Permian Giant Oil Field Would Lose $500 Billion At Today’s Prices

Posted in The Petroleum Truth Report on November 20, 2016

Did you hear about the largest U.S. oil and gas field that’s in the Permian basin of west Texas?

That’s the one that’s not a field because it hasn’t been discovered yet. That’s the one whose 20 billion barrels are an estimate by the U.S. Geological Survey. That’s the one whose 20 billion barrels would lose $500 billion at today’s oil prices.

Wait a minute. What about the headlines?

Bloomberg: A $900 Billion Oil Treasure Lies Beneath West Texas Desert

USA Today: USGS: Largest oil deposit ever found in U.S. discovered in Texas

Deutsche Welle: Largest US oil and gas discovery made – USGS

Read the source–the U.S. Geological Survey.  The USGS did an assessment of the undiscovered, technically recoverable resources of the Wolfcamp shale in the Permian basin.

“Undiscovered” means what it says–it has not been discovered. It’s an estimate, an educated guess. “Technically recoverable resources” means the oil that could be produced if cost didn’t matter.

Where Did $900 Billion Come From?

Where did the $900 billion value come from? Multiply 20 billion barrels times $45 per barrel and you get $900 billion. In other words, if the oil magically leaped out of the ground without the cost of drilling and completing wells; if there were no operating costs to produce it; if there were no taxes and no royalties.

Sweet. Jeb Clampett shootin’ at some food.

In the real world, an average Wolfcamp well costs $7 million to drill and complete (Table 1 from my June 2016 post on the Permian basin plays). Average operating costs are about $12 per barrel. Severance taxes are almost 5% and the average net revenue per barrel after royalties is only 75%.

permian-economic-assumption

Table 1. Permian basin economic assumptions by play. Source: Company documents, SEC Filings and Labyrinth Consulting Services, Inc.

The Cost

The obvious question that reporters apparently failed to ask is, What is all of this going to cost?

The USGS document “Fact Sheet 2016–3092” that summarizes the Wolfcamp study includes a table that allowed me to calculate the number of wells required to produce the estimated 20 billion barrels of oil.

For each subdivision of the Wolfcamp play or “AU” (Assessment Unit), the USGS provided a calculated mean number of potentially productive acres and the average drainage area of wells. By dividing the two, I was able to determine the number of wells (shown in yellow) for each Assessment Unit in Table 2.

table-1-from-assessment-of-undiscovered-aeb_nov-2016

Table 2. Key assessment input data for six continuous assessment units in the Wolfcamp shale in the Midland Basin of the Permian Basin Province, Texas. Source: USGS and Labyrinth Consulting Services, Inc.

According to the USGS’ input data, it would take 196,253 wells to produce the 20 billion barrels if it exists. At $7 million per well, that would cost almost $1.4 trillion in drilling and completion costs alone.

It would cost more than $1.4 trillion to generate $900 billion in revenue resulting in a net loss of $500 billion at $45 oil prices excluding all operating expenses, taxes and royalties–and no discounting.

That’s a discovery that no one can afford to make.


39 comments on this entry


  1. Art-
    This shows the difference between the view of a geologist or journalist (headlines) and an engineer! As you mention he $900 billion in revenue is not profit and would be substantially reduced after capital, expenses, royalties and transportation costs are considered. The present worth of the oil production discounted at say a 5% rate would likely be a fraction of the $900 billion (even at a $60 oil price). That is IF these POTENTIAL reserves could actually be deemed PROVEN and recoverable through a proper analysis. It is nice to know that the USA has the potential to become more energy independent with potential oil reserves such as this.


  2. Jeff,

    I agree that it is good to have resource potential. My biggest concern, however, is that real oil prices are still 40% higher than 15 years ago even at $45 oil and the marginal cost is 2.5 times higher than pre-2005. The global economy cannot grow with high energy costs and the kind of resources we are finding today suggest that the trend toward higher energy costs will only continue.

