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So Much for Peak Oil
The Surging Permian

“Peak Oil” adherents have never looked more foolish. The world is awash in oil and, thanks to the depressive effect on prices this glut has had over the past two years, you’d expect suppliers to be uniformly retrenching as they slash capital expenditures to help balance their books. But out in west Texas, atop a geologic formation known as the Permian basin, oil production has hardly dipped at all, and in fact now stands to surge once again. The FT reports:

This formation, about 300 miles long and 250 miles wide, holds some of North America’s most accessible shale oil reserves. Companies that have been lucky enough, or smart enough, to build strong positions there — such as Pioneer Natural Resources and Concho Resources — can expect to have a competitive advantage over other oil producers, in what remains a very difficult market. […]

Although the Permian was not immune as activity across the US oil industry slumped after the crude price crash of two years ago, it has proved the most resilient of the “big three” US shale regions. From peak production, crude output has dropped by 40 per cent in the Eagle Ford shale of south Texas, and by 25 per cent in the Bakken formation centered on North Dakota. In the Permian, by contrast, the drop is only 2 per cent.

It was the Permian basin, too, that gave us the surprising good news last week of a new oil and gas field that is estimated to contain some 3 billion barrels of crude and 75 trillion cubic feet of natural gas. But some analysts think that Alpine High discovery, as it’s being called, is just the tip of the proverbial iceberg. Liam Denning writes for Bloomberg:

The Permian basin’s attractions are well known in the E&P sector — just ask Blackstone or EOG Resources. As oil prices have collapsed, producers have slashed jobs, idled rigs and basically tried to do more with less. Part of that has involved focusing on the best acreage that can turn a profit, in cash terms anyway, even at lower oil prices. Hence the rush, or retreat, to the Permian.

But in today’s market it’s not enough just to know those hydrocarbons are there—you need to know you can profitably extract them at current prices, which have dropped significantly based on global oversupplies in both oil and gas markets. There, too, Denning notes, the Permian seems to excel:

[Apache Corp. CEO John Christmann] said Apache had 700 locations it could drill in that area that were “very economic at $50.” Bump the price to $60, though, and Apache reckons the number of viable locations jumps to anywhere between 2,450 and 3,200…[I]f 10 bucks a barrel is all it takes to triple or quadruple Apache’s potential set of opportunities in this particular play, then that presents a problem for OPEC ministers, among others, meeting later this month in Algiers, potentially to announce some sort of freeze on their production.

While OPEC meets with delegates from other petrostates on the sidelines of an energy conference in Algiers two weeks from now to moot a potential agreement that would limit their collective production and perhaps induce a price rebound, America’s oil producers will be busy refining their techniques, cutting their costs of production, and, as Apache has so richly demonstrated, finding new reserves of oil and gas to explore.

And here’s the really worrying aspect of all of this for all of those desperate petrostates: if they are successful in sending prices back up, it will be U.S. shale producers—whose projects are smaller and easier to ramp up quickly—who stand to benefit the most.

“The era of Opec as a decisive force in the world economy is over,” declared famed oil guru Daniel Yergin back in April. That seems to sum things up nicely, but let’s add something to that: private producers, American shale firms chief amongst them, are already ensconcing themselves as key players in this new energy world order.

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  • Kev

    Petrostates will eventually adjust by cutting social spending and currency devaluations. The cost of extracting oil in Arabian peninsula is in single digits, they will be fine. US oil companies by contrast are not profitable at current prices and are only kept afloat by massive quantities of debt. How long is this gonna go on?

    • CaliforniaStark

      The problem for the Saudis and other Arabian states is that merely making a profit is not enough. Oil revenue makes up substantially all their income, which they use to fund extensive welfare states. Cutting social spending, and reducing the standard of living of their citizens, will likely result in unrest. The House of Saud and the other Gulf State sheikdoms could be overthrown.

      Under the circumstances, the Saudis and other Gulf state are probably following the best strategy possible: Keep producing enough oil to protect their market share, and negatively impact sales from higher production costs countries, such as Iran. Take steps to cut their budgets in a reasonable manner that will not create unrest. Begin diversifying their economies. Continue to engage in fruitless discussions with other OPEC states regarding limiting production..

  • Kevin

    Petroleum has long boom bust cycles. We’re in a bust now, but sooner or later the worm us likely to turn. Peak oil was silly, but so is thinking low prices will last forever.

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