Permian Production Stays Strong as Eagle Ford Tapers Off in the Face of Low Oil & Gas Prices

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The good news for the U.S. Oil & Gas Industry is that predictions of a sharp falloff in production are wrong--at least so far. West Texas Intermediate (WTI) crude oil hit a peak of about $108 per barrel in June 2014, before it plummeted to as low as $44 per barrel in early 2015. Since then, prices have stabilized at around $60 per barrel.

The Permian Basin region will produce about 2 million barrels per day (BBL/d) of oil in July, and the Eagle Ford area will produce about 1.6 BBL/d, according to projections from the U.S. Energy Information Administration (EIA) (Washington, D.C.), the analytic and statistical branch of the U.S. Department of Energy (DoE) (Washington, D.C.).

Crude oil production in the Eagle Ford will fall by about 49,000 BBL/d in July, the fourth month in a row of production declines, which total about 97,000 BBL/d for the first half of 2015. By contrast, production in the Permian is expected to show a small increase in July. Year to date, production in the Permian has grown by an estimated 113,000 BBL/d, according to EIA data.

On the gas side, production is expected to fall in both formations in July, the EIA forecast. Production grew in both formations in the early months of this year, but lately production has declined for both. Year to date, gas production has increased by about 130,000 million cubic feet per day (MMcf/d) for the Permian, but dropped about 37 MMcf/d in the Eagle Ford.

The Eagle Ford is a higher-cost area when compared with the Permian, so it should not be surprising that Eagle Ford production of both crude oil and natural gas tapered off there sooner than in the Permian. But even the lower-cost Permian is seeing production declines in recent months, as continued low average gas prices punish producers there and in the Eagle Ford.

Click on the image at right to see monthly average spot prices for natural gas at Henry Hub from January 2014 through June 2015.

Low oil and gas prices have caused some operators to bail out of Texas. New Standard Energy Limited (West Perth, Western Australia) on June 29 said it would sell its assets in the Eagle Ford and the Gulf Coast to Sundance Energy Australia Limited (Norwood, South Australia) for about $18 million.

Commenting on the sale of the Texas assets, New Standard Energy's Chairman Arthur Dixon said: "Timing and market forces have unfortunately conspired against us, and we have to consider our current and future capital position. Any additional work (on the assets) would require access to additional debt or equity funding to drill and fracture-stimulate more wells to retain our acreage and grow our reserves base, which is prohibitive in light of our current debt facility, lender appetite, and broader equity market for small oil and gas explorers and developers."

The West Texas economy, powered by oil and gas production in the Permian Basin, so far appears to be having a soft landing, according to a recent study by Amarillo economist Karr Ingham. As reported by the Odessa American newspaper, Ingham said, "We may have escaped the worst outcome." In an earlier assessment, he predicted a 66% decline in the region's rig count and the loss of 17,000 jobs across all industries in Odessa and Midland. As of late June, there were 233 drilling rigs operating in the Permian Basin, down about 59% from the area's late-2014 high rig count.

West Texas has been adding jobs recently as workers transition from the Oil Patch to other industries.

"It is a temporary reprieve--the Odessa general economy is not going to escape a 50% decline in crude oil prices and the resulting sharp industry downturn that easily," Ingham said in his report. "But the transition has been surprisingly mild thus far, and may point to a softer landing for the Odessa economy as the cycle plays out in the coming months. We are certainly weathering this storm OK so far, but we will see what the future months hold."

A unit of Alon USA Partners (NYSE:ALDW) (Dallas, Texas) has begun to assess expanding the processing capacity at its refinery in Big Spring, Texas, which currently processes about 65,000 BBL/d of Permian crude. Company officials cite plentiful feedstock and a favorable location as reasons to investigate expanding the Big Spring refinery. And Pioneer Natural Resources Company (NYSE:PXD) (Irving, Texas), a major producer in the Permian, has said it may add two rigs per month in the Permian, depending on prices and other factors, including the lifting of the crude oil export ban.

"The typical metric of success in the oil industry is what it costs to find and produce the next unit of oil or gas," said Jesus Davis, Industrial Info's vice president of research for Oil & Gas Production, Pipelines and Terminals. "That's never truer than when oil prices fall. Efficient producers can make money with crude at $60 per barrel. Less-efficient producers will have a harder time turning a profit with prices at their current level. But as we're seeing in other oil boom regions, lower crude oil prices in Texas are cooling upward wage pressure and causing skilled craft labor to migrate to other industries and other regions."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.