The revolution that the oil market began experiencing in 2014 has changed the rules of the game forever. Hydraulic fracturing and shale oil have made the US the world’s largest oil producer, overtaking Saudi Arabia and Russia. However, if you delve deeper into US production data, you can see how practically a single region is to blame for this entire revolution: the Permian Basin, located between Texas and New Mexico, producing 6 million barrels of crude every day. Produces oil. However, the frenetic activity in the region is beginning to have consequences. More and more experts are talking about a process of consolidation (rather than development) or even claiming that the Permian Basin is ‘drying up’.
The Permian Basin of the United States is the great symbol of the country’s oil industry. A semi-desert area in which extraction pumps, drilling rigs and large tanker trucks can be seen from a distance, which transport crude oil and the fluids needed to implement hydraulic fracturing (fracking) and extract unconventional oil produced from bituminous shale. Are. This region has become the oil heart of the country, The geological structure of this basin, located between Texas and New Mexico, is extremely favorable, which has allowed American oil companies to increase their production domestically.
There has been and will continue to be such activity that the Permian Basin is about to produce 6 million barrels of oil per day, which will exceed the combined production of the two OPEC giants Iraq and Libya. If the region were an independent country, it would have the honor of being the fourth largest producer of crude oil (not including derivatives or condensate) in the world, behind the United States, Russia, and Saudi Arabia. Since 2014, crude oil production in the Permian Basin has increased sixfold.
The region has been chosen to play a leading role in the American oil boom fueled by fracking and shale oil. Although everything indicates that this ‘show’ is reaching its peak (the capacity to produce more crude oil is gradually being exhausted), US oil companies are trying to spread the ‘gum’ as much as possible. That could lead to sustained oil production in the region of 6 million barrels per day in the Permian Basin for a time. The big question is for how long? According to the US Department of Energy, The Permian Basin has approximately 22 billion barrels of recoverable crude oil, If the current extraction rate is 2.2 billion barrels per year (6 million per day), there is still oil to be found for some time.
However, extraction of these reserves is not linear in terms of cost and technology. The simplest and most economical hydrocarbons are extracted first (Called Level 1 or 1P, Just like people who eat the juiciest part of dessert or pizza first, no one wants to keep the edges or the driest part of the cake. Something similar may happen in the Permian Basin.
Shale oil is putting more pressure on US production
Before peak production (the maximum produced in the basin) is reached, productivity per well will fall as operators must operate lower quality wells. “That may be starting to happen. According to our models, this suggests the industry has dug its best wells. No one is likely to be left indifferent by a decline in production. As Eagle Ford and Bakken (Other large formations) have not been able to regain the ground lost in the past eighteen months, once the Permian peak is reached, the shale oil revolution will move from the growth phase to the decline phase, and Hubert Peak will emerge strongly, ” says Adam Rozencwajg, managing partner of investment firm Goehring & Rozencwajg (G&R).
Oil and Hubbard’s Peak Theory
Hubert’s Peak Theory is the theory that predicts how oil will reach its peak production at some point (there is still a long way to go before this happens globally). Since oil is a non-renewable resource, global crude oil production will eventually peak and then enter terminal decline following a bell-shaped curve. Although this model can be applied to many resources, it was developed specifically for oil production. This peak, today, This makes no sense on a global scale.
Since technology is advancing rapidly and there is still a lot of oil left to be extracted in areas already discovered.
Furthermore, the discovery of oil in Guyana or Namibia would delay the global peak of oil (or never come because oil would lag behind progress in renewable energy before it becomes scarce). But this can happen in specific areas. In fact, Alaska has already reached its peak oil. adam rosenkwajg Assures that ‘peak oil’ or peak oil in the Permian Basin is closer than thought. “Using our modeling and analysis, G&R estimates that the last and final U.S. oil megabasin, the Permian, will reach peak production in 2025. And if that happens, it will send alarm bells ringing in the U.S. and around the world. “, which could translate into oil prices getting too high.”
“The most important development in global oil markets is the depletion of the Permian Basin. We first warned about this in 2018, predicting that the Permian would peak in 2025. In retrospect, our analysis was too conservative. We now believe “The basin may reach its peak in the next twelve months,” investment firm Goehring & Rosenquaz said in a quarterly report.
“We decided that the strong production momentum would not be able to continue, especially in the Eagle Ford and Bakken (despite a slight revival later on). Our models suggested that by 2018, 60% of the most productive and profitable areas (those two Basins referred to as Level 1 fields) had already been depleted, as those two fields had erupted before that in the Permian Basin. On the other hand, The Permian Basin was developed lastTherefore (in 2018) more than 60% of its Level 1 fields are still yet to be drilled. However, given its high production rate, its condition has started to worry us, as it may soon end,” he says.
Models that predict fatigue
However, these experts’ models do not match the models of other oil market participants who predict that the Permian Basin still has room to increase its production for many years. Technology is advancing rapidly, while lateral drilling (with a hole reaching much further into the reservoir) allows better production in oil extraction. If these positive hypotheses hold true, then when peak oil begins in the Permian Basin, oil demand will have begun to decline as a result of the energy transition.
However, G&R emphasizes: “Unfortunately for global oil markets, Our models tell us that the Permian Basin is about to reach a plateau in terms of production, “If we are right, the only source of notable production growth outside OPEC over the last 15 years will be the shift from growth to decline.”
After several years of aggressive exploitation of the richest fields in terms of oil, it can now be concluded that oil companies have already exploited more than 60% of the Level 1 fields: “When we first reported in 2019 When we made these predictions, we were hopeful “We expect the Permian Basin to grow significantly by 2025 before reaching these levels, but with the benefit of hindsight, we were probably overly optimistic.”