An upbeat shale patch, much to OPEC’s dismay, is hiring and ready to drill for more oil as producers are comfortably making a profit. But you have to be big if you’re competing in America’s prime spots. The vast majority of explorers surveyed for a Federal Reserve Bank of Dallas report released Wednesday said they could profitably drill a new well at current prices. More than half are increasing headcount. The outlook for small oil and gas companies in the Permian Basin, however, is “dismal” unless benchmark prices stabilize at $70 a barrel or higher, according to the study.
The Permian, covering a vast area of West Texas and New Mexico, has become one of the world’s hottest oil exploration areas, luring billions of dollars of investment from giants like Exxon Mobil Corp. and sending acreage prices skyrocketing. As competition there heats up, Concho Resources Inc. is paying $8 billion for rival RSP Permian Inc. to create the basin’s biggest producer. Among 136 oil and gas executives interviewed by the Dallas Fed March 14-22, the response to how much they need per barrel to cover costs of new developments in the U.S. averaged $52, and just $35 for existing wells. In both cases, the averages increased by $2 from last year but are way below the U.S. benchmark price.
The Permian is the cheapest place to drill, with operating expenses averaging just $25 a barrel in its Midland section and $30 in the Delaware part, according to the report. The Dallas Fed didn’t define what it considers a small producer facing difficulties in the area. West Texas Intermediate crude has rallied more than 50 percent from its June low, to $64.38 at the close on Wednesday.
With the incentive of prices above costs, U.S. production has added more than 1 million barrels a day over the past year — the equivalent of output from OPEC member Libya — to record levels above 10 million. That has caused “profound implications on energy geopolitics,” according to Fatih Birol, head of the International Energy Agency.
Sources and photo-credits: Bloomberg