The Permian Basin Petroleum Association says there is an encouraging amount of oil and natural gas drilling in the Basin and other experts report that the wide array of factors at play brews a great variety of responses at the major companies.
The PBPA says the Basin’s increased rig count was driven by ExxonMobil with 37 rigs at work here and across the nation along with Occidental Petroleum and ConocoPhillips with 29 rigs each on Oct. 8.
Citing Enverus Intelligence Research, the association reported 24 rigs each dispatched from EOG Resources and Mewbourne Oil, 21 each from Continental Resources and Devon Energy and 19 from Chevron.
“Texas led the major producing states with a gain of 6 drilling rigs in the past week, according to the weekly report of Oct. 11 by Baker Hughes,” the PBPA said in its Permian Basin Oil & Gas Magazine.
“Oklahoma was the only other state to add a rig.”
Odessa oilman Kirk Edwards, State Rep. Brooks Landgraf and Waco economist Ray Perryman say a lot goes on behind the scenes as big companies and independents mull their decisions.
Edwards said the Basin continues to be the most active drilling area in the United States and the world.
“With the 289 drilling rigs currently running in the area, nothing seems to be slowing down the massive amount of oil and natural gas that is coming from these new wells,” Edwards said. “Technology and ingenuity are playing key roles as we have seen the U.S. drilling rig count plummet over the last year, but the amount of oil is still reaching record highs each month lately.
“With the increased discipline the operators are showing over the last two years they are able to keep drilling costs down and productivity up.”
He said each well drilled costs somewhere between $10-$12 million dollars depending on the length of each lateral drilled and they usually take a couple of weeks to drill.
“Independents along with the majors are all involved in this play and they continue to compete side by side for the best acreage and drilling locations,” Edwards said. “The newer technique of pad drilling, which is drilling multiple wells from just one drilling pad, has become a game changer for better drilling economics.
“I look forward to seeing what innovations and techniques the oilfield will be coming up with next.”
Landgraf said the dynamics of oil and gas production, especially in a region as important as the Permian Basin, are influenced by a variety of factors beyond just the price of oil.
“While strong oil prices certainly provide an incentive for companies to drill, other factors such as economies of scale, technological advancements and operational efficiencies can also play significant roles in determining activity levels,” said Landgraf, chairman of the House Environmental Regulation Committee In Austin.
“Economy of scale” is a macroeconomic term referring to the cost advantage that a company experiences when it increases its production volume and lowers its average cost per unit.
Landgraf said majors like ExxonMobil and Occidental have the ability to deploy multiple rigs simultaneously, allowing them to benefit from economies of scale and reduce per-rig operating costs over time.
“These companies may also have the capital to invest in cutting-edge technologies, which can improve the efficiency of drilling operations and ultimately drive down costs even further,” the Odessa Republican said. “Meanwhile, independent companies may be more selective in their operations, focusing on areas where they can maximize returns based on their specific asset base and often prioritizing more strategic, targeted drilling to ensure profitability.
“But it goes without saying that successful drilling operations wouldn’t be possible without the hardworking men and women who make up the backbone of the Permian Basin’s energy workforce. Their expertise, skill and dedication are the true driving force behind the success of these companies and the region’s energy industry.”
Perryman said drilling decisions are often complicated, literally involving detailed analysis of the economics of each potential well. “Reservoir engineering is needed to estimate likely recovery and projected oil prices and other market factors and their implications for profitability,” the economist said. “Costs are also driven by numerous factors including, among others, labor costs, drilling depths, distances, conditions and the recovery methods used.
“Some costs are also specific to each company, which can impact drilling activity,” he said. “One firm may be more bullish on prices, for example, and tend to favor more drilling while another may have a variety of options in the Permian Basin and elsewhere and be making decisions based on comparing and contrasting possibilities.
“The major firms are also investing in multiple energy sources, carbon reduction and storage with varying degrees of intensity, which can influence their appetite for drilling at any point in time,” Perryman said. “Finally there is a wide variety of available reserves and capacity among the major energy firms, thus impacting their responses to similar market conditions.
“It is worthy of note that all of the large players have recently acquired substantial additional shale reserves, mostly in the Permian Basin, thus indicating an intention for long-term drilling and production programs.”
He said the cost per day numbers for a rig are well below $1 million, but when the expenses for labor, materials, financing, insurance and other necessary items are included they are substantial.
“Rigs have always been able to drill multiple wells, though not all at once,” Perryman said. “Newer techniques such as various lateral lines once below the surface can increase rig efficiency and additional resources can be tapped by moving the rig a few feet over and then drilling again in a different set of directions once below the surface.
“In fact we have seen record levels of production achieved and sustained in recent years with far fewer rigs than would have been required in the past.”
In a region like the Permian Basin with layer upon layer of potential production zones which have been fairly well mapped, he said, the probabilities of at least some production from any drilling site are quite high.
“However, the question is always one of how future revenues, drilling costs and other factors will compare to current parameters,” Perryman said. “While it’s likely that some oil will be produced given the high degree of technology that goes into the process, it is still possible for drilling costs to outweigh future revenue in some areas.
“In short, every company has its own cost structure, projections about reservoir potential and future prices, portfolio of leases, priorities and investors’ expectations. As a result the decision process varies across firms as has been the case for much of recent history.
“A key factor is obviously current oil prices, but that’s only one of many the elements impacting drilling program decisions.”