    All the best,

    Art


  3. I was in Virginia this past weekend visiting with my wife’s relatives. They asked me about this “giant” discovery. I told them that my opinion that it was non-commercial. Thanks for bailing me out Art.


  4. Michael,

    Glad to help!

    Art


  5. Thanks for posting your evaluation. Obviously, just another money pit that may attract a lot of dumb money. If I was the SEC king, I would request that all “tight rock” oil and gas producers report quarterly the percent of their completed wells that had reached payout. Payout would include all actual and assigned costs to a given well. I follow the North Dakota portion of the Bakken play. The average cumulative production is 170 plus thousand barrels per well. Of course this number will continue climb with time. However, I wonder if the average well will ever reach payout???


  6. Jim,

    The SEC does require that public oil and gas companies provide an annual “standardized measure” of discounted future cash flows relating to their claimed proved oil and gas reserves. This is found in their 10-K filings.

    I did a post on Bakken EUR and break-even economics a year ago: http://www.artberman.com/only-1-of-the-bakken-play-breaks-even-at-current-oil-prices/

    That study suggested that a few Bakken operators could break even at below $55 per barrel but that the average was closer to $60 per barrel.

    All the best,

    Art


  7. Too right… That “discovered” word caught my attention the first I saw it on Twitter…
    http://www.roxnoil.com/wpadmin/index.php/2016/11/17/the-press-is-comprised-of-idiots-who-cannot-read-or-comprehend/


  8. Terrel,

    As usual, we agree. Your post is right on.

    All the best,

    Art


  9. Art,

    A lot of data coming out has indicated incredible improvements in the fracking process and there are a lot of RIG’s coming back online. It is looking like the shale guys really can compete with OPEC and continue to drive down the price of oil. In addition with their very large debt obligations they have no choice but to stay in the game. I know a lot of people are skeptical but I think the shale output will be able to get the global economy over the EROEI hump where in the future alternative energy can pick up the slack vs the high cost oil plays.


  10. Dan,

    That’s what the propaganda from oil companies and sycophantic analysts hope that you believe!

    But the technology comes at a cost and that moves the marginal cost of production higher. As long as everyone is able to pay more for oil, there will be enough oil for awhile. Falling demand growth at $45 oil prices, however, suggests that most people aren’t able or willing to support the cost of today’s oil.

    It is true that tight oil is competitive with OPEC production including the cost of their fiscal budgets. That is great for tight oil plays but not so great for the world if the industry needs $70 or $80 prices to survive. The global economy cannot support that need.

    All the best,

    Art


  11. Hi Art. Great article, as usual. I commented on it on my site, “Cassandra’s Legacy”. ATB, Ugo

    http://cassandralegacy.blogspot.it/2016/11/peak-oil-in-fact-free-world-new-oil.html


  12. Excellent post, Ugo. Thanks for the link.

    All the best,

    Art


  13. […] have been beaming over a “vast” new oil treasure in the Permian Basin. This energy analyst reminds us to pump the brakes a bit on that […]


  14. Dear Mr Berman
    Thank you for taking the time and effort to offer your much appreciated series of articles debunking main stream publications and oil company propaganda. Having lived most of my life in Wyoming’s oil and gas production regions, I find most of my neighbors have no comprehension or wish to comprehend the facts you present. Reminds me of Upton Sinclair’s famous quote, “Its hard to get a man to understand something if his job depends on him not understanding it.”


