Permian's Next Chapter

As the world’s most prolific hydrocarbon play evolves, new challenges—and opportunities—have emerged or remained
By Luke Geiver | January 17, 2020

If the first chapter of Permiania included an acreage grab, drilling bonanza, infrastructure conundrum and other factors associated with the frantic, early stages of development for what has become the most prolific hydrocarbon producing play in the world, the next stage of the Permian’s near-term storyline already appears different. 

Since the introduction and acceptance by industry executives and investors of terms like “within cashflow,” exploration and production companies of all sizes have entered a new operating norm. Shareholders and lenders are now pushing for operators to focus on, or choose, dividend payments and stock buybacks in lieu of production growth, acreage buys or other non-shareholder return-based strategies. Strong financial operators still have the ability and support to make big deals, but the general consensus is that once production is maintained, additional revenue should be spent outside the oilfield.

Throughout 2019, the number of Permian-linked E&P’s implementing their first-ever dividend programs or share buyback events steadily increased. In the present, nearly every producer is pushing a message that clearly indicates to investors and others that success in the Permian isn’t solely about asset growth, delineation in the field or midstream upgrades. Instead, Permian players from southeast New Mexico across West Texas are now conscious and clear about bringing the value in the field to those that have helped back it. Multiple factors, however—from oil prices to base decline rates to export options—will play a role in the near-future of the Permian’s development. 

All sectors across the play have had to navigate volatile oil prices. The combination of less-than-ideal oil prices with a producer mindset shift away from extreme growth at all costs has caused stress and created impact in the pumping and drilling sector. For much of 2019, the Permian rig count was in decline, along with the number of fracturing crews present. While the Permian boasts some of the best breakeven numbers in all of shale, the lack of infrastructure to handle produced gas or produced water along with the uncertainties of oil or gas takeway and processing capacity has made the allure of the Permian bright but not blazing. The presence of stacked pay and a better understanding of how to use lateral length and completion design to produce more continues to be a driving positive of the Permian. But, global factors, oil prices and a tight-margin world through every sector is pressuring all companies to focus on their core cash-flow generating assets and discard the others.

To end the year, Basic Energy Services and PumpCo announced plans to shutter their respective pumping units. Both chose to focus revenue generated from the sale of pumping assets on other sectors in the Permian. The current play appears to be more about managing upside potential, immediate cash-flow and eliminating non-core assets until general market conditions (guided by oil prices and global economic factors) improve. 

The Permian, despite company moves, time-sensitive assessments on the state of the play, or headlines that seem to indicate a negative direction, is in a class of its own. With more than 350 active drilling rigs and a huge mix of global operators and independents, the play is still positioned to remain a dominant force for global oil and gas production, jobs, and opportunity for years to come. 

Permian: Changing But Staying The Same
Full-service credit rating agency Kroll Bond Rating Agency believes that differentiation in the energy industry in terms of operational and financial risk management has increased. “Some companies are becoming more disciplined in response to the industry’s challenging headwinds, while other energy companies have remained static,” KBRA said. Because investors are seeking returns, many entities may face difficult operating conditions that don’t allow for continued debt use. KBRA believes distressed high-yield energy companies will continue to look at mergers or acquisitions instead of going it alone. 

Several deals from 2019 indicate that no entity is ever free from merging or acquisition plans. Carrizo and Callon Petroleum, both large producers with financial issues related to debt maturities and free cash flow, merged to focus on the Delaware and Eagle Ford. At the end of the year, WPX Energy joined with Felix Energy because in part, Felix leadership said the current operating conditions made their move very relevant at the time. The deal was valued at $2.5 billion. 

Apart from investor sentiment, Permian producers continue to navigate an infrastructure- and midstream-world that can teeter between enough and undersupplied. For a play that produces roughly three barrels of water for every barrel of oil, the Permian’s water handling and takeaway providers have been up to the task of meeting industry needs. More than ten water firms made major moves, added technology, upgraded existing facilities or built new water-based infrastructure in 2019. Companies are finding ways to treat water with floating evaporators, track supplies with satellites or monitor water-contracts with blockchain technology. 

