Company Leaders Expect Strong 2017 for West Texas Oil
Written by NBCDFW.com
The business of building well pads grinds almost to a halt when the drilling stops.
The Odessa American reports around February, when oil prices bottomed at about $26 a barrel, Silverado Contracting on Highway 385 found themselves with less than half the 20 workers who turned dirt during the boom.
Kevin Shifflet, the yard manager for the company on Highway 385, said they struggled to find 40 hours of work in a week. He took a pay cut. And when they could, they turned odd jobs like preparing construction sites for office buildings instead of readying prairie for future drilling.
But that’s changing. And now, after weathering a two-year bust, it appears 2017 will be a busier year in the oil field. Not just for Silverado, but the broader region.
“We went weeks and months without getting bids at times, and now it’s like once a week,” Shifflet said, adding that companies are also moving up deadlines to have the pads ready so they begin work on the wells faster, he said. “It’s really busy out there.”
It’s not just the prep work in the oil field that foreshadows a recovery in West Texas. Other signs include hiring in the region, ongoing land grabs and more and more announcements by oil companies of plans to spend more in the region in 2017. All of that dovetails with a brighter outlook for oil prices following OPEC’s recent announcement to cut production, but it may have happened anyway.
“I believe 2017 is the Permian’s year,” said Joseph Triepke, the founder of Dallas-based research firm Infill Thinking and an Odessa native. “Companies were going to raise spending levels anyway, and OPEC was just icing on the cake.”
Triepke estimates 150 rigs will be added in the Permian Basin in 2017 if the OPEC deal holds.
More conservatively, the energy intelligence firm Genscape estimates about 40 rigs will be added in the Permian Basin by mid-2017.
“It comes back to the economics of the Permian right now,” said Jodi Quinnell, manager of crude analytics for the energy intelligence firm Genscape. “They are good. They are probably some of the best as you look across the shale plays.”
The Permian Basin’s rig count has already been rising for months.
After years of focusing on the best performing areas of the Permian Basin and honing techniques from the amount of sand used in a frack job or the length of a laterally drilled well, companies in the Midland Basin can break even or even profit on a well in the oil price range of $45 per barrel, according to Genscape. It’s lower in the Delaware Basin to the southwest.
“Before the OPEC announcement, we definitely thought the Permian was going to be kind of the hotbed of activity, where a lot of the activity would be added back,” Quinnell said. “And over the last seven months, we’ve seen that happen.”
Oil companies have announced billions of dollars of land grabs in recent months, amid rising acreage values, often to add onto the sweet spots where they already focus.
Midland-based Diamondback Energy in mid-December announced plans to buy two sister companies and their acreage in the Delaware Basin in the southwest Permian Basin in a $2.43 billion cash and stock deal. Company officials said the deal supported plans to keep adding rigs in 2017.
Permian Basin-focused companies like Diamondback continue to outperform rivals elsewhere as they have through the two-and-a-half-year bust. And many have announced plans to boost spending in the region in 2017 by about 40 percent, Triepke said, citing averages from 15 companies he tracks.
Many of those budgets were announced before OPEC finalized a deal Nov. 30 to cut overall production by $1.2 million barrels a day to boost prices, with some non-members of the cartel such as Russia agreeing to further cuts.
It reversed a 2014 decision by the cartel to keep pumping, despite oversupply created in part by companies in regions like the Permian Basin, in an effort to win market share.
When the 2014 decision sent prices into a nosedive on Thanksgiving Day two years ago, it took months for the cartel’s decision to show its effects in West Texas through a declining rig count. This time, there may be a similar lag as 2017 budgets take effect and companies add rigs, Triepke said.
“By February, you won’t even recognize this place,” Triepke said.
In the end, economist Ray Perryman wrote, “OPEC blinked.” And the result was a stronger outlook for oil prices even while analysts awaited proof that the OPEC members with a long history of cheating quotas would make good on the agreement to cut production.
Permian Basin oil production, today about 2 million barrels a day, never significantly declined during the bust.
Companies in the region developed technological advances and more efficient techniques, while service companies faced pressure to lower costs, to the point that oil companies found it profitable.
In recent months, supermajor oil company Exxon Mobil discussed with investors a rapid decline in development costs in the Permian Basin that make many of its wells viable to drill at a $40-per-barrel price.