Monthly Archives: August 2018

Permian Economics – Is It Really That Good?

I ain’t buying it. The Permian is now touted as the best thing since hot cakes. Companies are dumping acreage in the Eagle Ford, Bakken and elsewhere and stampeding to West Texas claiming that drilling costs are lower, production higher, and they (the explorers) will make investors a lot of money. Perhaps. Perhaps serendipity will play a major part in whether or not they make a dime.  Only a few spots in the Niobrara and Stacks play seems comparable, and even there, wells are not performing as promised. And investors get excuses. Like prices…currently W. Texas oil is seriously discounted. WTI – is West Texas Intermediate. This new stuff is not intermediate, but very light grade. Not your father’s WTI.

Trade magazines, of course, depend upon these bogus claims from their advertisers and keep up the canard that all you have to do is poke a well in the ground and money gushes out like Jed Clampitt did.

There are numerous problems in the Permian. First, in my mind, is the fact natural gas is being wasted, or cannot be sold, forcing a shut in of a well. Secondly, that gas when sold is not bringing diddly squat.  At least as bad as in the Stacks play, natural gas is being downplayed and the oil content boosted.  When gas prices were high over 10 years ago, drillers called their wells “gas wells” and explored for gas, made gas, and also made a little oil, sometimes only a few hundred barrels or less per year.  But they were called gas wells.

Today, no one calls their well a gas well, all those same wells are now called “oil wells” and they downplay the fact 90% of the revenue may come from natural gas at low prices, while the oil is dwarfed by the amount of connate waters being produced. So you make 80 barrels of oil, 450 barrels of water you have to dispose of, and a million or so cubic feet of gas. Great until the pipeline is so full you cannot stuff another cubic foot of the stuff in it. And what to do with all that salt water.  Disposal costs are increasing, especially in places where earthquakes are shaking the ground.

How long before West Texas starts seeing that phenomena? Oklahoma City and surrounding area is experiencing quakes miles where injection sites. Is that an indication these fluids are moving far further than anticipated, or perhaps have set into motion a whole series of cascading events in the subsurface that will readjust an entire petroleum province?

Permian drillers have attempted to pass off high gravity oils (read gassy oils or light hydrocarbons like ethane) as liquids and the pipeline companies are complaining that the oil is often lighter gravity than they contracted to buy. 90 gravity oil is wet gas basically.

The companies are attempting to fool the investors and doing a good job of it. Almost all these companies have failed to make a return on the investment and are trying to at least buy back some of their own stock to increase the price so the investor is led to think they are “making money”, a questionable proposal at best.

I value property, and one client is a charity. They have an income from a well drilled in the Stacks play in 2014. It has rapidly depleted, but was continuing to make gas. We projected that the oil would deplete in 18 months. That was about a year ago. The gas production remained stable depleting much slower.  But early this year, the well was plugged and abandoned.  The cost of water disposal exceeded our projection of the lower economic limit and they simply were spending more for water disposal than the well made. It became another well touted to last 30 years and make 300,000 barrels of oil, in fact made no more than one-tenth that. So where is the “next big thing” going to arise?  I don’t know but until gas prices increase, the economics of these wells suck putty balls. And that price will not rise if drillers continue to drill more and more gassy wells. Remember, the Delaware Basin was, in fact, a gas basin to begin with and it still is.