Let’s review the situation for the oil and natural gas industry as we approach the official beginning of summer and the June 22 meeting between OPEC’s oil ministers, Russia and other non-OPEC nations.
The Permian Basin continues its oil-producing dominance – The Permian has been in an outright oil boom for more than a year now, and a new report from the folks at IHS Markit contends that that boom will continue apace through at least 2023. The report projects that, by 2023, total Permian oil production will grow by a somewhat amazing 116 percent, to 5.4 million barrels oil per day, which would be more than any OPEC nation other than Saudi Arabia.
To put that projected number in further context, that would be equal to the daily production of crude oil output for the entire United States of America in the year 2010. So, that would obviously be amazing growth, and that kind of growth requires a huge investment in new drilling. IHS estimates that the upstream oil and gas industry will invest more than $308 billion and drill over 41,000 new Permian wells between now and 2023.
And it’s not just about crude oil – we must remember that these Permian wells also produce a phenomenal amount of natural gas. IHS Markit projects that natural gas production from the Permian will also more than double in the next five years, expanding by 114 percent to 15 bcf per day by 2023.
This kind of rapid growth will of course create challenges, straining the road infrastructure, housing and water supplies of West Texas and Southeast New Mexico. But these are good problems to have since they are problems of plenty, and will be more than offset by what will become an incredible influx of new money into the coffers of state and local governments.
Let’s hope the policymakers invest the funds wisely, because every boom in the oil and gas industry eventually becomes a bust. That cycle has not been rescinded.
Speaking of cycles, the big merger and acquisition frenzy the upstream industry experienced from the summer of 2016 through the winter of 2017 has in recent months slowed to a comparative trickle. But we did see a very significant multiple acquisition in the service sector this week, as DrillingInfo (DI), already one of the largest SaaS and data analytics companies servicing the industry, announced on Tuesday that it was simultaneously acquiring both 1Derrick and the research and database business of PLS.
These acquisitions will now make DI one of the leading providers of M&A-related data in the industry. So maybe they’re expecting M&A activity to start picking up again. As with everything else related to the oil and gas industry, this aspect of the business does run in cycles.
What, oh, what will OPEC do? – Pretty much all of these cycles are mainly influenced by commodity prices. As I mentioned a few weeks ago, in spite of the big Permian boom, the price for crude oil is by and large in the hands today of OPEC and Russia. Two years ago, this was not the case, as OPEC lacked the cohesion necessary to do much about the extreme volatility and low prices that ruled at that time. But an injection of new leadership within the organization and, perhaps more importantly, in Saudi Arabia has produced a paradigm shift.
Since entering into its deal with Russia and several other non-OPEC nations, the cartel’s new-found production and export discipline has lead to a steady increase in crude prices. The collapse of production from Venezuela helped to rebalance the global market sooner than expected, and likely reductions in output from Iran in the coming months threaten to send the Brent price above $80, a looming prospect that U.S. President Trump has begun to express concern about through his Twitter account.
While the IHS Markit report is encouraging to those who would like to see that sort of massive output increase, let’s face reality: That’s only going to happen if the crude price remains fairly strong. With Saudi and Russian representatives making public statements about possibly agreeing to higher output levels when the parties all meet on June 22, there is the possibility, even likelihood, of a price contraction to lower levels. Indeed, the market is already showing jitters about that potential outcome.
Should the OPEC/Russia nations go overboard with export increases, which they did in early 2014, we could even be in store for another price collapse, in which case all bets for continued booms in the Permian Basin or anywhere else would be off.
So next week, the eyes of the industry won’t be on the Permian Basin, but on OPEC and Russia.
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Picture: MIDLAND, TX: Workers stand on the platform of a fracking rig in the Permian Basin oil field on near the oil city of Midland, Texas. (Photo by Spencer Platt/Getty Images)