A research study by the University of Houston Research Center indicates that after a difficult 2018 and early 2019, oil takeaway infrastructure is primed to meet demands by the end of 2019. However, oil export infrastructure and gas takeaway, treatment and downstream customer options continue to be an issue. Apache Corp. made headlines in 2019 when it hired a third-party vendor to handle its gas. The E&P ended up paying for an outside party to take its produced gas for a price greater than the gas was worth. The University of Houston Research Center believes that the continued lack of gas takeaway and export infrastructure will harm small, independent producers the most.

“While refineries have increased processing to keep up with production, supply of crude oil will soon outstrip demand and the producers will need to find new customers,” said Ramanan Krishnamoorti, co-author of the research. “Even though there is more than $90B in construction projects for terminals, LNG, refining and petrochemical facilities along the Texas and Louisiana Coast right now, and another $200 billion planned for the next decade, construction can’t keep pace with the supply of oil coming out of the Permian.” 

The rapid growth of production doesn’t appear to be falling below current levels either. Global information firm, IHS Markit, ran the numbers on base decline rates in the Permian and found that wells drilled in the past 1 to 2 years will show a production decrease after the first year of up to 85 percent. But, the research team also said that well production during the first year of a Permian well is so great that the decline rate formula for brining a new Permian well online always makes sense. 

IHS describes base decline rates this way. “Base decline is calculated by identifying the actual or forecasted production of all the wells onstream at the start of the year, then tracking their cumulative decline by the end of the year. Understanding those base declines is critical for engineers/operators who must determine what level of drilling and production targets must be achieved for their company to grow production, and hopefully, maintain performance and provide returns to investors.” 

According to the information giant, oil and gas operators in the Permian Basin will have to drill substantially more wells just to maintain current production levels and even more to grow production. Well spacing and completion strategies could have an impact on the number of wells needed, however. 

Although there are continued issues with infrastructure takeaway, pressures from investors, a diminished participation of certain funding silos, well spacing questions, and other factors to overcome, the opportunity in the Permian remains clear. The massive formation holds more than six (double that depending on who you talk with) known and proven tight oil and gas producing benches. At more than 4 million barrels of oil per day produced, the Permian produces more oil than any shale-based formation. Oil prices will fluctuate for various reasons, but technology continues to improve and extracting hydrocarbons becomes more feasible and efficient every month. The service providers in the drilling, completion, midstream or production sectors that remain fluid and able to meet the ongoing demands of operators will continue to thrive. Operators in strong financial positions will continue producing and growing—either in the field or by acquisition. The first chapter of Permiania may be over.Although there is still acreage that needs to be held by drilling, a majority of the play is transitioning from the initial land grab and prove-out of initial wells and benches. The next era appears to be unmatched in a new way because of the technology entering the play and infrastructure coming online that will drive down operational costs. All of it is best described by an old saying that says big oilfields just keep getting bigger. PR

One Operator’s Impact In New Mexico 
ExxonMobil’s Permian development efforts will have a $64 billion impact on the New Mexico portion of the play. As part of ExxonMobil’s Permian Basin growth plans, the company plans to expand its operations to produce more than 1 million oil-equivalent barrels per day as early as 2024. This push will require roughly $55 billion in capital expenditures in Eddy and Lea counties. 

At current funding levels, those contributions would translate to the following: 

  • $6 billion for higher education: Enough to pay college tuition for more than 827,000 New Mexico students
  • $10 billion for health and human services: Equal to the salaries of more than 146,000 nurses
  • $18 billion for New Mexico’s public schools: Equal to the salary of more than 309,000 elementary school teachers
  • $6 billion for other state government services: Which is almost equal to the entire 208 New Mexico state budget

Workforce Spotlight
To help promote available positions and connect available talent with oil and gas employers, the Texas Independent Producers & Royalty Owners Association outlined the job outlook in the Permian early in 2019.

  • From January through February, the crude petroleum extraction sector had the highest number of job openings
  • Houston, followed by Midland and San Antonio had the highest number of job postings. 
  • The top hard skill listed for open oil and gas positions was oil and gas (19 percent), followed by valid driver’s license (15 percent), and good driving record (10 percent).
  • The top common skill listed for open oil and gas positions was management (42 percent), followed by operations (32 percent), and communications (29 percent).
  • The top qualification sought for listed open positions was commercial driver’s license (979), followed by Master of Business Administration (226), and Transportation Worker Identification Credential (TWIC) Card (181).
  • The leading posting source for open oil and natural gas positions was (6,491), followed by (5,218), and (3,170).