Our recent print edition of Energy Ink Magazine touted the Permian Powerhouse. Since then, industry analysts have suddenly brought into question the health of the play in the context of rather volatile global markets.
Rig counts have dropped for six consecutive weeks. The EIA’s latest short term energy outlook report shows a slower demand growth for 2020. Supply is expected to continue to outpace demand. The trade war with China has become far more serious with that nation cancelling all imports of U.S. grain. Even popular analyst site RigZone recently reported that “U.S. shale oil output growth is slowing and nowhere is this more evident than in the Permian Basin...”
That article sites operational bottlenecks, market and logistical factors and slowing well flows as being the primary drivers of a Permian slowdown. Countless other analysts are beginning to predict the end in concert with a coming global price crash.
But analysts have become just as addicted to social media prominence as a teenager, and dire news tends to pull more web hits than good news. And though just last Friday, Pioneer Natural Resources warned that the shale boom could end by 2025, it also said that belief does not apply to the Permian.
In fact, the Permian is still growing. The “sky is falling” claims seen in recent weeks are simply coming from a moderate slowdown that will not last. Rystad Energy’s August 2nd report using publicly available data (not just their own) shows rather incredible gains in new production per well and anticipate that to continue through the year. (see their report)
The problem is that not all producers are alike, though many analysts fail to make the distinction. In a Forbes article last Friday, Allen Gilmer of DrillingInfo.com made this clear: “They miss the fact that there are operators that can make a lot of money on drilling the same well another operator can’t." That much is detailed in Rystad’s assessment of new production by producer type where the supermajors and private EP companies are showing increased IR rates while other producers, including the top ten publicly held companies, are not.
Gilmer also details that analysts typically take a one size fits all view and fail to see the latest trends in production such as the growth of “interstitial acreage” use. He indicates that analysts “fundamentally misunderstand what the eventual producing units will look like”. For instance, the increasing use of developed acreage for “multiple producing horizons” ultimately lowers drilling costs as such acreage is already paid for, hence, “interstitial acreage.” As such, future breakeven costs based on models which include cost of acquisition are no longer as valid.
If the oil industry is suffering, certainly it is from geo-political events and oversupply. These things will change. But the real suffering in the industry is at the hands of analysts and the media who largely fail to understand the complex drivers of an industry that is still poised to break records and continue to dominate the global oil landscape.