If Oil Prices Soar, Blame Some of it on the Permian

---

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--If global oil prices spike in the coming years due to a supply shortfall, some analysts have identified a culprit: flat, then declining, production from the Permian Basin.

This week, two speakers at an energy conference sponsored by Enverus (Austin, Texas) pointed to "Peak Permian" as a reason why supply could fall short of global demand, pushing up prices.

"There is a significant amount of uncertainty over the next six months" over oil prices, Al Salazar, senior vice president for intelligence at Enverus, said May 16. He pointed to "sluggish" supply growth and lower production limits the Organization of the Petroleum Exporting Countries (OPEC) (Vienna, Austria) imposed on its members. He said the group may have to reverse those production cuts in the face of strong global demand growth next year.

Speaking at Enverus' EVOLVE conference, Salazar said he expects demand will outpace supply by 1 million to 3 million barrels per day (BBL/d) in the second half of this year. The gap will be closed by drawing down on oil in storage, he observed, with storage levels close to their five-year average, additional draws will be bullish.

The problems are not limited to 2023, he continued: "There are huge uncertainties through to next year," including "strong, durable" demand growth from China, India and other non-OECD countries. Enverus analysts recent think global economic weakness and oil demand have bottomed out, and are heading upward, leading to an increase in demand for oil. Reflecting the uncertainties in the market, he said econometric models alone suggest Brent crude prices could rise well into triple digits next year.

Global crude oil supply is expected to have modest growth at around 100 million BBL/d for the rest of this decade, but demand is projected to plateau at around 105 million BBL/d by 2030, Salazar told the EVOLVE conference. An under-supplied market, where demand growth is met at least partially through "aggressive" storage drawdowns as producers seek new barrels, would push up oil prices, he said.

Salazar and an Enverus colleague, Chetan Sharma, a senior associate, both predicted a "significant slowdown" in oil production from the Permian Basin, where production has risen sharply and consistently for the last decade, to about 5.7 million BBL/d today from slightly over 1 million BBL/d in 2013.

Click on the image at right to see a graphic on oil production growth in the Permian Basin.

"The Permian is entering a new phase where operators focus on capital discipline. This along with productivity degradation and (drilling) inventory exhaustion," are leading to peak-Permian production, Sharma said. U.S. oil fields have accounted for about 90% of oil supply growth over the last two decades, a rate of growth he called "unsustainable."

Since 2005, when the shale boom started, U.S. oil production has risen about 140% while the rest of the world grew only 13%.

"The U.S. will be unable to sustain the shale boom," he continued. "We expect total U.S. oil production to moderate, then fall. Peak production will occur in 2027 at about 14 million BBL/d. Production in the Permian will peak at about 7 million BBL/d: "Peak Permian is well on its way."

Well productivity has declined about 9% year over year in the Permian as initial rates of production have fallen 5% to 10%, depending on the location, Sharma told the EVOLVE event. As well density has increased, the estimated ultimate recovery (EUR) of each has fallen.

For private drillers in that basin, which straddles West Texas and eastern New Mexico, acreage inventories will be exhausted by 2030. He said he expected industry consolidation to pick up as private drillers become less profitable.

He added that the dynamics evident in the Permian are being mirrored in the nearby Eagle Ford Shale.

The clarion call for "capital discipline" by investors, while understandable, has had a direct impact on the Permian's prospects, he said. "During the shale boom, the largest public drillers reinvested 100% of earnings back into upstream operations," meaning new exploration and production. "Now, only 40% to 50% of earnings are going back into finding new oil." As shareholders have demanded, and received, a greater share of earnings, they are crimping future finds. For more on that, see February 8, 2023, article - Shareholders Remain Primary Beneficiaries of Historic Profits at Integrated Oil Supermajors.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).