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Who Is To Blame For The Decline In Permian Production?

Haley Zaremba

West Texas’ Permian Basin has had a rough year. Investors have been pulling away from the once-gushing Permian Basin after a year of diminishing returns and performing under expectations. Last month, when crude oil was down a whopping 22 percent on the year, there were damning headlines such as “The Permian Basin Is Getting More Toxic to Investors” headlining Yahoo! Finance and other outfits quick to condemn the faltering oilfield.

In pursuit of becoming the largest Permian Basin operator, Occidental Petroleum (NYSE:OXY) made a deal to acquire Anadarko Petroleum, leading to it being taken to the cleaners by the world's greatest value investor,” reported Yahoo! “Shareholders in Occidental seemed unimpressed with the massive debt intake associated with the buyout and have dumped the stock. As a result, Occidental shares are nearly down 50 percent in the past 12 months.” This, the article was quick to point out, was far from an isolated case. Over the last 12 months, Andarko stock values had already lost nearly 30 percent before the buyout, Diamondback Energy was down 23 percent, Pioneer Natural Resources down 31 percent, Concho Resources down by nearly 50 percent, and Whiting Petroleum Corp. lost a jaw-dropping 86 percent over the same period.

Part of the reason that the Permian Has been struggling in recent years is that shale wells are inherently a boom and bust operation. While shale wells are extremely attractive to market investors in the beginning stages, thanks to the massive gush of oil they provide at the outset (as exemplified by the mega-producing Permian Basin, which has flooded the international market with record-breaking volumes of crude since the early 1990s), shale wells simply can’t keep up this kind of output. 

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The nature of shale wells is that they decline in production much more rapidly than conventional wells, leading to inevitable slowdowns such as what we are currently witnessing in the once almighty Permian. “Shale wells lose as much as 70 percent of their production in the first year, meaning that explorers have to constantly pour money into more drilling just to maintain production. By contrast, once up and running, conventional wells lose as little as 5 percent each year, providing a much more solid production outlook,” Bloomberg reported in a shale-shaming article all about how “Texas oilman Jeffery Hildebrand became a billionaire by shunning the shale revolution in his own state”. 

In the past few weeks, however, things have been looking up for Permian Basin investors and producers, with the media changing their tune about the death of the basin and predicting continued growth and even a major comeback for West Texas shale. Bloomberg, however, says that investors should be wary of counting their chickens before they’ve hatched. 

In a report this week entitled “Permian ‘Child’ Wells May Cut Oil Recovery By 20 percent, Bank Says” Bloomberg reveals that Permian producers are continuing to drill in an entirely unsustainable manner, and that in their rush for gushers, they are impeding their own growth in the long term. The article is based on analysis from investment bank Tudor, Pickering, Holt & Co., based in Houston, Texas, and the jist of the issue, according to Bloomberg, is that “oil producers drilling so-called parent-child wells in the Permian Basin are risking the loss of 15 percent to 20 percent of the crude that can ultimately be recovered from those wells by spacing them too close together.”

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Oil producers must walk a fine line with child wells in the Permian basin. If they drill a child well too close to the parent well, it will have a severe negative impact on the output of the younger well. If they don’t drill close enough, however, they run the risk of leaving oil reserves untapped in between.

“In much of the Permian,” says Bloomberg, “the amount of oil that can be recovered from child wells is on average about 20 percent to 30 percent lower than that of the parent, the analysis shows. That means overall production from a particular area could be some 15 percent to 20 percent lower than projections made by producers.” While this outlook is grim, Tudor, Pickering, Holt’s analysis also proposes a solution: if both parent and child wells are drilled and fracked at the same time these “co-developed” wells improve recoveries and could keep producers more in line with projections. Will producers listen?

By Haley Zaremba for Oilprice.com

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