In the tentative upturn in the US shale oil industry since May, most of the additional drilling and much of the acquisition spending has been focused on one hotspot: the Permian basin of western Texas and eastern New Mexico.
This formation, about 300 miles long and 250 miles wide, holds some of North America’s most accessible shale oil reserves. Companies that have been lucky enough, or smart enough, to build strong positions there — such as Pioneer Natural Resources and Concho Resources — can expect to have a competitive advantage over other oil producers, in what remains a very difficult market.
As share prices of US exploration and production companies have rebounded this year, those focused on the Permian have been the best performers. Shares in Diamondback Energy and RSP Permian, for example, have been hitting record highs, up 48 per cent and 66 per cent respectively over the past 12 months.
Even ExxonMobil and Chevron — the two largest US oil groups, which were left behind by smaller, more innovative rivals as the shale boom took off — now have opportunities in the Permian to make up some lost ground.
Although the Permian was not immune as activity across the US oil industry slumped after the crude price crash of two years ago, it has proved the most resilient of the “big three” US shale regions. From peak production, crude output has dropped by 40 per cent in the Eagle Ford shale of south Texas, and by 25 per cent in the Bakken formation centred on North Dakota. In the Permian, by contrast, the drop is only 2 per cent.
In a sign of the region’s attractions, EOG Resources, one of the most successful of the independent US shale producers, last week announced a $2.5bn deal to buy privately-held Yates Petroleum. Yates’ most valuable assets are drilling rights on 324,000 acres of the Permian.
EOG pioneered oil development in the Eagle Ford, and it is still the largest producer there. But William Thomas, EOG’s chief executive, told analysts on a call last month that it would spend 45 per cent of next year’s capital budget in the Delaware, a sub-basin on the western side of the Permian.
Since May, the number of rigs drilling horizontal shale oil wells in the US has risen by 77 to 325, according to the oilfield services company Baker Hughes. Of those, 49 were added in the Permian, compared with just four in the Eagle Ford and six in the Williston Basin, which includes the Bakken.
At the same time, the Permian has been a focus for deals. Of the $30.4bn spent on mergers and acquisitions in the US exploration and production sector so far this year, 48 per cent has gone to the Permian, according to research company Wood Mackenzie.
Companies have been attracted to the Permian because it holds some of the lowest-cost oil in North America.
Production costs can vary widely within each area, and the best spots in the Eagle Ford and Bakken are still competitive but overall the Permian has the most attractive economics. At current crude prices, bringing a well in the Delaware basin into production will generate an internal rate of return of about 18 per cent on average, according to Platts Analytics. That is higher than for any other shale region.
Coming relatively late to the shale party, behind the Bakken and the Eagle Ford, the Permian has offered greater scope for companies to cut costs and raise production. Since 2012, average peak output per well has risen by 122 per cent in the Permian, compared with 67 per cent in the Eagle Ford and 78 per cent in the Bakken, according to data analysis firm NavPort.
Meanwhile, costs are falling sharply. Concho Resources told investors at a Barclays conference last week that it had cut the cost per foot of its wells by about 40 per cent since the first quarter of 2015.
Long-term prospects for the region were also underlined last week when Apache, the US exploration and production company, announced the discovery of a “significant new resource play” in the Permian, which could hold more than 3bn barrels of oil and 75tn cubic feet of gas, in a part of a formation that had been neglected by other companies.
Geologists sometimes describe the Permian as a “layer cake” of multiple different oil-bearing formations, with names such as Wolfcamp, Spraberry and Bone Spring. Companies are experimenting with techniques to optimise production from as many of these layers as possible.
Exploration in the Permian has a long history, with the first oil struck in 1923, and west Texas has experienced several cycles of boom and bust. Drilling rights are often held by smaller companies that are prepared to sell out, giving larger operators a chance to build positions. That also opens the door for private equity investors such as Blackstone, which last month committed $1.5bn to two oil producers to buy Permian assets.
Exxon and Chevron also see great potential in the region. Exxon came into the Permian through its takeover of XTO Energy in 2010, and added on subsequent smaller acquisitions, while Chevron has a large legacy position. But they see similarly bright prospects.
Exxon said last month that it had cut unit development costs on the Permian by 70 per cent over the past two years, and “a large part” of the inventory of wells it could drill would be economically viable with crude at about $40 a barrel.
Chevron said it had cut unit development costs by 30 per cent since last year, and raised production by 24,000 barrels per day. It was using six rigs there last month, and plans to raise that to 10 by the end of the year.
Heightened levels of M&A activity suggest other companies will add more rigs, too, even if the oil price remains at its present level of about $45 for US crude. “You don’t typically do a billion-dollar deal and then wait for market conditions to improve,” points out Benjamin Shattuck of Wood Mackenzie. “You get rigs in the field.”
On that basis, the Permian seems set to remain a hot location for a long time to come.http://www.ft.com/cms/s/0/ac4c922a-7510-11e6-b60a-de4532d5ea35.html#axzz4K0V6mjLV