All eyes on Permian

Author Manash Goswami

As US crude prices breach $50/bl, all eyes are on the Permian basin, the Texas/New Mexico oil field that is most likely to lead a step up in drilling activity. The Permian is the playground for some of the most resilient US shale operators, such as Pioneer Resources and Occidental Petroleum.

As US crude prices breach $50/bl, all eyes are on the Permian basin, the Texas/New Mexico oil field that is most likely to lead a step up in drilling activity. The Permian is the playground for some of the most resilient US shale operators, such as Pioneer Resources and Occidental Petroleum.

Rig counts have fallen in the Permian basin during the price downturn, but it has stood out as one of the most resilient basins. The rig count in the Permian dropped by 39pc from 233 a year ago, compared to a  72pc drop in Texas’ Eagle Ford shale (to 29 rigs) and a 71pc drop in the Williston basin in North and South Dakota, (to 22 rigs).  

Even if producers are reluctant to add back rigs, the Permian would see an increase in output in five months at a flat rig count, according to an analysis by Bank of America Merrill Lynch (BoAML), while most other basins may take twice as long. Together with better availability of labor in Texas than in most other states, “the Permian basin seems best suited to capture future capital,” it says.

US crude producers are in better shape than expected despite a period of sharply lower oil prices, US banks say. Defaults on loans among oil producers have been fewer than expected and the relatively short period of very low prices have helped as did drilling productivity gains.

Even so, producers may not be ready just yet to loosen their budgets and expand drilling plans. Most, including Anadarko and Apache, want to see a more sustained oil price recovery.

"There is nothing magical about $50/bl," Pioneer Natural Resources' chief financial officer Rich Dealy says. "It is more about our view of the long term."

While the current price may allow companies to work off some of their drilled but uncompleted wells in the second half of the year to stem the average well decline rate of 25-30pc, a $50-55/bl price range is still too low for most to redeploy rigs to target production growth, Wolfe Research says.

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