IHS Markit: Rising costs tighten Permian economics

Exploration and production firms that acquired Permian basin acreage in the land grab of 2016 are now faced with maintaining premium valuations while meeting high-growth expectations in a rising cost environment, according to research by IHS Markit.

Exploration and production firms that acquired Permian basin acreage in the land grab of 2016 are now faced with maintaining premium valuations while meeting high-growth expectations in a rising cost environment, according toresearch byIHS Markit.

Despite the Permian’s continued economic attractiveness, rising service sector costs will raise per-well capital expenditure by more than 15% during 2017, said Imre Kugler, senior consultant at IHS Markit.

“The economics for the Permian are still impressive at a $41/bbl weighted average for a $55/bbl [West Texas Intermediate] price-projection, but costs are rising, mostly for service sector-related costs of drilling and completion, proppant, sand, and a tightening rig market as utilization rates increase,” Kugler said. “While Permian and Anadarko basin plays remain in the money, so to speak, lofty acquisition values become more difficult to pay off when the plays require nearly $50/bbl WTI to produce a 10% internal rate of return.”

Many firms are able to offset rising service-sector costs with increased productivity, particularly in the early life Permian plays, while more mature plays outside of the basin have reached a plateau with economics primarily altered by cost, Kugler explained. Outside the Permian, the lack of infrastructure bottlenecks will place less cost pressure on the Bakken, Wattenberg, and Eagle Ford regions.

“Oil-price stabilization is creating greater confidence, and pumper calendars are filling up quickly,” said Thomas Jacob, research consultant at IHS Markit. “In the Permian in particular we see significant expansion in drilling and completion activity. As a result, we at IHS Markit estimate the play will increase its proppant consumption from 20% of the US market in 2014 to 37% of the market in 2017.”

Jacob said an increase in the number of wells hydraulically fractured in 2017 and higher frac-sand-mass-per-well assumptions for fourth-quarter 2016 and beyond have led to a 62% increase in North American frac-sand demand in 2017. “This year, mine-gate sand prices are expected to increase by roughly 50%, and, in particular, fine-grade sand prices are increasing most significantly,” he said. “The market share of fine-grade sand increased from 60% in 2014 to 80% in 2017.”

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