Pricing continues to dominate in the Permian

This is a collaborative article from Pritesh Patel, Shrav Gummadi and Dipti Patel.

The Permian Basin is the most dynamic play in North America today. The Wolfcamp Delaware is holding its own at a price under $30 as breakeven in its first quintile wells. The Wolfcamp Midland is also very good but is still approximately $10 higher to breakeven.

In the second quarter, we saw overall costs rise by 5.6% for unconventionals, and it increased by 2.5% for conventionals. These costs were driven up by service company inflation as well as an increase in supply and logistics complexity.

The number of the rigs increased by 22% in the second quarter while the number of wells spudded increased by 23%. The Permian is expected to account for 41% of rigs in 2017 with 370 rigs in the third quarter.

Over the period from 2017 to 2022, IHS Markit projects the Permian region to increase horizontal rig count by 32%. While longer laterals are the trend these days, the Wolfcamp Delaware on average remains shorter than the Wolfcamp Midland, where the average lateral length seems to be approximately over 7,500 ft. In the Bone Spring, the wells tend to have a shorter lateral length, averaging around 5,000 ft.

In 2017, IHS Markit expects to see an increase of 6.7% in drilling costs and the drivers for this increase in costs will come from land rigs and cementing. Cementers, like fracking companies, are seeing an increase in utilization in the region and this is driving demand up and in turn driving up costs.

Completions costs went up by 7.5% for unconventionals. In the second quarter, the numbers of wells frac'ed increased by 30%, and this reflected an 8.5% increase in stimulation services in the region. In 2017, unconventionals completions costs in the region are expected to increase by 20%. Permian frac demand and supply are expected to increase 106% and 60% in 2017, respectively. Increases in lateral lengths, proppant intensity levels, and the shift to slickwater completions have made the Permian one of the most economic plays in a low oil price environment. The inventory of DUC wells in the Permian has come down; the Delaware Basin has seen a much steeper decline in DUC wells than the Midland Basin.

The relative strength of Permian activity has attracted increased attention from many frac service providers; many companies have moved capacity into the Permian, or set up new operations in the basin. Despite reservations by some companies regarding entering the Permian market, frac capacity continues to increase. Capacity utilization is expected to increase from 60% in 2016 to 81% in 2017.

This has major implications for sand mine operators in the Midwest. If the Permian becomes self-sustainable, sand mine operators in the Midwest are at a significant disadvantage; they would not be able to compete with local sand mine operators in Texas on a cost basis owing to high rail costs into Texas from the Midwest. There is a high level of interest in finer sand deposits in West Texas owing to its close proximity to the Wolfcamp Midland and Delaware basins; it is unclear at this time whether this is a structural frac sand preference change.

Figure 1: Drilling and completions pricing

Facilities costs went up 1.3% on average in the second quarter. IHS Markit estimates a 3.5% increase in facilities cost for 2017. The biggest driver will come from artificial lift. In the Permian, some operators have seen an effect called slug flow behavior, which tends to put unnecessary pressure on artificial lift systems, causing them to be inefficient and increasing overall maintenance costs.

Operating costs increased by 0.9% for unconventionals. In 2017, we expect to see an increase of 2.7% in opex, with the main driver being transportation costs. As production increases, pipeline capacity will become precious, leading to an increase in trucking costs.

See additional insights on the Permian Basin.

Shrav Gummadi is a Senior Consultant at IHS Markit.
Pritesh Patel is Executive Director, Consulting at IHS Markit.
Dipti Patel is a Senior Research Analyst at IHS Markit.

Posted 11 September 2017

Shrav Gummadi, Senior Consultant, supports the IHS Markit's upstream cost analysis team, focusing on the well services markets as well as the North American unconventional fields. Ms. Gummadi has more than 10 years of expertise in the oil and gas business across various functions, with extensive field and operations experience in upstream oil and gas. She has worked in most major basins across the United States and has also worked in Latin America and Asia. Ms. Gummadi holds bachelor's degrees from the University of Michigan and an MBA from the Indian School of Business in Hyderabad.

Dipti Patel is a Senior Research Analyst with IHS Markit. She leads and maintains market segment cost models. Her work involves collecting current cost trends as well as forecasting cost trends for more than 31 market cost segments. She is also part of cost research and forecasting for the North American Cost Service. She is responsible for collecting, analyzing, and forecasting cost trends in the North American market. Ms. Patel holds a bachelor's degree from the University of Huddersfield, United Kingdom.

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.