Bryan Sheffield, a third-generation oil wildcatter in Texas’s Permian Basin, knows what he’ll do if crude drops to $80 a barrel: shut down half his drilling rigs and go on a takeover hunt for weaker rivals.
Sheffield is among producers who’ve together invested $150 billion in the Permian since 2010 seeking their piece of an oil trove estimated to be worth as much #$%$ trillion. As the money pours in, risks are mounting of a bust as analysts including Marshall Adkins of Raymond James & Associates Inc. forecast crude is heading down to $70 a barrel next year, a price that would slow drilling in the most expensive U.S. shale formation.
While traditional wells have been drilled in the Permian since the 1920s, producers have become giddy over the potential of the region’s vast overlapping layers of oil-soaked shale rock. Pioneer Natural Resources Co. (PXD) estimated the remaining yield at the equivalent of 50 billion barrels, more than any field on Earth except Saudi Arabia’s Ghawar. The varied geology, though, makes it more costly to explore and develop.
“That’s the double-edged sword,” said Benjamin Shattuck, an analyst at Wood Mackenzie Ltd. in Houston. Multiple oil zones layered one atop another provide ample potential for riches, “but you also have to be a knowledgeable and good operator in order to drill economic wells out there.”
If oil drops another 18 percent to $80 a barrel, wells in some parts of the Permian that sprawls beneath Texas and New Mexico will become money-losers, said Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York.
Energy producers on average need oil prices around $96 a barrel to break even on wells drilled in Permian layers known as the Cline Shale and the Northern Mississippian Lime, according to Mike Kelly, an analyst at Global Hunter Securities LLC. That compares to average break-even prices of around $78 a barrel in the Eagle Ford Shale a few hundred miles east of the Permian, and $84 in the Bakken of North Dakota.
The Gulf of Mexico, stung by the worst offshore oil spill in U.S. history in 2010 and then overshadowed by the onshore fracking boom, is on the verge of its biggest supply surge ever, adding to the American oil renaissance.
Over the next three years, the Gulf is poised to deliver a slug of more than 700,000 barrels per day of new crude, reversing a decline in production and potentially rivaling shale hot spots like Texas's Eagle Ford formation in terms of growth, adding additional pricing pressure to domestic oil supplies.
The Gulf Of Mexico's growth will bolster the United States' emerging role as the world's top oil and gas producer, a trend led by advances in hydraulic fracturing and horizontal drilling that unlock hydrocarbons from tight rock reservoirs in places like North Dakota's Bakken and the Permian of West Texas.
Huge finds over the last decade - in what engineers call "elephant fields" that can produce for 25 years or more - are lifting growth in a basin some companies once abandoned, fearing it was drying up or its resources were beyond reach.
Appraisals in the Gulf's Lower Tertiary have shown fields that could have half a billion barrels or more of oil, like Exxon Mobil Corp's Hadrian, estimated to hold up to 700 million barrels, or Anadarko Petroleum Corp's Shenandoah, which tests this year showed could hold up to three times more than initial estimates of 300 million barrels.
if oil goes to $80 a barrel, that will cure itself. there will be a lot of growth because of cheap energy and then the growth will gobble up the excess capacity and we'll see increased oil prices and then slower growth. energy prices work as a choke on the economy. i don't worry about this scenario because i think it's very unlikely for any length of time.
Yes, the hedges would look good, but it wouldn't really result in more DCF/unit. They'd even recognize mark to market gains, but we all know about that...
It would hinder profitability on any future incremental production that isn't already hedged (production growth).