December 01, 2018

The Permian Basin in New Mexico & Texas is Creating a Headache for OPEC

Innovation and good leadership are often what determines the future success of a business. There’s no better example of this than the actions of the Permian Basin shale oil executives over the last few years. All indications are that this distinguished group, with notable accomplishments to date, is about to reap extraordinary dividends if OPEC decreases oil production anytime soon. It is no secret that fracking technology has advanced in leaps and bounds, thus driving down extraction costs beyond the expectations of most. The upshot of this is that West Texas and New Mexico Permian drillers have a vastly strengthened resilience to oil price fluctuations. The recent drop from around $70 to $50 per barrel, while rightfully attracting management attention, has not altered US strategic growth plans at all. From an OPEC viewpoint, there are emerging new challenges, most without precedent, and it’s not immediately clear if this sometimes divisive cartel of oil producers can rise to the occasion. For a start, Saudi Arabia is the only OPEC entity bigger than the Permian Basin – the latter now ranking in output ahead of entire countries like Iraq and Iran. It’s unquestionably a powerhouse on the international landscape of oil production. Aside from this, it’s a daunting realization that the US oil and gas exploration effort in the Permian has established up to 114,000 wells over the last 10 years. This, with new fracking and emissions technologies, has culminated in a great many of them being profitable at oil prices as low as $30. In contrast, OPEC does not enjoy the same latitude and profits are severely pressured even at the current $50 mark. Some OPEC members seem to dismiss the Permian impact based on what’s becoming a critical misconception: that the transportation of the oil, even if it is extracted economically, is stretching distribution capacity well beyond its limits. This is turning out to be more like wishful thinking by a complacent competitor. As recently as August, the national oil production had its biggest annual fillip in nearly 100 years - close to 16 million bpd, outstripping both Russia and Saudi Arabia. This record-breaking increase in US oil production was made possible by the foresight of the Permian Basin’s leadership to use chemical additives improving the flow of oil through pipelines. These stopgaps were employed in unison with the recent pushed-through opening of a new pipeline, signifying the start of a development program to build yet another three by the end of 2019. The error of underestimating the Permian caucus may have market-altering effects for possibly decades to come. The US became a net exporter of gas and oil for the first time in 2018 as it took steps to address storage capacity limitations at Houston and Corpus Christi terminals. One can only believe that this has rung all the OPEC alarm bells like nothing else. US oil companies are already developing wells without actually fracking in preparation for higher storage capacity in the near future. It is commonly thought that integrated actions as described above will propel the Permian together with other national oil regions even more emphatically onto the global stage. OPEC is caught between a rock and a hard place. If indeed it cuts production at its next meeting in early December, the resultant boost in energy prices will allow the Permian to gain market share profitably. Raised prices play right into the Texas and NM cost advantages. If, on the other hand, OPEC maintains production or swells it current prices will presumably persist or fall more: in effect, this exacerbates OPEC’s disadvantages. It calls for the Saudis to employ a new brand of astuteness and a think-out-of-the-box mentality. Failing this, the Permian region may well emerge as the new energy order of the day, relegating OPEC to a relatively subsidiary role.


Chase Energy Services

Chase Energy Services is one of the largest privately held integrated oilfield services company in the US, providing end-to-end oilfield services through an experienced management team, innovative technologies and an unrelenting focus on safety. With more than 500 employees, the company serves customers across Southeast New Mexico and West Texas in frac and acidizing, well construction and completion, cementing solutions and well servicing. learn more