US Permian Needs New Approach: AD Little (Update)
(Updates with author's comments at end)
The US Permian shale basin has vast amounts of oil and gas, thought to exceed 250bn barrels of oil equivalent and, according to consultancy AD Little (ADL), its output could reach 5.4mn boe/d by 2023.
The economics of oil production drive gas output, now trading at a discount to Henry Hub, and a portion of it has already been identified as a source of gas for several US liquefaction projects, including Tellurian's Driftwood LNG and NextDecade's Rio Grande LNG.
However, to achieve these ambitious targets the US shale industry will have to dramatically change how it operates, says ADL in a report published October 17. Traditionally production has been driven by independents, but to meet the $310bn capital expense to unlock the Permian’s reserves and drill 41,000 new wells, companies will have to shift strategy and adopt new business models.
ADL sees four key issues that independents will need to focus on, which include long-term partnerships with refineries to guarantee steady cash flow, instead of selling at the well-head; ending the discount of Permian prices against world benchmarks by investing in pipeline and export-shipping capacity; increasing operator collaboration to build vital, non-competitive services such as trucking, roads, water usage, power, housing, school and hospitals; and finding creative funding solutions to raise the estimated $310bn required.
ADL said: "The rush to develop the Permian will drive a level of activity not seen in the history of the oil and gas industry. Growing production to exceed that of every oil-exporter bar Saudi Arabia and Russia in just five years is an enormous challenge. To succeed, independent oil producers will need to radically change how they operate, increasing collaboration and creating new ecosystems to deliver the necessary infrastructure and investment. In short, independents must act in a much less independent manner if the Permian’s potential is to be realised.”
The author Bob Peterson explained the short timeline for the production growth and the consequent increased expenditure in an email to NGW: a major metric for oil and gas producers is how fast they can grow profitable production. This attracts investors, raises the value of their stocks, and lowers the cost of capital, he said.
A number of the operators – such as ExxonMobil, Shell, BP, Apache, ConocoPhillips and Pioneer – are reshaping their investment portfolio and ‘coming home to North American shale’ from Russia, Africa, etc. Lower risk, ‘short cycle’ projects can be completed in a year’s time as opposed to five to seven for a deepwater offshore project, to replace those assets. The Permian barrels are inexpensive, some of the cheapest for new projects: $40-45/barrel full costs, compared with $50-80/barrel for offshore.
The incremental production is about 3mn boe/day, which is 300,000 barrels boe/d for each of the top ten operators: the equivalent of a large offshore field such as Mars or Thunderhorse in the Gulf of Mexico. So another way of looking at this is that the Permian will develop the equivalent of 10 major offshore finds over the next five years, which would be unprecedented.