What’s Trending in North American Plays & Basins?

We've all heard the craze surrounding the Permian Basin over the past 12 months, but there are promising signs from other North American unconventional plays. On the first episode of Upstream in Perspective, we interview Imre Kugler. Imre is a Director within our plays and basins research team. Here’s a transcript of the conversation.

Jessica Nelson: We want to start with your take on the current state of the industry, if you will. You've had a number of conversations with industry leaders and clients over the last couple of months. Can you share any key takeaways that might give our listeners a good understanding of the state of the North American market?

Imre Kugler: Sure. I think optimism is really the word. Especially when we were out at NAPE, some of the conversations there and just the feeling in the room was that of optimism. There's a big difference with $60 oil versus $40 or $50 oil, and that's almost palpable with people's reactions and people's plans for 2018.

Jessica Nelson: Let's talk about the forecast for 2018. I read that IHS Markit is forecasting a 10% growth in North American oil supply in 2018. You just talked about a recent conference you've been to. How does that sound compared to what you're hearing when you're talking to a lot of these clients and industry leaders for this year?

Imre Kugler: Well, I think there's a lot of optimism. Probably the hardest part of our forecasting process is to help temper that with some reality. There's a lot of bottlenecks in terms of perhaps the service sector, or pipeline offtake, or how much inventory is remaining in these big, sort of multiple bench, maybe as many as 100 operators operating. Just how far and how fast can we go, that seems to be the question that we really have to answer. Everybody's gearing up and ready to go, we just have to sort of quantify exactly what we think is practical.
We came up with a growth from 9.9 million barrels in December of 2017 to 10. 9 million barrels at the end of 2018. That's a pretty good growth figure, especially when you consider how much base decline there is in unconventionals. That's a pretty good upward path that we're on right now.

Jessica Nelson: We all know a lot of that growth from 2017 came from the Permian Basin. Do you expect the focus on the Permian to continue into 2018?

Imre Kugler: Yes, I don't think there's any reason that it won't. We feel pretty good about the Permian. There's a lot of inventory, there's a lot of operators. The financial performance has been very strong; we have most of those break-evens, certainly sub 60 and much of it in the 30s, so the financials look good there. There's really no other basin to rival it in terms of scale and opportunity. The Eagle Ford and then the Bakken have gone into a bit of a maintenance mode. We expect some growth there, but not really enough to change things in the overall system. In some of the emerging basins like the Anadarko Basin, SCOOP and the STACK there, or perhaps the Powder River Basin, the Uinta Basin, those are some that are starting to get kicked around more. The size just really isn't quite big enough to rival that of the Permian. It's difficult to talk about North America without talking about the Permian, essentially first and foremost.

Jessica Nelson: Sure, yeah. You just mentioned some sleeper plays that stakeholders should be watching. Talk a little bit about how does the profitability of some of those basins compare back to the Permian.

Imre Kugler: Some of it can be pretty favorable. We have the STACK really being pretty close to the Permian, break-even performance being somewhere in the 30s to 40s. The issue there is just running room and scale. We actually have the STACK growing at about the same pace as the Permian, but really not getting anywhere near it in terms of volume. We have it going up, nearly doubling over the next couple of years, but the issue is it won't even catch the smallest of the Permian plays, being the Bone Spring. Getting the Anadarko Basin much past half a million barrels a day anytime soon will be tricky just because of the size.
As far as sleeper plays, the ones I mentioned, that those really are what we're looking at: the Uinta Basin, the Anadarko Basin, the Powder River. I think $60 oil, one of the other themes, is maybe a bit more exploration and stretching of the boundaries of some of these areas. We've known about the SCOOP and we've known about the STACK for several years, what the difference is we're starting to hear about the push maybe further east. EOG announced a lot of acreage in McClain County. We're hearing a couple of people at NAPE talk to me about moving back to the panhandle of Texas, so the far western reaches of the Anadarko Basin; likewise that's the story in the Uintah Basin, is pushing further and further to different fields sort of northwest in that play.
Really, I think it's going to be boundary creep of the plays we've been watching for a few years, and seeing if we can't have the scale in some of those basins increase a bit.

Jessica Nelson: I know early you talked a little about optimism for this year. I know last year started with some confidence too, which seemed to evaporate mid-year. Anything besides the oil price driving that optimism this year over last year?

Imre Kugler: I think it's backed up certainly by well performance, and the combination of the cost structure not getting ... Costs aren't really running away from anyone right now. We expect some cost increases as the service sector and some of the other markets tighten a bit, but not enough to offset oil price and not enough to offset continued better well performance. We're seeing that in a lot of basins.
We may hit a tipping point in here where it becomes less of cranking away with profit intensity, and more some of the laggard companies catching up with some of the leading companies. That might be the biggest shift. But we feel really confident in our forecast number, the million barrels of growth for 2018. There's really not a lot that goes against that. Our main focus is just tempering expectations when it comes to the forecast, and trying to make sure that we're keeping within the bounds of the real world of pipeline and service sector capacity, and things like that. That's really the only hold back.

Jessica Nelson: I guess we'll all keep our eyes on North America this year. Is there any other research you're working on now that our listeners should be aware that's on the horizon?

Imre Kugler: Yes, definitely. We're taking a look at that Uinta Basin pretty closely, just to see which operators are there. We've had EP Energy and Crescent Point out there for a while. We're going to do an update on what they've been up to. Our quarterly production forecast will be updated in April, so look out for that. We'll see if we've had any big changes. We don't really anticipate much. We think we have 2018 pretty well dialed in.
But we'll have some updates on what we're seeing across the plays. That's our new forecast format is we'll include not only the forecast, but what changed from last time. We'll go through the trends and the top 10 or so plays, and even some of these emerging plays. It'll be a pretty comprehensive update. That's what's on the shortlist or what's coming out in the next month or so.

Learn more about our plays & basins insights on IHSMarkit.com.

Hear additional insights from our upstream experts on our podcast, Upstream in Perspective.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.