Is Growth In The Permian Slowing Down?

The Record Breaker

It’s done it again! Around the Spring of 2017 energy publications couldn’t stop talking about the Permian’s major accomplishment of producing over 2 million bpd of oil. The celebration was well deserved as the Permian had doubled its daily production from 1 million to 2 million bpd in just 5 years. Then the unthinkable happened. In January 2018, the Permian reached 3 million bpd. And now, as we approach the end of 2018, the Permian is approaching 3.5 million bpd. This astonishing growth rate eclipses the resurgence of oil prices that now sit around $70 per barrel and have risen more than 50% in the past year.

When the impressive borders the impossible it begs the question, just how did the Permian do it? The classic arguments remain in play, that the Permian is just like any boom, it’s lucky. Others argue that the boom will die as quickly as it rose. Yet none of this is true. The success of the Permian Basin is a result of advances in science and technology, careful planning, industry trends, and most importantly making the decision to go for something even if the outcome is uncertain.

The Little Oil Field That Could

The Permian isn’t just growing, it is skyrocketing, with a cohort of countries rather than other oilfields. With the Permian approaching the 3.5 million bpd threshold it is in striking distance of surpassing Iran and Iraq in production, which respectively produce around 3.9 million bpd and 4.5 million bpd. The Permian alone now makes up over 30% of the entire United States oil production. This is all to say that once an oil patch gets to 3 million bpd, it’s a big jump from 2 million bpd. So how did the Permian get to 3 million bpd in just one year, and how is it continuing to grow at such a rapid rate?

“A Very Prolific Play”

On December 13th 2016, Rex Tillerson stepped down as CEO of ExxonMobil to become the 69th Secretary of State and was replaced by long time Exxon executive, Darren Woods. In an interview two months later with CNBC host Becky Quick, Woods’ intentions to go into the Permian could not have been clearer. Woods announced his plan to invest an average of $25 billion in capital expenditures every year until at least 2020. Quick then asked if this increase was due to oil prices picking back up. With an air of calculated caution, Woods explained “While we have seen prices go up in the short term we’re not building our investment campaign based on the assumption that those prices are going to be there forever”. In March of 2017, prices sat at around $55 a barrel. Woods explained that when oil is at $40 a barrel the Permian and Bakken Wells offer a 10% return at the bare minimum. Although Exxon has the best profit margins in the business due to its scale and extensive network of refineries in Texas, there’s plenty of room for the smaller players when oil is north of $60. Woods also announced his first acquisition as CEO, a $5.6 billion-dollar deal in stock and cash to double Exxon’s well count in the Permian to 5,500 wells and total Permian resource to 6 billion barrels

Why the Permian?

Advances in fracking have allowed oil companies to extract reserves from ancient shale formations. Shale in the Permian is a short-term cycle investment, meaning that it’s a low-cost option that is versatile and can move as the market moves. As the Permian’s production output has taken off, it seems that the basin’s reserves are in fact much richer than once estimated. Oil majors are still timid from the wild oil market the past few years. Under pressure from shareholders, the Permian is a disciplined decision to take advantage of the short-term rise in oil prices, without shelling out the massive expenditures associated with offshore plays.

Long Term Potential

The biggest reason why the Permian has become such a hot play is because of the long-term outlook of its reserves. In the early days of black gold booms, drillers would bleed basins dry as quickly as they could. Learning from past mistakes and the wisdom of Aesop’s Fables, today’s companies recognize that the Permian has the potential to lay golden eggs for years to come so it’s not worth killing the goose. Darren Woods of Exxon made it clear that no matter what the price of oil was or was expected to become, he cared more about making their investment “sustainable and successful for the long-term”. This logic makes perfect sense. When you have a cash cow like the Permian that gives you margins over 10% as long as oil is above $40 a barrel, you want that investment for as long as you can, and that means cutting production to keep the basin healthy.

A Disciplined Boom

"The Permian has been around for a long, long time. It never left the stage, but its career has been relaunched. They understand the geology better, and there's a lot more oil to unlock there.” said Jim Burkhard, vice president and head of oil market research at IHS Markit. With shale providing the ideal short cycle investment, the Permian Basin isn’t anything like the wild frantic oil booms we have seen in the past. It is a disciplined boom, with a growth rate that shows no signs of stopping.

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