Permania is Back!
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Today, we’re looking at a U.S. oil basin that we talk extensively about in our sand market reports and is back in the spotlight of oil and gas media: the Permian. Two of the largest oil companies in the world announced major, ambitious goals for the Permian basin, which involve producing more oil each than the majority of OPEC nations produce. Production growth seems to continuously defy expectations.
Oil Majors Ramping Up
The roots of the hydraulic fracturing revolution in the U.S. bring names like EOG, Pioneer, Apache, and Devon on the oil side, and RRC, CHK, and Mitchell on the gas side. The major international oil companies had a relatively smaller portion of their total assets and acreage invested in tight shale plays, opting instead for large-scale, traditional oil plays in the Gulf of Mexico and international plays. But that dynamic changed over the past few years, and Chevron and Exxon signaled that they are heating up for a play for dominance in U.S. shale, and particularly in the Permian. Both firms announced major CAPEX increases focusing on the basin:
Chevron’s outlook is supported by strong performance in the Permian Basin, where the company has added almost 7 billion barrels of resource and doubled its portfolio value over the past two years. Permian unconventional net oil-equivalent production is now expected to reach 600,000 barrels per day by the end of 2020, and 900,000 barrels per day by the end of 2023.
ExxonMobil said today it has revised its Permian Basin growth plans to produce more than 1 million oil-equivalent barrels per day by as early as 2024 – an increase of nearly 80 percent and a significant acceleration of value.
These two majors making these announcements on the same day suggests competition for regional dominance is heating up.
The frac sand market is a 120 million ton per year market, with a Q4 average delivery price for a total of $10.8 billion.
The Permian Basin has been the most dynamic and game-changing region for the frac sand market. After prices for Northern White shot up well above $100/ton last winter, sand companies opened mines everywhere they could, releasing a deluge of sand on the market once production ramped up. One of the largest mining areas is between the West Texas towns of Kermit and Monahans — located right in the middle of the Midland and Delaware basins, sub-basins of the Permian — and this production significantly weakened prices. Since sand costs are around half of the completion costs, and around a quarter of the total well costs, lower sand prices are a boon to production companies and will encourage more oil and gas production.
Here’s an excerpt from our most recent sand report:
“The Permian demand picture over the past several weeks has been dynamic, to say the least. The E&P sector is hesitant to step on the gas as upstream fundamentals continue to evolve. Given the vast amount of available HHP on the market, many operators are working on a well-to-well basis with spot frac crews, which is making it very difficult for the pressure pumpers to manage sand positions. Adding to the planning stress is the direct sourcing trend and the fact that it is virtually impossible to know if a spot crew will be providing sand or if the operator customer will be direct sourcing. Along the same lines, regional sand suppliers are finding it increasingly difficult to manage their demand outlooks for their E&P customers. Due to the on/off nature of E&P completion programs, they do not have a consistent off-take as pressure pumpers do, therefore if a well is delayed, this often forces mines to scramble on the spot market to find a suitable buyer. It seems that as the direct sourcing trend continues, the Permian market fundamentals will continue to fluctuate and week-to-week volatility will persist.”
Click here for info on our Frac Sand offerings.
Midland is a boom town. Truckers make $150,000 per year, rent prices are at or above those in major international cities, and now the Wall Street Journal reports that “Even a barber can make $180,000 per year.”
Last July, traffic problems were visible on Google Maps, with massive deep red swatches on most roads around Kermit and Monahans, towns with populations of around 6,000 and 7,500, respectively. Locals started Instagram pages (slightly NSFW) documenting the high number of traffic accidents. Highway 285 is now one of the most dangerous roads in the U.S.
So is Midland going to follow so many other boom towns with a drastic crash? With the current CapEx announcements and oil and gas projections, it’s not likely. The Permian also enjoys prime positioning near Corpus Christi — a major export region — at a time when the U.S. is asserting its power as a global exporter.
It could certainly use a bit of a cooldown, though.
With the explosive growth of oil and gas production, takeaway capacity out of the Permian — primarily pipelines — was a major challenge in late 2018. The Midland-Cushing spread hit as low as -$20/bbl as every barrel of pipeline capacity was full, nearing the economics of trucking crude out of the region. When the Delaware to Cushing Sunrise expansion came online in Q4, the spread rallied and even turned positive briefly after traders were caught short Midland crude.
As production continues to defy all expectations, takeaway capacity could hit limits again, with only small additions of around 300k additional bbl/day of capacity coming online through the end of the year. If we do hit those limits again, the Midland-Cushing spread should weaken once again.
And of course a Permian crypto coin exists, because why not? Introducing Permian Chain!
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-Editor in Chief, Josh Yanus