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Pioneer sees Permian topping 10mn b/d: Update

08 Mar 2017 17:03 GMT
Pioneer sees Permian topping 10mn b/d: Update

Adds comments from Shell, Chesapeake

Houston, 8 March (Argus) — US independent Pioneer Natural Resources expects Permian basin crude output to quadruple to as much as 8mn-10mn b/d by 2027 as more layers of shale formations get developed amid improving technology.

The Permian basin, spread across Texas and New Mexico, is one of the lowest-cost US basins, with numerous oil reservoirs stacked on top of one another. It has the added advantage of well-developed transportation and storage infrastructure and an ample oilfield equipment and service providers, making the region attractive at current oil prices. Production of about 2.25mn b/d is expected in March, up by 70,000 b/d from a month earlier, according to US Energy Information Administration (EIA).

"Permian will be a big supplier to the world over the next few years," Pioneer chairman Scott Sheffield said at the CeraWeek conference in Houston.

Sheffield's forecast goes beyond one made by leading Permian producer Occidental's chief executive Vicki Hollub in the same conference — she predicted a rise to as much as 4mn-5mn b/d, although she did not give a time line.

A host of producers including majors such as ExxonMobil, Chevron and Shell are betting on the Permian. Shell expects its unconventional output to rise to 400,000 b/d of oil equivalent (boe/d) by 2020 from 270,000 boe/d last year, with the increase "predominantly led by the Permian," Chandler Wilhelm, vice president for emerging business at Shell said. The company's unconventional business will get $2bn-$3bn of the worldwide total capital expenditure (capex) of $25bn. The Permian will get more than 50pc of that, he said.

The untapped potential of the basin and available infrastructure are making producers pay top dollars to acquire assets in the region. Last year, asset prices in the Permian touched a high of $58,000/undeveloped acre. In comparison, deals in the nearest peer Eagle Ford, also in Texas, ranged from $4,600-$37,000/undeveloped acre.

Despite those elevated prices, Parsley Energy chief executive Bryan Sheffield said he did not see a bubble in the Permian. Companies are willing to pay those kind of prices because drilling costs have come down and technology has improved — allowing them to make money even after paying those high rates. Plus, companies that are focused in the Permian are willing to pay more because they need to add more acreage to expand.

"You do need the footprint to add more rigs," Bryan Sheffield said.

Still, producers without a presence in the Permian will also be part of the revival of the unconventional industry. Chesapeake Energy sees its vast spread of assets in multiple regions giving it ample opportunity to drill and develop acreage at current prices. Its large acreage holding means that it does not have any acquisition costs and can focus its investment on developing its assets.

"We don't have to get on to the Permian train," Frank Patterson, executive vice president for exploration and production at Chesapeake said.

Both Parsley and Pioneer saw costs rising, particularly for sand and in the well completion business, as producers start to run down their inventory of drilled but uncompleted (DUC) wells. Pioneer's Sheffield said the company is insulated from most of the increases on the completion side because it owns its fracturing supplies after it acquired a fracturing equipment company in 2011. It also owns sand mines with 90 years of supply, he said.

Following the downturn that saw more than 100 bankruptcies in North America, Pioneer's Sheffield said he expects the industry to be more cautious in stepping up activity and will keep an eye on costs.

"People will run a tighter ship because of the downturn," he said.