Permian loses some lustre for US majors

Although still a key driver of future output for the US oil majors, the prolific Permian shale basin is starting to lose some of its edge.

Overall output from the Permian is forecast to reach a record 5.45mn b/d this month as it has thrived compared with other basins that have struggled post-pandemic. But ExxonMobil and Chevron are scaling back their most bullish growth expectations for this year from the top-performing US oil play, which has been plagued by inflation and supply-chain bottlenecks.

The biggest US producers were the last to return to the Permian during the recovery from the pandemic-induced collapse in drilling, as smaller private operators were able to respond more quickly to rising crude prices thanks to a lack of shareholder pressure. ExxonMobil and Chevron have been able to take advantage of long-term contracts with suppliers. However, cost pressures in the Permian are probably the most elevated out of all the areas of the world in which Chevron operates, according to chief executive Mike Wirth.

"I do think that it is probably a very real — I don't want to call it a governor —but a constraint on the pace of industry activity and ramp up as we get into the next year," Wirth says. Chevron is pegging its Permian output this year at the lower end of its forecast range of 700,000-750,000 b/d of oil equivalent (boe/d). That would still represent a 15pc increase over 2021.

A backlog of drilled-but-uncompleted (DUC) wells built up during the pandemic provided a cheap and easy way to kickstart production as prices rebounded. "You saw that through the back half of last year and certainly the first part of this year, which may have misled a little bit in terms of the rate of growth because this was a kind of surge capacity," Wirth explains.

ExxonMobil, Chevron's bigger rival, has also slightly scaled back expectations for the Permian this year, with anticipated growth now seen at 20pc, down from 25pc. One of the challenges in the Permian is to ensure ExxonMobil can maximise the recovery of the resource in a cost-effective manner, according to chief executive officer Darren Woods. "Obviously, as we go through that, we're optimising and adjusting our development plans," he says.

The oil majors are not the only ones feeling the squeeze in the Permian. US independent Pioneer Natural Resources, one of the biggest producers in the Permian, is rejigging its drilling portfolio to focus on higher-return wells in order to boost productivity. The company continues to expand its lateral drilling programme to 15,000ft (4,572m) and beyond, saving as much as 15pc/ft and leading to rates of return that are 20pc higher than 10,000ft laterals.

DUC out

Even though the Permian has outpaced all other shale regions during the post-pandemic recovery, higher costs could impede growth in 2023, with publicly-listed companies still under pressure to boost returns. A recent EIA analysis sounded a warning over US oil production prospects given a decline in the number of DUC wells, in addition to a lack of pipeline takeaway capacity for natural gas. The active oil rig count, as measured by Baker Hughes, has been broadly flat since the summer. "Because of the lag between well drilling and completion, the reduction in DUCs may limit increases in future crude oil production without more drilling," the EIA report found.

In the Permian, associated natural gas is produced alongside oil, and pipeline constraints together with a crackdown on flaring, present further hurdles. "The industry is building out more natural gas takeaway capacity, but it is probably not arriving until 2024," CFRA Research energy equity analyst Stewart Glickman says.

By Stephen Cunningham