What West Texas producers are saying about $40 oil

Oil drilling operations in west Texas|Getty Images

Oil drilling operations in west Texas|Getty Images

It’s all about oil in West Texas. The area is home to the Permian Basin, the most prolific oil-producing formation in the U.S., a hydrocarbon-rich collection of formations that stretch from Texas into New Mexico. Once written off as a place for tumbleweeds, the area has become a boom region in the past decade as the advent of horizontal hydraulic fracturing—”fracking”—brought new investment to waning, vertically drilled oil fields.


Crude production in the Permian Basin is at near-record levels, around 2 million barrels per day, according to the Energy Information Agency, for the first time since the early 1970s.

But as crude prices have collapsed over the last year amid oversupply and waning global demand, cutbacks have once again starkly taken root in this oil patch, which has experienced boom and bust cycles for nearly a century now. West Texas Intermediate crude was back above $41 a barrel on Thursday but has traded below $40 for much of the week. A year ago, it was above $90.

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The rig count has dropped dramatically, down 55 percent since late September, as oil and gas companies drill fewer wells.

“Current prices do not justify continued drilling in the U.S. for oil. Period,” said Steven Pruett, chief executive of Elevation Resources, a mid-sized Permian Basin producer backed by private equity.TSRlogo1

Elevation, which pumps about 3,000 barrels of oil and 8 million cubic feet of natural gas per day, currently has three drilling rigs running. Two came online in June, when oil climbed back above $60, a move that had many in the sector, including the Dallas Federal Reserve, believing the worst was over.

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Standing in front of one of those towering rigs, Pruett said the company is already debating whether it will stay in use: “With $40 a barrel, we have to reassess whether we can continue to justify running this drilling rig to drill new wells. It’s not very exciting to put $7 million in the ground with the prospect of recovering that $7 million over 50 years.”

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Seven million dollars is Elevation’s estimated cost to bring a new well online, including drilling and fracking.

Roughly 250 rigs are operating in the Permian right now, up from a low of about 230 in June. If oil stays at near-$40 lows, more will come offline. Pruett said he thinks the count could fall below 100, as it did in 2009, the last time crude was cheap.

BMDBannerNewHe isn’t alone in that sentiment. Already, one can see nearly 40 inactive rigs sitting quietly in an industrial park outside of Midland, pointing straight up into the sky because there isn’t enough room to break them down and store them sideways. Other lots hold other relics of $100 crude.

Some analysts peg the ballpark break-even of pulling oil out of the West Texas ground at $35 to $40, making it one of more cost-effective energy plays in the United States

Related: Mexico Pipeline Boom Fueled by Texas Drillers

But Stephen Robertson, vice president of the Permian Basin Petroleum Association, said the break-even point varies greatly from company to company, and from well to well, based in part on timing and the maturity of a given site. The numbers, he and others maintain, are also changing drastically and quickly.

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“There are some companies out there that have figured out a way to cut their drilling costs by 50 percent,” Robertson said. “While a few months ago, their break-even point may have been one (price), now it’s different.”

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