Revival in Oil and Gas Production and the Spaces In Between
Favorable Economics, the Permian, and Choices
In July, I wrote about the ramped up activity in the Permian Basin. The point of that story was to merely observe and document that period of time in the Basin. In the data offered over the course of several articles, the conclusion was clear: the U.S. is in the early period of another boom from U.S. production of oil, and Texas is largely the zone for the majority of the production capacity. While the Bakken Shale and the Eagle Ford receive numerous well-deserved headlines, exploration and production (E&P) firms were busy making new history in the Permian Basin.
The largest producer in the Permian Basin is Occidental Petroleum, also known as Oxy. This also makes the firm the largest producer in Texas. Pioneer Natural Resources, Apache and Kinder Morgan Production follow behind Oxy in Permian Basin production for 2012. According to the Energy Information Agency, in 2012 the U.S. imported approximately 10.6 million barrels of crude oil per day. The ratings agency Moody’s recently made an announcement about the impact of the “Permian revival” on exploration and production (E&P) firms. In their communication, they mention producers speculate that the full development of the Wolfcamp Shale could result in 2 million barrels a day — more than the 1970s peak for the entire basin. That is nearly 20% of U.S. daily imports. When might that happen? Hard to say.
There are many factors that weigh into how much oil and gas producers will produce, foremost though is price. Spot prices for crude oil settled around $109 for West Texas Intermediate (WTI) and $112 for Brent as of September 9th. Assuming prices do not tank, as they did with natural gas, the trend will be longer lived than a short-term one. Oil is more dear, less fungible, and geo-politically important.
But what could make prices dive in negative ways? One is Syria. In a worst-case scenario, initially high prices would occur from potential supply shocks in the region. If conditions remain unhinged, then it could dampen the recovery underway in the U.S. Economic demand could decline and oil prices might as well. But all of these forces have to align, and they likely will not. The U.S. is more resilient than given credit. This scenario is if Syria does not comply with the diplomatic solution of handing over its chemical weapons stockpiles. The U.S. strikes, and regional violence is ignited, which could be currently described in terms of a slow boil in the Middle East. Iraq is still vulnerable; Iran remains a wildcard. The terrorist organizations are predictably unpredictable. This would be unfortunate to say the least.
Another price-related issue surrounds the interplay between natural gas and oil production. One significant producer in the Permian Basin has changed its focus since 2005, from a 40/60 oil-to-gas ratio, to roughly the opposite, that is the production of more oil than gas. Some producers do not have the luxury of switching their energy portfolios that quickly. Supermajors Shell and Exxon have production mixes of over 50% gas. Exxon’s acquisition of gas-focused XTO Energy in June 2010 tipped the balance in favor of gas. When energy demand increases, due to more favorable and sustained growth, and natural gas prices stabilize, new choices may be made by firms. Demand for natural gas will continue to grow in power generation and transportation, along with the infrastructure required to deliver the gas to markets.
The U.S. economy, along with positive signs from China and occasionally Europe, is finally hobbling along rather than limping. The U.S. continues to benefit from low-priced natural gas and increased oil production from the unconventional energy revolution. The consultancy IHS calculates U.S. disposable income gains of $1,200 in 2012, with more savings expected to accrue to consumers’ pocketbooks, as much as $3,500 in 2025, their study projection period. In essence, the oil and gas ‘revolution’ buffered families, to a degree, from the lingering ill effects of the recession. This is good news, but I’m not sure how many people really felt that. The U.S. energy gains are restoring U.S. competitiveness in world markets. America’s gains can become beneficial to preferential trading partners in different ways, sort of economic friends with benefits.