Oil wells creeping into Texas cities herald the twilight of the Shale

(Bloomberg) — Every morning when Michael Quinn pulls into the parking lot of the luxury apartment complex he manages in West Texas and looks across the street, an unpleasant sight looms on the horizon: a 24-foot-tall insulated wall.

Most Read from Bloomberg

Quinn, who works at Midway Station Apartments in Midland, isn’t worried about the glare. A sand-colored tarp-covered barrier is designed to block noise from an oil well site on the side of the road. To Quinn, it’s a symbol of the thriving industry that is the lifeblood of the local economy.

But it actually tells a very different story: The Wall, and the associated increase in urban drilling, is the latest sign that America’s shale deposits are reaching middle age.

An increase in drilling within the city limits suggests that the best rock has already been found in one of the world’s most productive oil fields. In the early days of the shale boom, with so much crude oil-soaked land being snapped up elsewhere in the Permian Basin, there was little reason to deal with the red tape required to drill beneath settled areas. But with more than two-thirds of the Permian’s premium land being drilled, producers are seeking more permits than ever to drill beneath the Midland and its 130,000 residents, according to BMO Capital Markets.

Observers have long predicted that shale would die out or be reborn. But this time is different: After years of refining their craft to boost output, producers in the Permian’s two main zones are pumping less oil for each new well drilled, rather than more. Exxon Mobil Corp., Chevron Corp. and production guidance from Devon Energy Corp. showed that U.S. shale growth is coming in at the low end of expectations. Analysts say the Permian could reach a production plateau within five years.

This is a problem that goes far beyond Texas. US shale, led by Permian oil, has accounted for 90% of global oil production growth over the past decade, according to research firm Enverus. This made the US the largest producer ahead of Saudi Arabia. Declining shale supplies mean the world can no longer rely on the US as its oil supplier, which can rise or fall quickly to calm a volatile market. That complicates the Biden administration’s efforts to tame pump prices, and it gives more power to OPEC as Russia’s intervention in Ukraine increases oil and gas supplies.

Francisco Blanch, head of commodity research at Bank of America Corp., said, “US supplies are already slowing significantly. in the past.”

The Permian Basin came into the public consciousness about a decade ago, as new fracking techniques turned what was considered a depleted oil field into the most desirable acreage on the planet. Crucially, the spectacular growth of US shale – adding more crude oil to global markets from 2012 to 2020 than the entire current output of Iraq and Iran combined – has become a thorn in the side of OPEC, and its market dominance is under threat like never before. saw that it was

But U.S. production has fallen since the start of the Covid-19 pandemic and is still about 1 million barrels per day below the record 13 million reached in early 2020. Next year’s increase is expected to be about 560,000 barrels per day, according to Enverus. That’s well above what producers need to break even, despite crude oil prices averaging more than $90 a barrel this year.

Read more: Why the global oil market depends on five US states

Rising costs for labor and equipment, as well as pressure to return more cash to shareholders, are partly to blame for drillers’ retrenchment. Meanwhile, rising interest rates likely spell the end of cheap money for shale producers looking to finance even modest growth plans. But in recent weeks, a new, more worrying trend has emerged: the rock itself is yielding less oil.

According to BloombergNEF, wells drilled this year produced between 8% and 13% less oil than a year ago, the first major reversal after a decade of rising productivity. Pioneer Natural Resources Co., one of the largest Permian operators, recently overhauled its drilling plan after executives were “not satisfied” with well performance this year. Laredo Petroleum Inc. said some production was affected by interference from other nearby wells.

More drilling is now done by private companies that are not under pressure from shareholders to buy back and increase dividends. According to Phillip Jungwirth, an analyst at BMO Capital Markets, this is contributing to lower productivity.

Private producers tend to own less desirable acres, he said. Some public and private companies use a technique known as multi-zone development, in which they drill several layers of shale at the same time to increase efficiency, but also touch their less productive rocks. BMO estimates that most of the highest-grade land has already been developed in the Permian and North Dakota’s Bakken, the top-producing shale regions. This leaves prospectors with a lower inventory of the most valuable sites yet to be mined.

“We’re going to run out of inventory in the next four to six years,” said James West, an analyst at Evercore ISI. “We’ve probably seen it before in other shales, which is why we’ve left those other shales and had so much activity in the Permian. “It is now raising its ugly head in Perm.”

Midland, the largest city in the Permian, has received 100 applications this year to drill within city limits, said Ron Jenkins, the city’s oil and gas coordinator. That’s nearly double last year’s total and the highest since Midland implemented a city ordinance for in-town drilling in 2010.

Although the Permian’s premium rocks are depleted, they are by no means grinding to a halt. Production there is expected to continue to rise for at least the next few years, albeit at a more modest pace than at the height of the shale boom.

To gain an advantage, some large, publicly traded US producers have made acquisitions to increase their access to premium acreage.

“Forward-thinking companies are acquiring additional acres to round out their game as strategically as possible,” said Sara Harris, executive director of Midland Development Corp., the city’s economic development arm. But he cautioned that over the years too many people have mistakenly called the Permian the death bowl. “Then it turned out that with new technologies it was necessary to get more resources.”

Economic difficulties around the world have contributed to lower oil prices in recent weeks. But if the Permian’s growing pains continue, then the world oil market could lose its biggest growth engine and put power back in the hands of OPEC and Saudi Arabia’s Crown Prince Mohammed Bin Salman.

“The Saudis and OPEC expected this,” said John Hess, chief executive of Bakken driller Hess Corp. “Now OPEC is really back in the driver’s seat.”

Most Read from Bloomberg Businessweek

©2022 Bloomberg LP

Source link