Permian Update Picture

Image Courtesy of PLH Group

Advances in hydraulic fracturing, known more commonly as fracking, have given rise to a domestic energy revolution with global economic and geopolitical impact. As has been widely reported, the US has become a major exporter of oil for the first time in decades. Indeed, the US is now the world’s top producer, with a national production of just under 12 million barrels per day, an increase of 2 million barrels per day since last year.

For those unaware, fracking is the process of using a mixture of highly pressurized water and sand to break apart oil-rich shale deposits so that the oil can be pumped to the surface. Shale deposits have long been known to exist in the continental United States. However, the technology required to access these deposits has only recently become cost effective. Massive cost reduction initiatives on the part of shale oil producers has dropped the breakeven cost per barrel by ~50%, from about $60 per barrel to around $30 per barrel.  As a result, fracked oil is now cost competitive to liquid crude across a wide range of price levels, cementing America’s foothold in the modern global energy economy.

At the heart of America’s newly accessible supply is a massive shale deposit in Texas known as the Permian Basin. This region—roughly the size of South Dakota—has become a key pillar in this new era of American energy production. In addition to the sheer size of the deposit, the Permian benefits from certain geological properties that make it uniquely able to benefit from low-cost fracking techniques. First, the Permian’s shale deposits are often several layers thick, with some layers as thick as 1000 feet. This geology helps to make Permian deposits more robust and gives the region a natural counterbalance to one of the downsides of the fracking process, which is that deposits dry up quickly. Second, the Basin is conveniently located near the Gulf of Mexico. This gives Permian producers easy access to coastal refineries as well as the port, where the product can be loaded onto ships for international export.

The rise of the Permian has also had profound geopolitical impacts, enhancing America’s capabilities and relationships with both allies and adverse interests. America’s vast production has allowed it to be less dependent on foreign oil, thus increasing energy security. It has also made new tools available to the government to achieve its political ends. Sanctions on Iran and Venezuela, two oil producing nations, have not affected US consumers, who are insulated by the Permian’s robust supply. The Permian has also driven down global prices, a benefit to consumers. What amplifies the Permian’s impact on global markets is the fact that OPEC never anticipated that the fracking revolution would develop to this scale. For decades, the Cartel occupied a comfortable position as the world’s major supplier, but the fracking boom has disrupted years of conventional thinking. The size of the Permian Basin, both in terms of production rate and reserves, rivals entire nations in terms of output. In fact, if the Permian Basin were made the 15th member of OPEC, it would be the Cartel’s third largest member nation, behind Saudi Arabia and Iraq. Experts expect it could surpass the world’s current number one field, Saudi Arabia’s Ghawar field, in three years or less.

The rate of buildup in Permian production is immense. Just in the last year, the Basin’s production rose by roughly 1 million barrels per day. The buildup has fueled a construction frenzy, not only of the production facilities themselves, but of the pipeline infrastructure necessary to move the product to refineries, and ultimately, markets. Over a dozen construction projects of pipelines terminating in the Gulf coast are expected to be completed by mid-2020. These pipelines are known as gathering lines and are used to transport fracked product to the coast for refinement and sale. They are large diameter installations which can transport hundreds of thousands of barrels per day. The aggregate value of these projects is in the billions.    [Add a couple sentences about resulting State-wide condemnation and eminent domain here].  The carrying capacity provided by these pipes alone could cause US exports out of the Gulf coast region to quadruple. Accompanying this explosive growth is a booming labor market, which has its own economic consequences. The huge influx of people into the region has raised apartment rents through the roof. The demand for workers is so high that restaurants have even begun advertising their wages on billboards to attract wait staff who are deeply tempted to pursue other opportunities as energy workers. Because population growth has outstripped available housing, huge numbers of trailers have been moved into the region to house the workers. Traffic has become clogged with production vehicles, dump trucks hauling sand, and workers commuting to drill sites.

Hopefully, readers now have a clearer understanding of just how profoundly impactful the Permian Basin’s growth has been, not just domestically, but globally. This pattern of development is expected to continue into the foreseeable future.  Landowners with property located between the Permian Basin and the Gulf Coast are advised to stay current on projects which may affect them.