The King Of Shale Oil, The Permian Basin, Is Still Riding The Wave.

Riding the wave.

The Permian basin, in West Texas and New Mexico, is producing over 5 million bpd (barrels per day) which is almost half of the total US supply. An analysis says the US has 76 billion bbl of untapped reserves and most of this is in the Permian.

In late 2018 the USGS completed an assessment of the entire Delaware basin, a subset of the Permian existing in both southeast New Mexico and West Texas. They came up with over 46 billion barrels of technically recoverable continuous oil resources, plus 281 Tcf of natural gas and twenty billion barrels of NGLs. NGLs are liquid compounds more complex than methane, such as ethane and pentane.

The immense quantities of oil and gas in the Delaware basin make up the largest deposit of oil and gas ever documented by the USGS in the USA. Quite simply, it’s the nation’s premier energy play with some of the largest recoverable reserves in the world.

Two monster wells drilled by Devon Energy were announced in 2018 making 11,000-12,000 boe/d (barrels of oil-equivalent per day) in an early 24-hour period.

Can the Permian basin pump additional oil to meet President Biden’s recent ban on buying oil from Russia?

The trick lies in the new technology of a long horizontal well (usually 2 miles) fracked many times along its length (more than 40 times). Fracking coaxes oil molecules from the layer by creating complex flow conduits or fractures that look a bit like tree branches that allow rapid flow back to the horizontal well and up to the surface.

The luck lies in the many different layers, up to 12, that the oil is found in: the Wolfcamp and Bone Springs are the main ones. These can be accessed by clever management of well pads, horizontal well combinations, and drilling and fracking operations. Optimizing these reduces break-even costs down to $40 per barrel, so if the price of oil is $100/barrel, you are making tons of money.

Other basins were also found to readily produce shale oil: the Bakken in North Dakota and the Eagle Ford in east Texas, each about 1 million bpd. But while these big shale oil plays have flat-lined since the pandemic years, the Permian has taken off. Over 20% of the world’s drilling rigs are operating in the Permian – more than all other countries.

The shale revolution enabled the US, producing 20% of world’s petroleum liquids, to overtake Saudi Arabia (no 2) and Russia (no 3). It also enabled the US to become self-sufficient in oil in 2019, the first time since 1947. In December 2015, the US was allowed to start exporting oil for the first time in 41 years. And natural gas exports have risen rapidly so that the US this year became the no 1 exporter of LNG, liquefied natural gas.

The result is the Permian is in a position to alleviate the global tight oil supply that has forced the price of crude oil as high as $130 /barrel – it’s now about $100/barrel. It will stay relatively high while war continues in Ukraine because of the uncertainty of Russian production, and pressure by the West to cut back purchase of Russian oil and gas. Russian energy exports represent about 60% of the country’s revenue, with oil and refined products 90% and natural gas only 10%.

Many independent oil companies in the Permian (over 50 in the New Mexico side alone) could act quickly to rev up their production. But major oil producing companies in OPEC cannot, and so far the country which has the largest capacity, Saudi Arabia, will not.

But there are headwinds brewing for the booming Permian basin.

US climate policy.

One of the headwinds is the US policy aimed at climate change. President Biden’s goals are (1) Carbon-free electricity by 2035, (2) 50% new EVs by 2030, (3) Net-zero greenhouse gases (GHG) by 2050 across all economies.

If natural gas power plants are closed down and replaced by renewable electricity, gas consumption in the US would fall by 39% by 2035. If a substantial fraction of gasoline cars and diesel trucks are taken off the road, US oil consumption would fall by 34% by 2030.

These dramatic drops in consumption/demand would lead to similar drops in US production – unless the oil and gas is shipped overseas, to southeast Asia for example. This could happen since global energy demand is expected by to rise by about 50% by 2050, particularly in Asia.

New Mexico climate policy.

In the Delaware, royalties and taxes on 45,000 wells provide revenue to the state and it’s been a windfall in recent years. For FY 2021, the $2.96 billion revenue was 35% of the state budget, with over $1.4 billion going to education and over $0.6 billion to health services.

The oil and gas sector generated 60 million metric tons of GHG emissions in 2018 which is 53% of the state’s total and 1% of the US total emissions. Methane makes up 35% of New Mexico’s greenhouse gases (c.f. a figure of 10% nationally) and in this state most of it comes from the oil and gas sector.

Under a democrat governor, Michelle Lujan Grisham, New Mexico has taken an aggressive stance on arresting global warming. The governor has set a goal to reduce by 45% methane emissions between 2005 and 2030. New rules have been established by New Mexico in 2021 to reduce methane leaks and gas flaring, and these are now some of the strongest state rules in the country.

The state government also committed in 2019 to reduce GHG emissions to net-zero over the whole economy by 2050.

The picture is one of a juggling act, with lawmakers of New Mexico trying to create a balance between a very profitable oil and gas enterprise, which emits GHG and ships GHG out of the state with the oil barrels, and a climate-motivated transition to renewable energies. It is not clear how an oil-rich a state like New Mexico can achieve this.

Earthquakes.

Last, there has been a serious uptick in earthquakes in the Permian, particularly in the Delaware basin of Texas just below the border with New Mexico. It was reminiscent of the earthquake problem in Oklahoma when the quakes peaked in the years 2015-2016 with a magnitude 5.8.

The problem was resolved in Oklahoma by controlling the injection of wastewater in disposal wells. The same approach is being used in the Delaware basin.

Despite imminent issues such as those outlined above, the Delaware portion of the Permian will continue to ride high on the wave. The Permian may pump additional oil to meet President Biden’s recent ban on buying oil from Russia, and may even assist Europe to replace Russian oil. For example, Germany gets about half of its natural gas and a third of its oil from Russia.