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By Robert Rapier on Nov 27, 2016 with 6 responses

20 Billion Barrels Of Oil Were Not Discovered In The Permian Basin

Some readers may have noticed that I haven’t been posting as many articles here as I have in the past, but it’s simply because I am busy keeping up with deadlines elsewhere. I have an article due once a week for Forbes, and two weekly articles and one longer biweekly article for Investing Daily. Add to that occasional articles I do for other sites, and I am writing around 200 articles a year with firm deadlines. On top of that, I have a regular day job as an engineer, and this year has been exceptionally busy.

This column doesn’t have a firm deadline. It’s a place I can write when everything else is caught up. But lately those other commitments have been taking up most of my spare time, and I have been lucky to get one column posted a month here. So, that’s the reason my posting frequency here has declined.

I have had some people tell me that they don’t like dealing with the ads on the Forbes site, and they have asked if I could repost some of my Forbes articles here. I am allowed to do that after they have appeared exclusively at Forbes for a few days. So today, I want to reproduce a modified version of one that got pretty good traffic at Forbes, and has gotten a lot of attention in the press.

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Earlier this month the U.S. Geological Survey (USGS) announced the largest estimate of continuous oil that it has ever assessed. The area assessed is in the Permian Basin, a region that has been producing oil continuously for nearly 100 years. Below I will get into the specifics of what this news means, but the mainstream media mostly interpreted it as CNN did in Mammoth Texas oil discovery biggest ever in USA. But this is a fundamental misunderstanding by CNN of what the news entails.

The Permian Basin lies underneath western Texas and southeastern New Mexico. The geology of the Permian Basin is rich and complex, both horizontally and vertically. The Permian Basin has commercial accumulations of oil and gas in stacked layers, at depths ranging from 1,000 feet to more than 25,000 feet. The greater Permian is made up of several subsidiary basins, the largest of which are the Midland and the Delaware.

The new USGS assessment is of the Wolfcamp shale in the Midland Basin portion of Texas’ Permian Basin. The new USGS survey estimates that there are 20 billion barrels of undiscovered, technically recoverable oil in the Wolfcamp alone. Quoting from the USGS news release:

“The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” said Walter Guidroz, program coordinator for the USGS Energy Resources Program. “Changes in technology and industry practices can have significant effects on what resources are technically recoverable, and that’s why we continue to perform resource assessments throughout the United States and the world.”

It is important to understand what this assessment actually means. This oil has been assessed as an “undiscovered resource.” This scientific assessment means the forecasters have a certain degree of confidence that the oil is there. For this particular assessment, the 50% confidence level is that there are at least 20 billion barrels there. The study further estimates that there is a 95% chance that there are at least 11 billion barrels there, and a 5% chance that there are at least 31 billion barrels there.

However, the fact that the assessment refers to the “resource” means that they are estimating the technically recoverable oil in place. This says nothing of the economics of recovering this oil. The amount that would be economically worthwhile to recover at prevailing commodity prices — which would be classified as “proved reserves” — will be a smaller subset of the assessed amount. It would even be zero at a sufficiently low oil price. This is merely an attempt by the USGS to estimate the amount of oil that could be extracted over time if cost was not a concern.

But given the history of the Permian Basin, it’s a pretty safe bet that there is still a lot of oil still left to produce there. The Permian Basin began producing oil in 1921. The Texas side of the Permian has already produced nearly 30 billion barrels of crude, as well as 75 trillion cubic feet (Tcf) of natural gas. Permian crude oil production has more than doubled since 2010 largely as a result of hydraulic fracturing in six low-permeability formations: Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware.

According to the Energy Information Administration’s (EIA) most recent Permian Region Drilling Productivity Report, the Permian is presently producing 2 million barrels per day (bpd) of oil and 7.3 billion cubic feet per day (Bcf/d) of natural gas. This accounts for more than 23% of current U.S. crude oil production, and exceeds the combined oil output of the Bakken and the Eagle Ford:

Source: Energy Information Administration.

Source: Energy Information Administration.

I have heard some characterize this news as a new oil discovery. It it not. This new USGS assessment is merely an attempt to put some framework around how much oil may exist in one of several producing formations within the Permian.

But to the critics that would hand wave this assessment away as much ado about nothing, I would remind them that the Permian has seen oil production more than double in the past six years. That is significant. There is also still a lot of oil to be produced there. So while you are on solid ground when correcting anyone who calls this a new discovery, you shouldn’t underestimate the Permian Basin.


Link to Original Article: 20 Billion Barrels Of Oil Were Not Discovered In The Permian Basin

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  1. By Arthur Berman on November 27, 2016 at 11:33 pm

    Robert,

    I agree with what you say here.

    At the same time, it is important to recognize that these 20 billion barrels are not commercial at today’s wellhead prices by USGS’ accounting of the number of wells needed to drain that volume and the cost of those wells.

    It is also worth noting that total Permian production (Texas and New Mexico) from horizontally drilled wells is approximately 1.2 million barrels per day (mostly from Bone Spring, Wolfcamp and Trend Area-Spraberry). The EIA Drilling Productivity Report lumps all production in the various counties it includes for “tight oil” in its production data so there is about 800,000 bopd in their data that is vanilla Permian oil from vertical wells.

    All the best, Art

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    • By Robert Rapier on November 28, 2016 at 12:22 am

      Hi Art,

      I saw that your article on this got quite a bit of traffic at Forbes. You and I made similar points, but your version had a more negative tone than mine. As to whether they are commercial or not, I have a slightly different take. Some of those barrels may or may not be commercial at current prices — but they do have to find them first. I am confident they will find some, but I think the naysayers of this news believe that 20 billion barrels of undiscovered resource = zero. I don’t believe that. I think it’s probably something; we just don’t know what yet.

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  2. By Arthur Berman on November 28, 2016 at 7:59 pm

    Hi Robert,

    Thanks for your reply.

    I think that the USGS does a good job at resource assessments–much better than EIA (compare Monterey, Marcellus and Poland studies by both groups). I don’t doubt that 20 billion barrels is a reasonable estimate for the Wolfcamp play for technically recoverable resources. Empirically, reserves end up being ~15-25% of TRR so 3-5 billion barrels is probably reasonable at some price.

    2014 proven tight oil reserves were 13.4 billion barrels (at an average oil price of $98 per barrel). Including PUDs, 2014 reserves were 24.7 billion barrels so perhaps these “new” Wolfcamp resources may translate to something like 12% of total tight oil reserves. That’s a notable contribution but a far cry from the general impression taken by many from last week’s reporting on the USGS report.

    All the best,

    Art

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  3. By BonzoDog1 on November 29, 2016 at 2:42 pm

    Click-bait stories about “new” oil discoveries, technology to remove carbon dioxide from the atmosphere or desalinization “solutions” to water shortages always seem to ignore the fact that the energy costs to perform such miracles make them unfeasible in the real world.
    OK, desalinization has been implemented in the Middle East where there is no alternative, but the investments in California get mothballed when the rains return.

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  4. By takchess on December 1, 2016 at 12:48 pm

    Nice article on Forbes today. will discuss once it circles back to your Rsquared blog.
    http://www.forbes.com/search/?q=rapier#5e68a02957fb

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  5. By bluejay on December 11, 2016 at 10:20 pm

    The formations have been drilled thru for fifty years or more so they already know the porosity of the formations although the shale formations were definitely non productive due to no permeability. By the way in the late 1960′s oil was produced at $3.00 per barrel and gas at 15 cents per mcf so costs will match selling prices in the long run. The next step will be when they drill horizontal in the present productive formations which have the porosity and permeability.

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