Operators remain slow to resume pre-pandemic drilling activity in the prolific Permian despite higher commodity prices, while anticipated federal restrictions might hinder production growth further in the years ahead, particularly in the New Mexico portion, according to US Federal Reserve Bank of Dallas.
In January, federal agencies temporarily halted new leasing and permitting for oil and gas drilling on federal and Indian lands and began a wide-ranging review of policies on development."Although the timing and outcome of this process are uncertain, we consider two possible regulatory scenarios and their impact on Permian Basin oil production," the Dallas Fed said in a March 4 report. "Taking both into account, we estimate that by the end of 2025, the Permian will produce between 230,000 and 490,000 b/d less than if drilling activity continued at its current pace. As a result, production and employment across the basin will gradually shift from federal lands in New Mexico to private and state lands in New Mexico and Texas, with wide-ranging economic implications for the region."
A halt of new drilling permits on federal lands and waters puts a total of 1.1 million b/d of oil output and 3.7 Bcf/d of gas output at risk by 2025 if existing permits and drilled-but-uncompleted wells are allowed to continue, according to S&P Global Platts Analytics. There are about currently 3,200 stockpiled permitted wells on federal lands as well that operators can lean on in the event of a policy change. More than 2,000 of those are in New Mexico over the Permian-Delaware.
Wells in the Delaware produce higher volumes of associated gas than those in the Midland, which is located entirely in Texas. The average initial production rate of a well targeting the Delaware measures about 2.1 MMcf/d compared to about 1 MMcf/d in the Midland. Greater volumes of lost associated gas production in the Permian will likely occur if operators are unable to secure new federal drilling permits in the Delaware.
Prior to the January moratorium on federal lands, operators in the Permian Delaware in New Mexico stocked up on permits, acquiring 1,973 permits during 2020. By comparison, producers acquired 2,218 total drilling permits in the play from 2017 through 2019.
In New Mexico, half of Permian production in 2020 came from wells on federal lands while all production in Texas originated from wells on private and state-owned land.
Prior to the coronavirus pandemic and the OPEC-related price crash of oil and gas, majors were leading the way in rig growth in the basin, according to data by S&P Global Platts Analytics and Enverus. ExxonMobil, which was running nearly 60 rigs in the basin in early 2020, has since dropped its active rig count to less than 10. Chevron's active rigs have declined from almost 20 to seven.
Active rigs across the Permian totaled 428 in March 2020, fell to a low of 128 in September, but had increased to 222 as of March 3. However, most of the companies returning rigs to the basin are non-majors as majors are allocating time and resources to non-Permian projects.
"New policies are likely months away, but oil companies, state governments and municipalities are in the process of examining the potential outcomes," according to the Dallas Fed.
With WTI approaching $60/b and Henry Hub near $3/MMBtu, internal rates of returns in the Delaware subbasin are 34%, the highest in the US, according to Platts Analytics. Delaware IRRs have increased by more than 10% since the start of the year. With the recent jump to $60, highly profitable basins would usually see a sizable jump in rig count. But now producers are looking to create more balanced financial sheets and tackle ESG issues, leading to a much slower recovery.
Platts Analytics IRRs are based on a half-cycle, after-federal corporate tax analysis, which excludes sunk costs such as acreage acquisition, seismic and appraisal drilling.
