Strap: Jeff Mower, director, Americas oil news
Welcome to The Snapshot, a series examining the forces shaping and driving global commodities markets today.
US oil producers are getting a bit more optimistic about their growth prospects over the next three years, having lowered operating costs just as an agreement by OPEC and non-OPEC producers to cut output has lifted prices.
International crude prices have risen since end-November, after OPEC and non-OPEC producers agreed to an output cut of roughly 1.7 million b/d.
Image 1: Breakevens
NYMEX crude futures are now in the low $50s per barrel, smack in the middle of the “Goldilocks zone” for companies to ramp up activity, especially in the West Texas Permian Basin where breakeven costs are the lowest in the country.
The Permian, which has been producing oil for nearly 100 years, is the largest US domestic basin by far in terms of production, wells and also oil rigs.
Spending in West Texas is expected to rise in 2017, following a pullback in 2016, with some of the funding the result of the vast amount of merger and acquisition activity in second of half 2016.
For instance, late in 2016 Diamondback Petroleum and Callon Petroleum made hefty acquisitions in the fast-emerging Permian’s Delaware Basin. Some operators have migrated to the southern Delaware Basin, lured by Apache’s Alpine High discovery, which the company claims to hold 3 billion barrels of oil.
Some smaller E&P companies are focusing on a lesser-known area of the Permian known as the Central Basin Platform.
Companies who have spent billions of dollars recently on Permian acquisitions and have issued equity will need to boost drilling and well completions to hold up asset values.
Strap: Analysts expect Permian production to rise, perhaps up to 3.7 million b/d by 2020
As a result, production could rise from roughly 2 million b/d currently to a 2.2 million b/d by the end of 2017 and 2.5 million b/d in 2020, according to analysts. But some analysts are forecasting even higher longer term estimates, up to 3.7 million b/d by 2020.
It’s worth pointing out that the bulk of these Permian investments were made prior to the OPEC/non-OPEC production agreement, when crude prices were at $40-$45/barrel, a range still considered profitable for some oil companies who have been able to drive down operating costs with new technologies and efficiencies.
Image 2: Internal rates of return
These lower costs are having a big impact on returns. According to Platts Analytics, the Permian Delaware internal rate of return jumped to 36.8% in December from 21.1% in November. Producers tend to ramp up drilling activity at a 20% return or higher.
While 7.6 percentage points of the monthly increase was due to higher oil prices, a 5.5 percentage point gain was due to lower drilling and completion costs.
The low costs help give the Permian the lowest breakeven in the US, at roughly $32/barrel, giving producers plenty of wiggle room in case prices turn lower later this year.
Until next time on the Snapshot – we’ll be keeping an eye on the markets.