Peak Oil is You

Donate Bitcoins ;-) or Paypal :-)

Page added on October 16, 2018

Bookmark and Share

The Permian Oil Boom Is Showing Signs of Overheating


At 10:30 p.m. on an 85F August night in Penwell, West Texas, a 69-year-old repairman is hammering away at the frame of an 18-wheeler in the forecourt of an abandoned truck stop. The song Free Bird by Lynyrd Skynrd blares from the radio. “I’m making more money than I ever did,” says Don Suggs, who spends nights inside a vacant, graffiti-covered shop nearby, where he sleeps in a hammock. Just six weeks earlier he was retired, living near Dallas. He’s here now, he says, “for one last hoo-rah.”

Suggs’s sole employee, Bo Bennett, a heavily tattooed native of Waco, Texas, beds down in what used to be the shop’s freezer. The only sign of a home comfort is a hanging punch bag. “This is the new West,” says Bennett with a smile.

Photographer: Matthew Busch for Bloomberg Businessweek

The Permian Basin is six years into a boom sparked by advances in drilling methods that have unlocked a sea of hitherto unattainable oil buried inside a 90,000-square-mile stretch of sedimentary rock straddling Texas and New Mexico. But as the area’s production approaches the level of Iran—the third-largest OPEC member—growth has begun to slow, throttled by shortages of pipelines, workers, power, and roads. There’s a lot, in terms of energy as well as geopolitics, riding on whether this is just a temporary blip or a longer-term deceleration.

The U.S. has become an energy superpower because of the Permian. The region’s crude output has doubled in the last four years, and could rise another 50 percent by 2023, according to industry consultant IHS Markit. That could propel the U.S. past Saudi Arabia and Russia, which in recent years have alternated in the role of world’s top oil producer. Such a development would have far-reaching economic and political implications for everything from America’s foreign policy to OPEC’s influence in global energy markets.

Suggs’s truck repair shop in Penwell.
Photographer: Matthew Busch for Bloomberg Businessweek

When U.S. shale emerged as a threat to OPEC in 2014, the cartel tried to kill it off by flooding the market with crude, sending oil prices below $30 a barrel. The move backfired: While some of the weaker U.S. players were swamped, others cut costs aggressively and invested in new technology. The American industry emerged leaner and stronger. Today, U.S. drillers are unshakably confident. “The Permian is huge,” says Vicki Hollub, chief executive officer of Occidental Petroleum Corp., the basin’s biggest producer, in an email. It “has the capability to sustain its position with respect to the rest of the world for another decade or two at least.”

Growth has been powered by improvements in oil extraction methods—notably horizontal drilling and fracking, which pushes sand, water, and chemicals down into the ground to force out oil and natural gas trapped in layers of shale rock that run three-quarters of a mile thick combined. Both technologies had been around for decades; the breakthrough came from deploying them in combination. That’s what wildcatters, including Scott Sheffield at Pioneer Natural Resources Co. and Mark Papa at EOG Resources Inc., began doing in the Permian around 2012. Their success attracted the oil majors: Chevron, Exxon Mobil, and Royal Dutch Shell are all heavily invested in the region now.

A gas flare near Pecos, Texas. Flares burn the natural gas that’s collected alongside oil in shale fracking.
Photographer: Matthew Busch for Bloomberg Businessweek

The Permian’s impact on global oil markets, the U.S. economy, and Donald Trump’s agenda has already been profound. The U.S., the world’s biggest consumer of crude, now imports less oil than at any time since 1968, when Richard Nixon won the presidency. That’s enabled President Trump to conduct foreign policy with a freer hand than predecessors hamstrung by dependence on Middle Eastern producers. Consider his sanctions on Iran. “Today the U.S. has its own petrodollars,” said Harold Hamm, the billionaire CEO of Continental Resources Inc. and a Trump confidante, on a conference call with analysts in August. “We’re seeing the current administration embrace this more and more every day, realizing the importance of it.”

Texas and New Mexico will account for a third of the entire world’s growth in oil supply next year, according to the U.S. Energy Information Administration. The payoffs are already visible. Texas has logged 21 consecutive months of job growth tied to the oil industry. And while oil and gas accounts for only about 1.3 percent of the nation’s economic output, that statistic is up a third from 2008.

The Permian, however, is also showing signs of overheating. Sand, which is used to prop open the fractures in rock that allow the oil to flow, has become a precious commodity that fetches about $60 a ton. Truck drivers command salaries of $150,000 a year. Getting a child into day care “is like you’re scalping tickets to a Rolling Stones concert,” says Jessica McCoy, a mother in Midland, Texas, the Permian’s unofficial capital. And the region’s roads, overwhelmed by the sheer volume of trucks barreling down thoroughfares designed for farm traffic, are among the deadliest in the country.

