It is the crown jewel of the U.S. shale industry, but it’s in crisis. Thousands of layoffs, numerous bankruptcies, canceled land auctions, plummeting rig counts, and fewer fracking crews have plagued the Permian for the better part of this year—but is the worst behind the landmass that is America’s best (and perhaps only) chance at oil independence?
Some, like Chevron, would say yes, but other Permian players are still making adjustments to be able to weather the effects of diminished demand and low oil prices that are, in some cases, below their pre-pandemic breakevens. Will Permian oil companies soon rise from the ashes of the pandemic, or will many more succumb to the pandemic’s aftermath before it’s over?
Permian Production
In the Texas part of the Permian Basin, oil production has trailed off significantly in 2020. In 2019, the average daily oil production in the Texas Permian reached nearly 3 million barrels per day (2.967 million). But this year, the basin’s oil production had dipped to 2.760 million bpd, according to the Texas Railroad Commission.
For total Permian production, according to the Energy Information Administration (EIA), oil production in the Permian has dropped from 4.414 million bpd last September to 4.150 million bpd this September. And in October, the EIA is expecting that figure to pick back up to 4.173 million bpd—an increase of 23,000 barrels per day. While that may not seem like huge gains compared to the 264,000 bpd shed over the course of the last twelve months, it is the only region that the EIA expects will see gains next month.
Related: What Will Happen To Gold Under The Fed’s New Monetary Framework? Drilling rigs in the Permian have dropped off considerably since the beginning of March. For the week ending March 6, the Permian had 415 active drilling rigs for oil, according to Baker Hughes. By the week ending October 2, the Permian had only 128 active drilling rigs—a loss of nearly 70 percent across the pandemic months. That downward trend has continued until last week when the basin finally saw a modest five-rig increase.
It is important to note that the drop-offs in Permian activity coincide with the summer season, where demand for transportation fuel is supposed to be higher.
Auctions
The U.S. Bureau of Land Management postponed a major oil and gas lease sale in May. The BLM canceled the sale without notice and without reason. But it isn’t hard to imagine that one of those reasons for canceling the sale was likely the unenthusiastic response from potential buyers that the BLM was anticipating at the time—at the height of the pandemic.
However, the BLM eventually had its lease sale. In August, the BLM put thousands of acres up for sale in New Mexico and Texas. And while the blocks didn’t sell for as much as it might have in years past, it did manage to find some interested parties.
If nothing else, this is an indication that the BLM is seeing some signs of life in the Permian.
Mergers and Acquisitions
Some have cited Chevron’s recent acquisition of Permian rockstar Noble Energy as a cause for others to have renewed faith in the Permian, too.
It was the pandemic’s first major oil deal, but Chevron’s takeover of Noble likely has more to do with Noble’s interest in the giant offshore Leviathan gas field in the Mediterranean than it does for Noble’s sizable Permian assets.
Overall, Permian-based mergers and acquisitions are trending down, according to a report by Mercer Capital, with just four deals worth just $1 billion taking place in the second quarter of this year. That compares to nearly $40 billion in Permian deals in the second quarter of last year.
Related: Gulf Of Mexico Oil Drillers Prepare For Storm Delta
This is a good indication that most oil and gas companies in the Permian are still unwilling to spend money on snapping up even bargain-basement deals in the most mouthwatering basin.
This all points to one main culprit: oil demand.
And now, the outlook.
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The EIA, IEA, OPEC, BP, and Total SE are all expecting demand to remain subdued for the fourth quarter and even beyond. The summer driving season is over. Airlines are moving forward with cutting more staff. The coronavirus pandemic is still restricting activity, and the Covid-19 vaccine that is expected to one day increase global activities won’t reach all the world’s 8 billion people until who knows when.
And until people get back to living their normal lives, oil demand will remain depressed, and oil companies will see their production curtailed by natural market forces.
The Permian will not be immune to this dropoff in demand, even though it is considered to be the shale industry’s bread and butter.
Q4 isn’t expected to see noteworthy gains in oil demand or production, even in the Permian. We may, however, see some stabilization over the next few months, or perhaps small gains in the Permian.
By Julianne Geiger for Oilprice.com
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With a drop of 70% in the number of operating oil rigs in the Permian basin, one would expect a corresponding reduction in production. So according to my calculations, the Permian basin is currently producing only 1.25 mbd meaning that US shale oil production is currently 2.19 mbd. Adding 4.44 mbd being the contribution of conventional oil production, gives a total US production of 6.63 mbd currently or 51% of the EIA’s claimed 13 mbd. This means that US oil production has lost 6.37 mbd because of the COVID-19 pandemic that triggered a collapse of global oil production and also prices. And yet, the EIA is admitting to a loss of only 3 mbd.
Therefore, a comeback of the Permian to its previous levels of production is very much in doubt.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London