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Is Peak Permian Only 3 Years Away?

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The world’s hottest shale basin, the Permian, is leading the second U.S. wave of tight oil production growth and will continue to do so for years to come, all analysts say.   

However, signs have started to emerge that the relentless intensification of drilling leads to diminishing returns, Simon Flowers, Chairman and Chief Analyst at Wood Mackenzie, said in an article this week. Pumping twice as much sand as usual into Permian wells and drilling longer laterals doesn’t deliver commensurate volumes of oil, Flowers notes.

“Drilling costs rise exponentially with depth, and there’s a suspicion that longer wells are hitting a cost efficiency ceiling,” WoodMac’s chief analyst writes.

Moreover, after the early production-exuberance stage, drillers are now much more focused on delivering profits and higher profit margins. They now favor quality over quantity, and value over volumes.

Might the Permian be reaching the limits of well size and design? Maybe – as Star Trek’s Scotty might observe of an underwhelming high intensity completion ‘you cannae change the laws of physics, Jim’,” Flowers says. But WoodMac suggests that drillers could ‘change the laws of physics’ and that these signs of setbacks may actually be growing pains.

The energy consultancy’s Director of L48 Research, Rob Clarke, argues that there are two basic and very sound reasons that the fading lateral drilling and proppant metrics might be just growing pains. One is much more advanced proppant placement, and the other is the oil majors’ move into the Permian, set to change things.

“Now, pinpoint frac technology can place the proppant exactly where it’s wanted. Science is also being applied to identify the most effective proppant grain size and shape as well as drill bit design and fluid chemistry, all with the aim of boosting EUR,” according to WoodMac.

In addition, ExxonMobil significantly boosted its Permian position earlier this year, and Exxon has “global expertise in extra-long laterals—including a 39,000 footer in Russia,” WoodMac says.

ExxonMobil has already drilled a 12,500-foot well in the Permian and “will no doubt ramp up longer still to test the diminishing returns theory,” Clarke noted.

Now the next challenge will be to deliver an effective completion of such a long well.

“The application of the Majors’ capital and industrial approach will test whether the thousands of wells to be drilled in the future enable the Permian to deliver on the bold growth targets,” WoodMac said.

Two months ago, Wood Mackenzie warned that as drillers are set to continuously develop the hottest U.S. shale play, they may soon start to test the region’s geological limits. And if E&P companies can’t overcome the geological constraints with tech breakthroughs, Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question, and potentially significantly influencing oil prices.

Apart from geological constraints, other factors that could affect Permian growth are increasing service costs and potentially persistently low oil prices.

While oil service margins have increased for oil field service providers such Schlumberger and Halliburton, oil producers, on the other hand, face cost pressure, and “higher well costs may force additional discussion on capital discipline going into 2018, which could be a good thing for the overall supply and demand balance,” BTU Analytics said earlier this month.

At the end of September, Moody’s warned that even if average drilling and completion costs have declined significantly in the past two years, “drillers will be hard pressed to further reduce drill-bit finding and development costs, since drilling efficiencies may be offset by higher service costs.” North American oil producers will need WTI at over $50 a barrel in order to achieve “meaningful capital efficiency”, Moody’s said.

Pioneer Natural Resources, for example, continues to believe in the Permian, but it thinks that the U.S. shale patch is heading toward hitting the ceiling of efficiency gains from larger frackings.

“In the U.S., we are essentially using a sledgehammer approach. We are using larger volumes or sand and fluids and pumping at higher rates,” Pioneer’s CEO Tim Dove said at the Oil & Money conference in London, as quoted by Platts.


“At some point you reach a peak on logistics, limits on sand, water volumes… that’s where we are getting to, [although] we’re not quite there as an industry,” Dove noted.

Still, the expertise of the majors, as well as science and tech breakthroughs in proppant use, may help the Permian outgrow its growing pains faster than expected.

4 Comments on "Is Peak Permian Only 3 Years Away?"

  1. coffeeguyzz on Mon, 13th Nov 2017 8:42 pm 


    As the infrastructure (pipelines) expands, as the different horizons continue to be delineated, as the northwest shelf shows ongoing productivity farther and farther to the NW, the Permian will be cranking along for many decades to come.

  2. Apneaman on Mon, 13th Nov 2017 9:32 pm 

    Surplus Energy Economics
    How the economy REALLY works – Tim Morgan

    #112: Will things go bang soon?
    Posted on November 13, 2017


    “Let’s start with the fundamentals. Contrary to conventional thinking, the economy isn’t really a monetary system at all, but a surplus energy dynamic. What drives the output of goods and services is the quantity of energy we can access, less the energy consumed in the access process. If the available quantity is constrained – or the energy cost of accessing it increases – the output of the economy will decrease.

    Money, having no intrinsic worth, has value only as a “claim” on the output of the real economy, which means, ultimately, that money is a claim on surplus energy. Debt, as a ‘claim on future money’, is really a claim on future energy.

    For more than two centuries, there has been sustained growth in available surplus energy. This has enabled total financial claims – the aggregate of money and credit – to increase as well, without toppling the financial system.

    What we’ve been witnessing since the turn of the century, though, has been an increase in the energy cost of energy (ECoE), combined with emerging constraints on the quantity of accessible energy. This process makes the continued growth in aggregate money and credit dangerous, because we are creating claims that the real economy will not be able to meet.”


  3. MASTERMIND on Mon, 13th Nov 2017 9:44 pm 

    Permian Reserves May Be Much Smaller Than You Think

  4. Anonymous on Mon, 13th Nov 2017 10:52 pm 

    1. The article is really not that strongly pushing the headline. It is more neutral.

    2. Any discussion of peak production needs to include a price assumption. The production will be higher at $70 versus $30.

    3. Productivity seems to have flat-lined for now. But growth can still occur because of the pace of drilling and completion. It is COMMON that productivity drops when rigs goes up and goes up when rigs go down. This is a phenomenon called “high grading”. (And the converse “low grading”.) In the near term, price (and from that rig count) is the much stronger driver than productivity changes.

    4. Be careful about crowing about “sweet spot running out”. Peakers have been hoping and predicting this for shale oil for years now, but been proven wrong so far. Just look at the record going back to the Rune Red Queen TOD article and before. Peakers WANT productivity to decline and shale to run out. So they misanalyse data (allow biases to cloud judgment).

    Yes, sweet spots do get exhausted. However there is a slow increase in our ability to do completions, to geosteer, etc. (much overplayed, but still substaintial over the years). And it doesn’t take radical new “tech” to change the equation. It can even just be “practice” of the people doing the work.

    In addition, there has been gradual learning of new sweet spots over time. It’s not like every spot was completely understood as of 2008 and then we just drilled out the sweet to the stale. Just look at the later development of Permian versus EF versus Bakken. Or the later development of Marcellus than Fayetteville (even ceding you the Barnett as a first case). Or the late development of Utica east Ohio drilling. And SCOOP/STACK. And those are meta developments. Even within the areas there is learning going on. Even still in the Bakken. And definitely still in the Permian. Yes, it has a long production history, but there is a huge area, lots of benches, and new development (via hz).

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