Meanwhile, a shortage of pipelines to transport crude from the Permian’s fields to refineries and tankers on the Gulf Coast threatens to cap production growth at least until next year, when new conduits come online. The basin’s total output has been growing by an estimated 31,000 barrels a day, down from the 134,000 barrels-a-day gains logged in October of last year.

Permian Basin Oil Production

Barrels per day

Data: U.S. Energy Information Administration

The slowdown hasn’t registered in Midland. The city can’t hire enough police, corrections officers, or school bus drivers because it can’t match the salaries oil companies are paying. Plumbers and electricians are also in short supply, and every fast-food restaurant in town has a “Now Hiring” sign in the window, with the exception of McDonald’s, which says “Always Hiring.” The lack of workers is the Permian’s “greatest challenge,” says Pioneer CEO Tim Dove. “With so much activity, the region is essentially experiencing negative unemployment.”

The lunch rush at Pody’s BBQ in Pecos.
Photographer: Matthew Busch for Bloomberg Businessweek

Mark Papa, who is considered a forefather of the U.S. shale industry for his time as CEO of EOG from 1999 to 2013, sees a “series of chronic logistical issues” to overcome. “Things are kinda crazy out there” and will take at least a year to improve.

While the short-term issues remain significant, there are longer-term threats as well. Shale wells generally have explosive growth in the first few months before rapidly declining, making for production profiles very different from those of large offshore discoveries or conventional reservoirs such as in the Middle East. More and more wells will be needed. Standard Chartered Plc has dubbed the situation the “Red Queen” problem, a reference to the character in Lewis Carroll’s Through the Looking-Glass who tells Alice “it takes all the running you can do, to keep in the same place.”

Furthermore, oil-field service giant Schlumberger Ltd. is warning that increased drilling intensity runs the risk of wells being laid too close to one another, causing them to lose pressure and to flow more slowly. The solution is to space them farther apart, but that leaves behind precious crude in the rock. Operators will have to spend more than $300 billion in the next five years to meet the industry’s goal of boosting the Permian’s production by half, according to Arthur D. Little, a Boston-based consulting firm.

Oil-field equipment moving through Orla, Texas.
Photographer: Matthew Busch for Bloomberg Businessweek

As such, perhaps the biggest challenge for wildcatters is getting investors onboard. The S&P 500 Energy Index has underperformed the wider market by 42 percentage points over the past four years, despite a 35 percent surge in the price of oil. Fund managers have lambasted executives for their high pay, demanding dividends and share buybacks. In the first quarter of this year, most companies responded with pledges to do either or both, then in the next quarter proceeded to blow through their capital expenditure budgets.

Some $30 billion of U.S. shale acquisitions have been announced since March, focused almost entirely on the Permian, with incumbents such as Concho Resources Inc. and Diamondback Energy Inc. bulking up and BP Plc making a long-awaited re-entry. The dealmaking demonstrates that energy companies are confident that near-term obstacles can be overcome.

At the truck stop, Suggs is planning for the future. He wants to build a full-service repair shop and an RV stop out back, but hasn’t worked out a timeline yet. “Let’s see how long this lasts,” he says. —With David Wethe and Rachel Adams-Heard


6 Comments on "The Permian Oil Boom Is Showing Signs of Overheating"

  1. twocats on Tue, 16th Oct 2018 8:17 pm 

    makes the work camps from “Into the Badlands” look like non-fiction.

    chaos… anarchy… all deserved

  2. Go Speed Racer on Wed, 17th Oct 2018 12:58 am 

    Just need a preacher-man to setup new
    congregations, on the lot next door
    to that truck repair shop.

    Give back some of that money to Jesus,
    and bless the pastor with a new RV.
    With popouts … 8 miles per gallon.

    Tune in Donald Trump vs Stormy Daniels
    on the satellite dish.

    What’s not to like.

  3. Mark Ziegler on Wed, 17th Oct 2018 9:37 am 

    Fracked light oil is too thin to refine. Either export it or import more real crude to blend.

  4. Richard Guenette on Wed, 17th Oct 2018 5:23 pm 

    Fracking is dangerous (It has caused earthquakes) and freshwater, chemicals and sand is used to break into the shale rock. Fracking has contaminated people’s wells.

  5. Duncan Idaho on Wed, 17th Oct 2018 7:24 pm 

    “Fracked light oil is too thin to refine. Either export it or import more real crude to blend.”

    We need to build refineries for light oil– but we won’t because the builders can do the math.
    It won’t last long enough for the payback.

  6. DerHundistLos on Thu, 18th Oct 2018 5:33 am 

    If the party most interested in pushing Permian oil says, “It has the capability to sustain its position with respect to the rest of the world for another decade or two at least.”, factor in a conservative discount of 20%, leaving 8-18 years of oil left. Then what?

Leave a Reply

Your email address will not be published. Required fields are marked *