As the sweet spots of the booming Permian Basin are drilled, oil companies will need to either spend more money or consider mergers and acquisitions to keep up their crude production volumes, according to the energy research firm Wood Mackenzie.
The conundrum is that Wall Street is punishing the stocks of public energy companies that increase spending and make corporate acquisitions.
One challenge with modern onshore shale drilling and horizontal wells is they tend to have large production volumes at first, but then deplete more rapidly than conventional vertical wells.
“Steeper decline rates … in the Permian basin will likely result in operators needing to drill more wells than originally planned, if they’re committed to hitting previously established long-term targets,” said Robert Clarke, WoodMac’s Lower 48 research director. “This will be especially challenging in the near-term because raising capital budgets today is effectively off-limits.”
Permian oil production has skyrocketed to nearly 4.2 million barrels a day, accounting for more than one-third of the nation’s record-high output. As a state, Texas is at a record-high of about 5 million barrels a day of crude oil production.
Comparatively, the Permian produced less than 1 million barrels daily in 2010 and still under 2 million barrels in 2015.
And, even though companies are targeting oil, the Permian still produces more natural gas than any part of the country except the Marcellus shale near the East Coast.
But maintaining these high volumes are easier said than done when the wells deplete quickly, requiring companies to keep drilling more and more new wells, WoodMac noted. Clarke, however, expects Permian production volumes to keep rising for at least the next couple of years.
The bigger Permian players like Exxon Mobil, Chevron and Occidental Petroleum are growing in the Permian and using greater scale and repeatable drilling processes to drive up production and efficiencies.
“Some companies are embracing economies of scale for both rigs and infrastructure as a way to enhance well performance and improve decline rates,” Clarke said. “However, our analysis indicates this approach is more effective at cutting costs than improving production characteristics.”
More consolidation makes sense in the Permian, but Wall Street is rewarding discipline and cost reductions, so it’s harder for companies to buy up rivals and risk being published in the stock market, he said.
So it seems something will have to give going forward.
