Permian Basin veterans cautiously optimistic about beginning of recovery

Permian Basin leaders like EOG, Pioneer ready to resume drilling, smaller companies more cautious

After a year and a half of tough times, the Permian Basin – the world’s most prolific shale basin – is showing signs of life again, but oil patch veterans say producers will be cautious until prices stabilize.

permian basinMike Starkey is the directional coordinator/engineer Terra Directional Services. He says the outlook in the Permian Basin is more positive for companies “picking a rig up to start drilling.”

“Several companies are looking at 4-6 wells to drill before the end of the year,” he said in an interview. “Several of the big players in the Permian are looking at adding four-plus rigs to their existing rig count in the third quarter.”

Last week, the Permian added added five rigs for a total of 142, down from 233 the year before. Starkey says most companies  “are looking seriously at the 4-6 well package. Not a major commitment but [it] will lock in leases and add production for the first of next year.”

Houston-based EOG Resources, one of the biggest players in the Permian Basin industry, said last month that it can deliver strong returns at $40 oil. The company claims to have a $15-$20 per barrel cost advantage over the rest of the industry, which needs a “sustained $60-$65 oil price and 12 months of lead time” to deliver modest growth, CEO Bill Thomas said.

Click here for video: CEO Mike Swihart explains how well automation reduces costs, boosts production for Permian Basin operators. Systems start at $3,000 fully installed by Production Lift Technologies of Midland, Texas.

“EOG Resources has the leading technical team for horizontal plays, and it is not surprising that they are making money on these wells,” said Ed Hirs, energy economist at the University of Houston in an email.

“The Permian has better geology with more sandy formations that are stacked for horizontal drilling than the other major horizontal plays in the US.”

Another significant player in the Permian Basin, Pioneer Natural Resources, noted in its Q1 reporting that it intends to resume drilling when prices hit $50 and can “quickly ramp up drilling activity when prices improve,” according to CEO Scott Sheffield. The company expects to maintain 12 horizontal rigs in the northern Spraberry/Wolfcamp region, with oil production growing 12 per cent in 2016.

Starkey agrees that most Permian Basin producers are “ok above $40,” but says “they do not have the production the big boys have to use cash flow to drill.”

Petroleum engineer Alan Means, CEO of Midland-based Cambrian Management, says it’s still too early to break out the champagne. He notes that many firms are still laying off employees and that the rig count is only just starting to rise.

“Even if oil breaks $50/b it is going to be a slow recovery. We will start to see some drilling activity in the horizontal San Andres play if it stays above $50,” he said in an interview.

“It will take $70-plus to see much increase in the shale activity.”

Oil prices are expected to rise through 2016, perhaps reaching $60 by the end of the year, as global markets draw down the current excess inventories and demand continues to grow, especially in emerging economies. The US Energy Information Administration is forecasting an average price of $76 Brent in 2017, with the spread between WTI and world prices ranging from zero to $10.

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