Canada’s oilpatch should not fret about the Permian Basin: Yager

A Financial Post headline on February 17 declared “The Permian Basin: An existential threat to Canadian oil as the war on cost heats up.”

OMG! For oilfield services, you finally hire a few people and sneak through a price increase and the bank no longer hates you, but then you pick up the news and learn Canada’s recovery will be muted by an ancient oilfield in western Texas. Does the bad news ever end?

The flow of globally irrelevant data from the U.S. is relentless. The Baker Hughes active oil rig count in mid-February was not quite 600 and still only 37 per cent of the October 2014 peak, but rig productivity has skyrocketed, according to multiple sources. The aforementioned article noted crude output from the Permian was expected to rise by 400,000 bbls/d to 2.5 million bbls/d this year and perhaps rise by one million bbls/d by the end of 2018. Look out world.

Despite rising land and service costs, Permian geology is certainly favourable, and many operators can make money at US$40. The implication is this will pressure Canada in terms of attracting capital because so many operators are redeploying finite reserve replacement dollars from long-term projects, like the oilsands, to quicker returns, like the Permian. Numerous global operators like ExxonMobil, Royal Dutch Shell, Chevron and ConocoPhillips were looking at spending more in western Texas and less elsewhere.

But the fact that the Permian Basin might produce one million bbls/d more in 21 months is almost meaningless in the great scheme of global oil markets. The U.S. Energy Information Administration (EIA) estimated Feb. 7, 2017, that 2018 world oil demand will be 99.55 million bbls/d, putting the Permian at three per cent of global supply. How can the tail of a basin that dates back to the 1920s wag the world’s oil dog? It can’t, and it would sure be nice to stop reading about it.

If the EIA figures are remotely correct, oil demand in 2017-18 will rise by an average of 1.5 million bbls/d this year and next. Decline rates on existing production vary greatly by reservoir, but last year, IHS Markit, one of America’s most credible independent oil research outfits, released a report indicating global decline averages of 4.5 per cent per year. This was based on a study of 811 international oilfields accounting for two-thirds of world production. Offshore decline rates were higher than on land, but technology and advanced recovery methods were slowing the decline in most areas. While the decline rates in light, tight or shale oil wells are improving as recovery understanding grows, the long-term decline rate of these reservoirs is certainly greater than the IHS average.

So to keep up with global consumption and production patterns and using EIA data for 2017-18, the world is going to have to unlock 5.8 million bbls/d of new and incremental production in 2017 and an additional 5.9 million bbls/d in 2018. Exactly how the Permian Basin, 600 rigs (not all in western Texas) and enormously improved drilling productivity are going to move the needle on this figure is unknown. And it shall stay that way because it is never going to happen.

This is not to say the Permian Basin is not a wonderful collection of hydrocarbon-bearing rocks because it is. Since production began in 1921, this 75,000-square-mile, multi-zone mammoth has yielded 29 billion barrels of oil and 75 tcf of gas. The Railroad Commission of Texas website reports it could do that again. A new producing horizon called Wolfcamp is estimated to hold 20 billion recoverable barrels alone. Lots of Canadian operators and service companies are active in this region. Nothing wrong with that.

But to have the media continually focus on the Permian and the U.S. rig count as a problem and not an opportunity is simply wrong. The National Energy Board reports Canadian crude output increased by almost 100,000 bbls/d in 2016 despite the worst drilling year in recent history. Why is that not a problem? The Canadian Association of Petroleum Producers’ 2016 Canadian oil production forecast sees Canadian output increasing by 700,000 bbls/d from 2015 to 2020. Why is the news not worried about this?

Oilfield services can’t have it both ways. The working oilpatch can’t cheerfully go back to work replacing reserves as they decline, while at the same time, having these efforts declared as a threat to its own future. Finding more oil is not a problem. It is essential. Indeed, report the news. But please dig a bit deeper and tell the whole story.

Like this? You should be reading Oilweek.

David Yager is a long-time industry commentator and an oilfield service management consultant in Calgary.

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