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Qualifier for Permian Renaissance: High Prices

Permian Basin rig activity is projected to increase as much as 50% to more than 700 rigs in the next few years, which could be the biggest rig count increase of any U.S. oil and natural gas basin, according to U.S. Capital's Cameron Horwitz, who directors the firm's exploration and production (E&P) research.

Crude output from the basin should increase by 750,000 b/d to 1.8 million b/d between now and 2018, said the author of the recent report, "Permian Basin: Renaissance in the Desert" (see NGI, June 18). The gains are made possible by the advent of hydraulic fracturing (fracking) and other technologies that have greatly accelerated U.S. production, as well as "elevated oil prices," Horwitz said in an interview with NGI. He underscored the fact that although production potential looks good, that doesn't mean the product would be low-cost.

"If we go back to $60/bbl oil, then I am not as bullish on the Permian," Horwitz said. "But in an $80/bbl-plus environment, there are a lot of opportunities."

Some of the potential Permian renaissance is tied to shale, but Horwitz thinks that is only part of the story. "There are a lot of different kinds of rock in the Permian, and some of it is shale, such as the Wolfcamp Shale, but the term 'shale' is used extremely loosely in the industry. People are slapping it on any kind of rock at this point."

Shale in the Permian is only one of the opportunities, Horwitz stressed, noting equally good opportunities in carbonates and sandstone. Fracking technology and high oil prices have caused E&P geologists to go back and reevaluate their old maps, he said.

"They're thinking about concepts they have known about and made work for decades, and they're now thinking about how the technology can help get more oil out of the ground," Horwitz said. "That is what has excited the place and in turn has gotten us excited about the [Permian]. That is why we are seeing that rig count climb toward 500, which would be an all-time record."

Horwitz said he is bullish on both oil prices and the Permian from "an opportunity perspective and an oil drilling perspective." The economics behind U.S. Capital's report for exceeding 700 working rigs is $90-$95/bbl oil. In an $80-$90/bbl environment he thinks the 700 rig level could be reached, but it would take longer. "And in a sub-$75/bbl environment, you would probably just stall out in the rig activity," he said.

What about the prospect for oil dipping below $60/bbl? Horwitz called that "a low probability." What a lot of people are focusing on is growth in onshore North American oil doing to oil prices what the acceleration of domestic natural gas production did to the gas market -- pushing it into what he called "chronic oversupply."

"I think making that argument [for U.S. oversupply of domestic oil] is hard to do given that we are still dealing with a global market that whether we like it or not is still to some degree controlled by OPEC, and Saudi Arabia's 10 million-plus b/d is still extremely important." Thus, if oil prices drop to $60, and WTI prices drop there, he thinks the Saudis would pull several million b/d off the market.

"I don't see the oil price dropping below $70/bbl," said Horwitz, adding the qualifier that if there is a major economic catastrophe in the Euro markets, "all bets are off." Short of any worldwide economic calamity he sees oil prices "muddling along" between $75-$80/bbl.

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