All eyes on Texas’ Permian basin

OREANDA-NEWS. June 15, 2016.  The Permian shale formation in the US state of Texas is likely to lead any step-up in drilling activity, with Nymex crude futures having surpassed \\$50/bl for the first time this year.

The US rig count rose for the first time in 22 weeks last week, ending a period of decline that resulted in it reaching its lowest since 1987, when oil service company Baker Hughes began publishing data. Producers added four rigs, taking the total to 408. At its lowest, the count was down by 54pc year on year and around 79pc below its 2014 peak of 1,931. "Oil market participants are now starting to focus on the timeframe and magnitude of a potential recovery in US shale output," US bank BofA Merrill Lynch says. "The Permian has experienced the most dramatic improvements in productivity."

The basin has stood out as one of the most resilient to lower oil prices, with its rig count falling by just 39pc compared with a year earlier to 142. The rig totals in the Eagle Ford formation, also in Texas, and the northern Williston basin dropped by 72pc to 103 and by 71pc to 22, respectively, over the same period. Maintaining the existing count may result in increased output, even if producers do not resume operations at idled rigs, BofA Merrill Lynch says. "Productivity gains will eventually offset a lack of incremental rigs and declines from existing production," the bank says.

Permian output will rise in five months at an unchanged rig count, while most other basins may take twice as long to achieve the same results, the bank's modelling shows. The Permian "seems best suited to capture future capital", BofA Merrill Lynch says. Upstream independents Occidental Petroleum and Pioneer have raised their 2016 production guidance, without increasing their capital expenditure, on higher-than-expected Permian output.

The preparations for a gradual ramp-up in activity may have already begun. Oklahoma-based WPX Energy has successfully completed a shares sale, raising \\$485mn. The firm plans to use the proceeds to accelerate drilling and the completion of wells, for bolt-on acquisitions and the purchase of midstream assets in the Delaware basin, which forms part of the Permian. And Devon Energy has agreed to sell nearly \\$1bn worth of assets, including production sites in east Texas for \\$525mn and some of its holdings in the Granite Wash shale — a sign that mergers and acquisitions may be picking up.

Even if producers are not in a rush to add more rigs, the ability to drill for longer — with a larger number of wells using the same rigs — may lead to a shortage of oil services, particularly sand for hydraulic fracturing, as demand rises, US bank Tudor Pickering Holt says.

The bank expects the US rig count to climb to around 650 by next year with oil prices at \\$50-60/bl. "It is hard to imagine that we would be talking about potential shortages in the service sector at \\$50/bl, but our analysis suggests that sand demand may easily eclipse 2014 levels next year," Tudor Pickering Holt says. Sector sand consumption may reach 140bn-160bn lb (63mn-72mn t) in 2017, up from 108bn lb in 2014. This could push sand prices above 2014 highs of \\$65/t and increase well costs by \\$250,000-500,000.

It took operators in the Delaware basin 35 days to drill a well in 2014, which is expected to fall to 20 days next year. And the average lateral length of wells will expand to around 7,000ft (2,130m) from 4,500ft. The net impact of these factors could be a seven to ninefold increase in sand consumption per rig in the basin, Tudor Pickering Holt says.