Texas is back as King of the oil world

Weekly US oil production is back to 9.3 million barrels per day and is nearing the 9.6 million barrel peak in mid-2015.

OPEC raised its outlook for U.S. production growth by 285,000 barrels a day to 820,000 a day in 2017. The number of drilling rigs operating in the country has more than doubled since May, data from Baker Hughes Inc. shows, as shale explorers emerge from a two-year rout buoyed by the initial price gains after OPEC announced its plan.

OPEC members are still sticking with their pledge to reduce output, the report showed. Production from all 13 members slipped by 18,200 barrels a day to 31.73 million last month, with Saudi Arabia continuing to pump below its official target.

As crude oil production in the Permian Basin of western Texas and eastern New Mexico has increased, pipeline infrastructure has also increased to deliver this crude oil to demand centers on the U.S. Gulf Coast.

One indicator of a potential shortfall in available takeaway capacity in the Permian is a negative spread between the price of West Texas Intermediate (WTI) crude oil at Midland, Texas, and the price of WTI at Cushing, Oklahoma.

Going forward, the Midland versus Cushing discount, which recently widened to more than $1 per barrel (b), is unlikely to be either as large or as persistent as it was following the rapid increase in Permian production from 2010 to 2014. At points in both late 2012 and mid-2014, WTI-Midland was priced at least $15/b lower than WTI-Cushing. Pipeline capacity expansions and other market changes are now underway to deliver more Permian crude oil to demand centers.

Pipeline infrastructure in the Permian is now better equipped to handle new production than it was in 2014. Several pipelines that came online to accommodate rising Permian production in recent years, such as Magellan’s BridgeTex pipeline, Sunoco Logistics’ Permian Express pipeline, and Plains All American’s Cactus pipeline, are undergoing expansions that are set to come online later this year, adding approximately 340,000 b/d of capacity.

In addition to expansions of existing pipelines, Enterprise Product Partners is building a new Midland-to-Houston pipeline with a capacity of 450,000 b/d, expected to come online later this year. Other pipeline expansions are planned for gathering systems and intra-Permian pipeline infrastructure to bring increasing volumes of oil to the larger pipeline origin points like Midland. After 2017, several more new pipelines and expansions are planned, or are in the planning stages, that could carry any additional increases in Permian production.

The Permian Basin of Texas and New Mexico is the new star of the U.S. shale oil revolution. Land prices in the Permian have skyrocketed, drilling activity has tripled since last year and production there is poised to soar despite cheap oil prices.

The First Texas oil boom was from 1900 to 1940. Texas oil production previously peaked at about 3.4 million barrels per day in 1972 and then 3.6 million barrels per day in 2015.

Some are predicting the Permian could eventually surpass the colossal Ghawar field in Saudi Arabia as the world’s biggest oilfield.

The key is that the unique geology of the Permian allows frackers to hit multiple layers of oil as they drill into the ground. That’s what sets the Permian apart from other major oilfields, making it lucrative to drill there even at today’s sub-$50 prices.

Oil explorers have paid as much as $60,000 an acre in the Permian Basin, according to Wood Mackenzie. That’s a stunning 50 times higher than the price four years ago.

Land in the Permian is now fetching 10 times what oil explorers will pay for the Bakken, the North Dakota shale formation that used to be the face of the American shale oil boom.

Pioneer Natural Resources (PXD) CEO Scott Sheffield is even more optimistic, arguing that the Permian could eventually exceed the 5 million barrels per day pumped each day from Saudi Arabia’s Ghawar field, the biggest in the world.

The Wolfcamp shale in the Midland Basin portion of Texas’ Permian Basin province contains an estimated mean of 20 billion barrels of oil, 16 trillion cubic feet of associated natural gas, and 1.6 billion barrels of natural gas liquids, according to an assessment by the U.S. Geological Survey. This estimate is for continuous (unconventional) oil, and consists of undiscovered, technically recoverable resources.

According to Scott Sheffield, Executive Chairman and CEO of Pioneer Natural Resources, the Permian will end up being bigger than the Ghawar field, with more than 75 billion barrels in the Spraberry and Wolfcamp plays alone, 40 billion barrels in the Delaware, and more in new zones being discovered, like the Wolfcamp C. Sheffield thinks the totals will exceed 160 billion barrels.

Permian production at 2.3 million barrels per day is 840 million barrels per year. Doubling production to 4.6 million barrels per day or 1.7 billion barrels per year could be maintained for nearly 100 years.

A Permian producing at 5-7 million barrels per day would mean overall Texas production could reach 6 to 9 million barrels per day. Texas by itself would almost have as much oil production as Russia or Saudi Arabia.

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