What’s in the future for the Permian Basin?

U.S. shale producers show no signs of slowing down. Companies like EOG Resources, Devon Energy, Newfield Exploration, and Diamondback Energy all reported plans in their second quarter earnings report that suggest U.S. producers would break the 10 million barrels per day barrier next year.

Despite the oil glut and low prices, oil drillers are more efficient and able to make a profit with lower oil prices. Most producers are raising their production rates without having to spend more money.

“With our ability to deliver attractive returns in this environment, our top strategic priorities are to maintain operational momentum in the U.S.,” Devon chief executive officer, Dave Hager said in a statement.

However, there is a negative trend coming out of this shale boom that is caused by producers drilling to many wells in close proximity to each other.

Shale wells can reach peak production within months of completion and oftentimes only produce for two more years. A legacy well in the shale world can be a well that is just a month or so old, and output from these wells had dropped by 350,000 bpd, a continual fall since 2012. This differs from legacy wells in the Gulf of Mexico that are able to produce for decades in some cases.

If a new well is fracked near an existing well, then a pressure transfer can occur and greatly reduce or stop production in the original well.

The investment manager at Horseman Capital Management, Russell Clark commented, “Eager explorers may undercut the life of wells by over-drilling. New well production is increasingly cannibalizing legacy production. The decline rate looks to be accelerating.”

The Permian Basin is particularly vulnerable to the trend with energy companies rushing to be a part of the boom there. Originally part of the cost cutting strategy, squeezing in multiple wells in small areas is now beginning to backfire on producers.

ConocoPhillips, a big name in the Permian play, agrees that producers should ease back to allow the wells to produce efficiently. “You can drill too fast in these unconventional plays. We get ultimately much better recoveries and avoid causing damage to an area that you can’t go back and fix very easily,” added Alan Hirshberg, the executive vice president of production drilling at ConocoPhillips.

To add to the headache of over drilling, shale producers have been relying on money from investors to stay ahead for the last decade. According to a report from Wood Mackenzie, this trend has encouraged companies to focus more and more on production without worrying about profitability.

Russell Clark added, “At some point debt investors start to worry they will not get their capital back and cut lending to the industry. Even a small reduction in capital would likely lead to a steep fall in U.S. production.”

If producers in the Permian Basin aren’t careful, the global oil glut could get worse thus leading to lower prices again, which could lead to investors backing out and jeopardizing the whole industry.

Article written by HEI contributor Raymond Arrasmith.

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