to its Permian holdings over the past three years, making deals with private landowners like billionaire Autry Stephens, to partner on drilling.
The deal marks the second recent purchase of Delaware Basin assets controlled by a family. In September, EOG Resources bought Yates Petroleum for $2.5bn. The Yates familyâ€™s history in American oil stretches back about a century. EOG paid about $9,000 per acre in that deal, which was also centered on New Mexicoâ€™s Lea and Eddy counties, PLS data shows.
Exxonâ€™s deal also comes just one day after Noble Energy paid $3.2bn, including debt, to buy Clayton Williams Energy. That acquisition focused on assets in the southern Delaware Basin in Texas, at a price of $33,000 per acre, according to PLS.
Permian basin thus remains the focus of attention today.