Why the Permian Basin Is OPEC's New Headache: QuickTake Q&ABy
A dry expanse straddling the Texas-New Mexico border has become such a bounty of energy that it’s now a threat to OPEC. Surging output from the Permian Basin, which has been described as a layer cake of oil and natural gas, is projected to help push U.S. crude production to a record next year, making it harder for members and partners of the Organization of Petroleum Exporting Countries to move prices higher and lower by controlling the supply to the world. As technology improves, and geologists learn more about what’s underground, estimates of Permian reserves steadily increase.
1. What’s so special about Permian?
The basin -- a geological term for a low-lying area that collects sediment -- may contain more recoverable oil than any field except Saudi Arabia’s Ghawar. Running 250 miles wide and 300 miles long across West Texas and southeastern New Mexico, it’s a bonanza for drillers, not only because it has layers of oil-rich stone, but also because each seam is 10 or 15 times thicker than those in other shale formations such as Bakken (in North Dakota, Montana and Canada) or Eagle Ford (in southern Texas). Adam Sieminski, an analyst at the Center for Strategic and International Studies in Washington and former head of the Energy Information Administration, compares it to a layer cake: Once a seam is exhausted, there’s another ready for exploitation.
2. How much oil is there?
One part of Permian, known as the Wolfcamp formation, was found to hold 20 billion barrels of oil trapped in four layers of shale beneath the desert in West Texas. That’s almost three times larger than Bakken. It’s important to remember that Wolfcamp is "just a sliver of the basin," says Ed Morse, Citigroup Inc.’s head of commodities research.
3. What about natural gas?
While Permian is mainly an oil play, the rise in crude production has swollen the supply of natural gas as a byproduct of the drilling. The basin is estimated to produce almost 8.5 billion cubic feet of gas a day, enough to heat 150,000 U.S. homes for an entire winter.
4. Was Permian a recent discovery?
Far from it -- crude has been pumped from the basin for almost a century. But its layers of oil-soaked shale were largely untapped until the last decade, when intensive drilling techniques perfected in other U.S. shale plays were adopted. Hydraulic fracturing, or fracking -- consisting of forcing water mixed with sand and chemicals into a well to create fissures in shale rock so oil or gas can escape -- was first used commercially in 1949. Horizontal drilling came in the early 1980s and provided access to shallow layers of shale. These methods weren’t used together, at least on a large scale, until the 2000s.
5. Who’s leading the Permian charge?
Short answer: Just about everyone. Occidental Petroleum Corp. and Pioneer Natural Resources Co. led the way and are now being joined by major oil companies including Exxon Mobil Corp. and ConcocoPhillips. American drillers plan to lift their 2017 outlays by 32 percent to $84 billion, compared with just 3 percent for international projects, according to analysts at Barclays Plc. Much of the increase in spending is flowing into the Permian, where producers have been reaping double-digit returns, even with oil commanding less than half what it did in 2014.
6. How high will output go?
Permian oil production is projected to rise to a record 2.49 million barrels a day in June, which would account for more than a quarter of the U.S. total. Permian output exceeded that of 8 of the 13 members of OPEC in April. Citigroup estimates that Permian could be producing 5 million barrels a day by 2020, more than either Iran or Iraq. The basin’s output will surge to an 8 to 10 million barrel-a-day range over the next decade, potentially surpassing all OPEC members, Scott Sheffield, Pioneer’s chairman, said in March. Vicki Hollub, chief executive officer of Occidental, sees output eventually growing to 4 to 5 million barrels a day.
7. How has this affected OPEC?
OPEC and 11 other oil exporters agreed late in 2016 to implement output cuts during the first half of this year, an effort to prop up global oil prices. Rising U.S. output, both from shale and offshore drilling, has undermined those efforts.
8. Is the U.S. shale industry the new swing producer?
Some analysts say yes -- that its decisions on increasing or decreasing output are what balance the global market. Saudi Arabia had that role from the 1980s until 2014, when it led OPEC into adopting a pump-at-will strategy, which flooded the world with oil and was supposed to put the high-cost U.S. shale industry out of business. Not all industry watchers agree that shale is now king. That’s because state-owned Saudi Arabian Oil Co., or Aramco, can ignore economics when making output decisions, something private companies can’t do.
The Reference Shelf
- QuickTake explainers on how oil prices are set, the future of Aramco and fracking.
- A QuickTake Q&A on OPEC preparing for the long battle against shale.
- The U.S. Geological Survey assessment of the Wolfcamp formation.
- Permian’s natural gas practically produces itself, writes Bloomberg Gadfly columnist Liam Denning.
- At $58,000 an acre, slivers of Permian land get swapped among companies.
- Two decades ago, there was talk of "life after oil" in West Texas.
- Canada has a Permian of its own.
— With assistance by Joe Carroll, David Wethe, and Stephen Cunningham