You’d think the oilpatch would be going bananas with flourishing prices and strong demand, but several discouraging factors are keeping the Permian Basin from realizing its full potential.
Odessa oilman Kirk Edwards, Permian Basin Petroleum Association spokesman Michael Lozano and economist Ray Perryman say the manpower shortage, getting supplies like tubing and casing delivered, the war in Ukraine and skittishness owing to the Biden administration’s open hostility are dampening enthusiasm.
Which is not to say everything is bad.
Oil and gas production in the 17-county Basin is bubbling along at a record 5.1 million barrels per day and 20.4 billion cubic feet per day and the prices, though very unstable lately, were good Tuesday at $111.30 per barrel and $4.86 per thousand cubic feet, according to the PBPA. Production is up from 4.9 million bpd and 18 billion cf/d last October, when production started climbing a little each month. Another bump to 5.2 million bpd is projected for April.
Asked how long it would take to complete a full expansion, Edwards said, “There has been a slow ramp-up since last year and production has consistently risen with the rise in prices.
“But manpower and the equipment shortage are keeping us from ramping up even more. The cost of steel products like casing and tubing for wells is up 100 percent in the last six months, which is causing some hesitation about drilling expensive wells when oil could fall back to $70 or, like two years ago, to the $30s.”
Edwards said the industry “is still seeing a lot of capital discipline with the big independents and the majors in West Texas.
“The big independents are running most of the rigs out here,” he said. “The majors, British Petroleum, the Exxon subsidiary XTO and Chevron, have been consistently drilling, but they’re definitely not ramping up like the independents are right now. With the way the industry has been vilified since the Biden administration took over, everybody is hesitant about adding any drilling, especially on federal lands and off-shore because the administration has been doing everything it can to slow that process down.
“There is a lot of hesitance to spend in this euphoria over high prices because of what Russia is doing and with Russia being taken off the market. Canadian production is up, but it’s seasonal.
“If the major independents had the certainty of these high oil prices coupled with the certainty of people and equipment to expand with, then you could easily see another million barrels a day brought on in the next two years,” Edwards said. “But it is a big if with everything that’s going on right now because we don’t have that certainty.”
The Baker Hughes service company reported March 18 that 316 drilling rigs were at work in the region, up from 216 a year ago, while the national rig count was up from 411 last year to 663. The U.S. rig count peaked at 4,530 in 1981 and hit its all-time low in August 2020 with 244.
Chevron Mid-Continent Business Unit spokeswoman Catie Matthews of Midland said Tuesday that her company will invest $4 billion annually in the Basin for the next five years. “We expect a 10-percent year-over-year production increase in 2022,” Matthews said.
An industry spokesman who asked not to be identified said shipments of casing and tubing from overseas sources like South Korea have been affected by quotas instituted during the Trump administration and that Ukraine is of course stymied from its usual production of tubular goods.
Lozano said that with over four million job vacancies in the country, the oilfield is naturally having trouble getting enough workers. “Capital investment in energy has also declined,” he said.
“We expect to see growth through the end of the year, but there is so much volatility out there,” Lozano said. “The resurgence of covid in Southeast Asia has caused a reduction in demand.
“Typically, the independents are able to navigate more nimbly while the larger companies have to turn like battleships. They have a lot more boxes to check and the independents have more flexibility.”
Perryman said from Waco that the pandemic and its fallout caused a variety of changes. “Some companies saw the pandemic-induced stress as a buying opportunity, scooping up assets at depressed prices,” he said.
“Some of these firms are now producing more in the Permian than the majors. Similarly, some of the most vigorous drilling is going on with smaller firms. The majors are still focusing on the Basin, but it’s a more cautious approach.
“When prices dropped as COVID-19 and the measures to stop its spread crushed demand, many highly leveraged companies were pushed to the brink of financial disaster or even beyond,” Perryman said. “Publicly traded companies also suffered and investors are not eager for a repeat.
“Firms are now working with tighter requirements and Wall Street is demanding returns to investors even if that comes at the cost of foregoing potential leveraged growth. In addition, when you have a policy environment where uncertainty about the future is dramatically increased, it makes more sense to keep a rein on new drilling programs to avoid being overextended.”
Perryman said it shouldn’t be surprising that production is not growing faster considering the lack of capital “and the very public stance in Washington and elsewhere that fossil fuels are on their way out the door.
“Some production increase has occurred without much drilling due to the large number of wells that were completed but not brought online in early 2020 when the pandemic hit,” he said. “But that is a temporary phenomenon, While renewables have a major part to play in meeting future climate goals, so must oil and natural gas, burned cleaner.
“Renewables simply can’t be deployed rapidly enough or produce power consistently enough to meet global demand,” Perryman said. “We have examined future demand under a wide variety of conditions, including all the scenarios put forward by the U.S. Department of Energy and others, with much more aggressive climate responses.
“In every case, the power generated by renewables increases between 350 and 600 percent by 2050, but the demand for oil and natural gas also exceeds current levels. Due to the lower carbon content in Permian oil and gas, there are also compelling reasons to shift more production to the region.”
As the war in Ukraine has shown, Perryman said, squelching the domestic oil and gas industry increases geopolitical risk. “Once these inescapable facts are recognized, we will see some changes in attitudes toward the industry and, over time, a return to more extensive exploration and production programs,” he said.
“Our analysis shows that modest increases in output will be needed under virtually any global outcomes that might conceivably occur. When all is said and done, which sometimes takes a while, the Permian Basin will be an indispensable partner in solving the climate situation while assuring that the world has adequate energy resources.”
