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Capital Flow To The Permian Basin Hasn’t Dried Up; It Has Moved Downstream

headline in Tuesday’s online edition of The Houston Chronicle, “Drillers Choke Off Dollars To Permian Basin Operations,” may have unintentionally caused confusion regarding the current state of play in the country’s most active drilling and oil-producing basin.

The story to which this headline was attached references a report by the firm Wood MacKenzie that discusses how upstream merger-and-acquisition activity in the Permian has trailed off somewhat dramatically in recent months. This is entirely true. As The Chronicle points out, Wood MacKenzie’s data indicates: “Drillers spent $35 billion in West Texas over a nine-month period that ended in early spring. By comparison, the collective value of land deals of the last six months is less than $5 billion.”

Someone at The Chronicle apparently realized that the initial headline was somewhat confusing ― the Wood McKenzie report does not talk about any slowdown in drilling ― because the headline was later changed to read “Rising Costs, Land Prices Have ‘Taken The Edge Off’ Permian Basin.” It was inevitable that the upstream M&A fever that developed in the Permian last summer was bound to eventually slow down. As geographically huge as the Basin is, there is a limit to the amount of acreage within it that could rationally be evaluated to meet acquisition costs that in some deals exceeded $40,000 per acre. So it is not surprising at all that the pace of land and reserves transactions has slowed dramatically.

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Gilmer: We Should View The Permian Basin As A Permanent Resource

Allen Gilmer, Co-Founder and Executive Chairman at DrillingInfo, Inc., is not a man who minces words, an attribute that has served him well during a long career in the oil and gas industry.  When it comes to the Permian Basin and the amount of oil and gas resource contained in it, he becomes positively loquacious.

“We should view the Permian Basin as a permanent resource,” he says, “The Permian is best viewed as a near infinite resource – we will never produce the last drop of economic oil from the Basin.”

No one disputes that the resource in the Permian is huge, but ‘infinite’ is a big word.  I asked him to expand on that concept.  “That is the practical reality with the amount of resource that is in the ground,” he says, “The research we’ve done indicates that we have at least half a trillion barrels in the Permian at reasonable economics, and it could be as high as 2 trillion barrels.  That is, as a practical matter, an infinite amount of resource, and it is something that has huge geopolitical consequence for the United States, in a very good way.  It has a huge consequence in terms of GDP, and right now it is creating an American energy global ascendancy.”

 

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The Eagle Ford Shale Finally Gets A Little Media Love

For most of the past year, the ongoing boom in the Permian Basin has sucked all the oxygen out of the room in terms of media reporting on the oil and gas industry in Texas.  The mergers and acquisitions frenzy of 2016 raised per-acre acquisition costs to $40,000, and that in turn led a rapid rise in the Permian’s rig count and subsequent drilling boom to take advantage of the higher oil prices that came about at the end of the year.  That story, which has resulted in the Permian’s becoming not only the nation’s largest oil producing basin, but also it’s second largest natural gas producing basin (more on that next week), is very compelling and needed to be told.

But the last year has seen another compelling growth story come about in the state’s other major oil play, the Eagle Ford Shale region of South Texas.  It’s a story in which the region’s rig count has more than tripled in a year, from less than 30 to more than 90, in which new-well productivity has more than doubled in less than two years, and in which the economic driver that turned this historically poor region into the nation’s hottest economic development area from 2011 thru mid-2014 has begun to rise again.

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OPEC Still Fundamentally Misunderstands U.S. Oil Industry

A new report from OPEC estimates that crude oil production from non-OPEC nations will increase by 950,000 barrels per day during 2017.  This is a dramatic increase from last month’s estimate of a non-OPEC rise of 580,000 during the year.

This new, much higher estimate has raised concerns within the OPEC cartel that its efforts to balance the global supply/demand equation will require it to either extend its current production limitations into 2018, or to agree to even deeper cuts in its member countries’ own production levels.  Based on these concerns, the new report urges all non-OPEC nations to limit their own production:

A large part of the excess supply overhang contained in floating storage has been reduced and the improvement in the world economy should help support oil demand. However, continued rebalancing in the oil market by year-end will require the collective efforts of all oil producers to increase market stability, not only for the benefit of the individual countries, but also for the general prosperity of the world economy.

The report singles out U.S. shale producers as the main culprit for the lingering over-supply situation.  This is not surprising, given that overall U.S. oil production has risen by a whopping 800,000 bopd since last October, as U.S. producers have activated more than 250 new drilling rigs and implemented higher drilling budgets for 2017.

This expectation that U.S. producers are somehow going to join together with the national oil companies and controlled markets of OPEC, Russia and other countries to intentionally limit production betrays the same fundamental misunderstanding of the nature of the U.S. oil and gas industry that created the global supply glut  and resulting price collapse in the first place.

 

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