Put Your Money On The Permian — The Phar Lap Of Oil And Gas Basins

I write on fossil energy, climate, and the transition to renewables.

Phar Lap was a champion racehorse bred in New Zealand and raced in Australia. He won 37 races from 51 starts, including the 1930 Melbourne Cup, and was an inspiration to people in the early years of the Great Depression. His death was from lead poisoning in the US, but the cause is controversial. His heart was 50% heavier than average for racehorses, and was returned to the National Museum in Australia. Phar Lap and Secretariat have been called the greatest two racehorses in the world.

The Permian races ahead of pandemic lows.

One year ago, the Permian basin in West Texas and New Mexico had just reached 5 million barrels per day (MMbpd) which was almost half of the total US supply of crude oil. It was projected at the time the U.S. had 76 billion barrels of untapped reserves, and most of this lay under the Permian.

The peak of crude oil production in the Permian before the pandemic was 4.9 MMbpd. But production in the Permian will rise to a record 5.7 MMbbl/d in May 2023, according to figures released by the U.S. Energy Information Administration (EIA) on April 17. The Permian is still running hard.

Other shale-type producers are increasing too. The Bakken in North Dakota and Montana has reached 1.18 MMbpd but remains a good bit lower than the peak of 1.54 MMbpd recorded in November 2019.

The Eagle Ford in Texas has risen to 1.14 MMbpd but also lies well below its pre-pandemic peak of 1.40 MMbpd.

Natural gas production in the U.S. has been surging even more. Associated gas in the Permian has risen from pre-pandemic 17.4 billion cubic feet per day (Bcfd) and will reach 22.5 Bcfd in May 2023 - a surge of 29%.

In Haynesville, which straddles the border between Louisiana and Texas, natural gas will rise from 12.0 Bcfd pre-pandemic to 16.8 Bcfd in May 2023. This is a surge of 40%.

The largest gas play in the U.S., the Appalachian which includes the Marcellus shale, will actually have fallen a bit from 36 Bcfd pre-pandemic to 35.3 Bcfd in May 2023.

Due partly to over-supply of natural gas, prices now at $2.6/MMBtu (Henry Hub) have dropped rapidly in recent months and are much lower than the price of $6.4/MMBtu averaged over 2022.

What are the keys of success in the Permian?

In late 2018 the USGS completed an assessment of the entire Delaware basin, a subset of the Permian existing in both southeast New Mexico and far-west Texas. They came up with over 46 billion barrels of technically recoverable continuous oil resources, plus 281 trillion cubic feet of natural gas and twenty billion barrels of NGLs. NGLs are liquid compounds more complex than methane, such as ethane and pentane.

The immense quantities of oil and gas in the Delaware basin make up the largest deposit of oil and gas ever documented by the USGS in the USA. Quite simply, it's the nation's premier energy play with some of the largest recoverable reserves in the world.

The technical key is a few horizontal wells per pad in stacked pay zones, each about 2 miles long and fracked up to 40 separate times along its length. Monster wells making more than 10,000 boepd have been reported.

Permian will peak at 8 MMbpd in 2030.

The betting on the Permian future is positive. Five heavyweights forecast crude oil production rising steadily through 2028 before peaking in the range of 7.3 - 8.0 MMbpd around 2030. The companies are EIA, Wood Mackenzie, Rystad, Enverus, and S&P Global.

According to this Bloomberg survey, oil production will expand by 40% through 2030. After plateauing for a few years, a slow decline sets in until 2035 and suggests oil will be a consistent supplier of energy consumption for decades.

The Permian will offset production declines from other shale basins in the U.S. Federal forecasts suggest total U.S. oil production stabilizing in the range of 12.3 - 13.3 MMbpd through 2050.

U.S. oil production in 2022 was 11.9 MMbpd and about 12% of global production (99.8 MMbpd) and looks like a stayer and a good bet to last the distance until 2050. The U.S. produces more oil than Saudi Arabia (no. 2) and Russia (no 3).

But Bloomberg argues that the Permian growth is too slow to ease inflation that has been forced up by high energy prices. The reasons are as follows:

· Oil and gas companies who achieved record profits in 2022 remain conservative in their capex expenditures because they were burned in the last decade of boom - boom shale expansion.

· Supply-chain delays and shortages of steel, drilling equipment and labor personnel have restrained expansion goals.

The Permian feeds LNG futures.

The Permian and Haynesville will have increased their natural gas production by 4-5 MMcfd since the pandemic. This is a surge of 29% for the Permian and 40% for Haynesville.

It's not a coincidence that both these resources lie close to the liquefied natural gas (LNG) export terminals spread along the Gulf of Mexico. LNG has a very bright future.

Since the war in Ukraine, investments in LNG have moved quickly from uncertainty due to supply-chain delays and climate-related stranded assets to a position of 'let's get the funding and permitting done as soon as possible' U.S. contractors are currently arm-wrestling over long-term exports with Europe, China and other Southeast Asia countries like Japan and South Korea.

Takeaways.

The peak of crude oil production in the Permian before the pandemic was 4.9 MMbpd. But production in the Permian will rise to a record 5.7 MMbpd in May 2023.

Associated gas in the Permian has risen from pre-pandemic 17.4 Bcfd and will reach 22.5 Bcfd in May 2023 - a surge of 29%.

Five watchdog heavyweights forecast crude oil production rising steadily through 2028 before peaking in the range of 7.3 - 8.0 MMbpd around 2030.

Federal forecasts suggest total U.S. oil production will stabilize in the range of 12.3 - 13.3 MMbpd through 2050.

U.S. oil production in 2022 was 11.9 MMbpd and about 12% of global production and looks like a good bet to last the distance until 2050.

Permian growth is too slow to ease inflation that has been forced up by high energy prices since the war in Ukraine.

U.S. contractors are currently arm-wrestling over long-term LNG exports with Europe, China and other Southeast Asia countries like Japan and South Korea.