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America’s Most Important Shale Patch Isn’t Going Anywhere

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The Permian Basin has dominated oil and gas deals in the U.S. in 2022, attracting almost half of all oil investments in the second quarter. Its abundant shale resources continue to attract investment from some of America’s most important oil firms, with no sign of slowing production. However, restrictions on new oil leases and threats of tighter environmental regulations from the U.S. government could see a curb in output unless Texas and New Mexico shift to a more environmentally friendly approach to oil and gas operations.

In the second quarter of 2022, the Permian Basin attracted huge levels of investment, winning 46 percent of all U.S. oil and gas merger and acquisition deals, or $5.5. billion out of a total of $12 billion in oil and gas production deals. The overall figure may have dropped since the previous quarter, but the Permian is still attracting high levels of interest as America looks to ensure its energy security, according to research by Enverus.

Despite rising inflation, oil prices remain high, at around $95 per barrel, and the demand for national crude production is continuing to grow as President Biden looks closer to home to fill the gap created by imposing sanctions on Russian oil. One of the major deals in the Permian region was a merger between Texas-based Colgate Energy and Denver’s Centennial Resource Development in May, making it the largest pure-play exploration and production company in the Delaware Basin of the Permian. The company expects to produce around 135,000 bpd.

Andrew Dittmar, Director at Enverus Intelligence Research, stated, “As anticipated, the spike in commodity prices that followed Russia’s invasion of Ukraine temporarily stalled mergers and acquisitions as buyers and sellers disagreed on the value of assets.” He added, “High prices, though, also encouraged a rush by private equity firms to test the waters for mergers and acquisitions.”

And oil majors are continuing to expand their operations in the Permian Basin following calls from Biden to boost national production. Exxon Mobil is planning to boost its output in the region as its subsidiary XTO Energy develops a huge new processing plant in the Permian. Production in the basin is driven largely by fracking, which allows oil and gas firms to access oil and gas from shale rock. It provides around 43 percent of the country’s oil.

Related: Which Countries Are The Most Reliant On Nuclear Power?

However, despite asking U.S. oil majors to increase their output, the government also has big plans to curb fracking. The Environmental Protection Agency (EPA) stated last month that it may deem parts of the Permian Basin in Texas and New Mexico in “non-attainment” with its ozone standards following pressure from green groups. The EPA worries that fracking produces volatile organic compounds (VOC) that create ozone when mixed with nitrogen oxides (e.g., from vehicles) and sunshine. If ozone levels become too high, companies in the region may have to reduce their drilling activities.

Jeremy Nichols, climate and energy program director for WildEarth Guardians, explains that Ozone levels in the basin have exceeded a federal standard “for the last several years -- really since the fracking boom took off in the Permian,” and classifying them as high-ozone “basically says you’ve got to clean up this mess or the consequences are going to get even more severe as far as restricting your ability to permit more pollution and more development.”

However, Exxon has pledged to make its Permian Basin operations net-zero by 2030, as it strives to balance its oil and gas operations with carbon reduction practices. It plans to decrease its emissions by electrifying operations and reducing its reliance on diesel fuel. It hopes to eventually shift all its electricity to be powered by renewable sources, which account for just 40 percent at present. It will also incorporate carbon capture and storage (CCS) technologies into operations to stop carbon from being released into the atmosphere.

But the Permian basin accounts for a significant proportion of finance and employment in Texas and New Mexico. A 2021 study suggested that the Permian Basin contributed over $18.8 billion to New Mexico’s GDP and provided around 46,000 direct jobs. Meanwhile in Texas, the oil industry provided more than 2.5 million total jobs in 2019 and contributed $411.6 billion to the state’s GDP. This shows the importance of keeping the basin up and running at any cost, even if that means implementing higher levels of green technologies to help reduce carbon and cut ozone levels.

Earlier this year, Bloomberg identified the Permian Basin as “uniquely positioned to become the world’s most important growth engine for oil production.” Despite curbs by Biden on new exploration and drilling, eyes around the globe turned to the Permian when Russia invaded Ukraine, leading to sanctions on Russian energy. Companies in the region have quickly boosted production beyond pre-pandemic levels, thanks to the fact they aren’t restricted by alliance quotas – such as those of OPEC+. As much of the drilling infrastructure is already established in the basin, increasing production is easier than in other regions, and the shale resources are abundant. Artem Abramov, head of shale research at Rystad Energy explains “We’ll stop using oil long before we run out of Permian inventory.”

There is significant hope around the Permian Basin thanks to its abundant resources, unrestricted oil production potential from existing operations, and high levels of investment. However, restrictions in oil leases, as well as regulations on ozone and carbon levels, could lead to a curb in production unless Texas and New Mexico act to make operations greener.

By Felicity Bradstock for Oilprice.com

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