Strong production growth from the Permian basin is expected into 2023, building on first-half 2022 average crude oil production of 5.02 million b/d, an increase of 13.6% year-over-year. Persistent supply chain bottlenecks, shortages of qualified personnel, and a fluctuating drilled-but-uncompleted (DUC) well inventory could dampen overall expectations, but the play continues to be the focus of many US shale operators.
As noted in this issue’s OGJ Midyear Forecast (beginning on p.26), the Permian basin rig count in June increased by more than 100 rigs year-over-year, and horizontal drilling permits for new wells in the basin hit a record-high in March 2022, according to Rystad Energy data.
In this year’s second half, drilling activity in the Permian basin is increasing as US shale operators deplete DUC inventory for the time being. After a June 2020 peak, the DUC backlog has decreased over 60% as producers completed more wells while keeping drilling subdued to preserve cash, ESAI Energy said in a June 20 report. “Viable DUCs will likely be depleted by yearend, leaving many producers with no choice but to accelerate drilling to keep production levels up,” the analysts said.
Adding frac crews will lead to strong production growth from the basin into next year as the rate of new wells spudded is rising twice as fast as the number of well completions, ESAI Energy data show. However, supply chain bottlenecks add downside risk to growth.
“Oil prices north of $100/bbl have incentivized more rigs, especially from private companies, and the diminishing inventory of DUCs means more drilling is necessary just to maintain levels of production,” said Elisabeth Murphy, ESAI Energy’s upstream analyst, North America. An increase in supply chain issues impacting rig and equipment deployment, coupled with the lack of DUC inventory, could hinder growth in 2023, but the analysts currently anticipate another strong year of Permian production growth, especially if producers increase drilling budgets for the new year, Murphy continued.
Public vs. private
Public companies are largely adhering to production plans announced in fourth-quarter 2021, but now guiding a modest increase of 5-6% annual oil growth after a prolonged period of flat to decreasing growth (based on reporting of 35 public companies analyzed), Veronika Meyer, vice-president, upstream research, Rystad Energy, told OGJ in June.
“Last year brought unprecedented profitability for the North American E&P sector, which long was criticized by investors for falling short on increasing shareholder returns during periods of high commodity prices, in favor of boosting spending to grow production,” Meyer continued. While oil prices remain elevated, she said, most public companies are not tempted to dramatically increase production this year.
A global call on energy security could shift these dynamics, she said, but many operators continue to emphasize investor-friendly actions including dividend increases, stock buybacks, and debt reduction more than boosting supply, she said.
Angie Gildea, US national sector leader, energy, natural resources and chemicals, KPMG, agreed. Capital discipline by public companies is likely to remain until investors are confident in market stability and long-term returns, she said.
“Multiple [public] companies have stated they are sticking with their modest production increases, signaling an overall change in sentiment in the industry vs. the drill, drill, drill mindset of the past,” Gildea told OGJ in June.
The private company group on the other hand, “managed to maintain an upward trajectory for all activity metrics, with output still growing in the first quarter of this year despite all logistical and winter disruptions,” said Rystad’s Meyer. Amid heightened oil prices, private operators stepped up in 2021 and continued to add rigs through this year’s first quarter, the impact of which will be visible in 2022 and 2023, she said. In the Permian, she said, “private operators are currently expected to contribute about 500,000 b/d of 900,000 b/d of total [Permian] projected oil growth [in 2022-23].”
However, privately held companies do face some of the same obstacles as their public counterparts, Meyer and Gildea both noted. Private companies may not be subject to public investor influence, Gildea said, but their growth capabilities face the same supply chain and skilled labor problems.
Some private operators won’t be able to get frac crews in the spot market in second-half 2022 due to persistent supply chain bottlenecks, Meyer noted. As a result, there is a risk that some portion of projected growth will be delayed until 2023 amid a fresh buildup in DUC well inventory in this year’s second half, she continued.
Looking ahead
As for a near-term increase in Permian private equity, a few targets are in play, Gildea said. Currently there are about 100 private-equity backed companies operating in the Permian—most of which were initially funded before 2020. An increase would likely require a decrease in asset price (unlikely, she said), improvement in supply chain and labor constraints, and increased confidence in long-term price stability.
Despite all the uncertainty in the market, activity in the Permian basin continues to increase. The play remains the leader in US shale production growth, according to Rystad data. And capital spending—driven both by increased activity and cost inflation (particularly in steel, diesel, and labor, and exacerbated by the war in Ukraine)—is set to reach $50 billion in 2022, Meyer said, an increase of 36% compared to last year.
Mikaila Adams | Managing Editor - News
Mikaila Adams has 20 years of experience as an editor, most of which has been centered on the oil and gas industry. She enjoyed 12 years focused on the business/finance side of the industry as an editor for Oil & Gas Journal's sister publication, Oil & Gas Financial Journal (OGFJ). After OGFJ ceased publication in 2017, she joined Oil & Gas Journal and was named Managing Editor - News in 2019. She holds a degree from Texas Tech University.