  15. Hello Art-
    Would you mind giving an update on the natural gas situation? It appears after todays EIA numbers, that storage injections are done for the year. Are you still anticipating a supply shortfall in December 2016? Given the record gas storage we have witnessed this injection season, how does that effect this potential supply shortfall forecast?

    thanks much


  16. […] il punto: l’essenza dell’esaurimento non è quanto ce n’è, è quanto costa estrarlo. Qui, Arthur Berman osserva che Bloomberg aveva calcolato il valore di questo “tesoro” in 900 miliardi di dollari come se […]


  17. […] il punto: l’essenza dell’esaurimento non è quanto ce n’è, è quanto costa estrarlo. Qui, Arthur Berman osserva che Bloomberg aveva calcolato il valore di questo “tesoro” in 900 miliardi di dollari come se […]


  18. Interesting and well worth reading and reflecting upon. Thanks for your analysis.


  19. […] essence of depletion is not how much of it there is, it is how much it costs to extract it. Here, Arthur Berman notes that Bloomberg had calculated the value of this “treasure” at $900 billion as if […]


  20. $7 MM horizontal well that drains 100 acres should produce more than 120-160 MMBO EUR.


  21. * 120-160 MBO not MMBO


  22. Art, there must be a problem with your math, .gov says some counties (well, at least one) in the Bakken are making a profit above 16usd BO WTI, (page 13, Dunn):

    https://www.dmr.nd.gov/oilgas/presentations/NDOGCPC102616_.pdf

    IIRC not long ago ND shipping costs to the east coast were in the ballpark of 18USD/BO.

    Must be making the money on gas sales.

    My understanding is that Permian wells have higher IP, better stacked pay, faster payback, higher price for gas and lower shipping costs, gotta be a no brainer.


  23. Art, hi. I have another, more general comment on this story on my blog. Maybe your readers will be interested in taking a look at it. It is here:

    http://cassandralegacy.blogspot.it/2016/11/tiffanys-fallacy-mineral-pie-is.html


  24. So at $90/barrel it would be profitable, including financing costs?


  25. […] essence of depletion is not how much of it there is, it is how much it costs to extract it. Here, Arthur Berman notes that Bloomberg had calculated the value of this “treasure” at $900 billion as if “if the oil […]


  26. I suspect this reserve’s economics are similar to new bitumen production in Alberta– the oil is there, but it’s not worth extracting. But it would be nice to have a more detailed comparison- the figures I’ve seen say in-situ bitumen (SAG-D) needs about $70 per barrel for ROI to be positive while mines need about $100. This looks to be roughly in the same ballpark…


  27. -IanH

    Just my 2cents here:

    Spokeswoman for the DMR, Alison Ritter, said that break-even costs are developed by collecting and tracking economic data from operators at the department’s monthly hearings. The information collected includes well operating costs, annual drilling costs and initial production rates for the previous 12 months. From this data, the DMR is able to map average well production for each county. Ritter said, “Based on those figures, we were able to develop the break-even oil prices at a 10 percent rate of return. These prices are considered to be the price at the wellhead.”

    http://bakken.com/news/id/244693/breaking-even-in-the-bakken-dunn-county-boasts-lowest-cost/

    First thing that came to mind was, so how many wells did they drill in 2015-2016?

    well, if you look at the slide for DUNN production (slide 25), it appears they didnt drill much and that break-even cost of 16 is likely their operating cost.

    again, just my 2cents.


  28. Thank you, mr Berman, for once again helping folks get a clearer picture. If anything should be learned about oil industry news stories, it’s: “be vewy vewy caweful!”


  29. Thanks PS, its a bit misleading to for them to quote WTI when the price is the wellhead sale price. I should have read the small print.

    And if they can ignore drilling costs as they didnt drill/complete any wells in the previous year but still got oil out of the existing wells, then that too could confuse the casual reader – with the rapid decline of output its not an ongoing business.

    I wonder if interest costs and the eventual need to repay the debts incurred figured.

    It read to me as if they were claiming that they could get a 10% rate of return from an ongoing shale oil manufacturing operation in Dunn county when WTI is at 16USD, making the whole thing ‘money in the bank’ at 40USD WTI. Some folk have have gotten just that impression.


  30. -IanH

    Ya I have friends who work at Apache and EOG as geo and they swear they are making money at current price level. But when I press them for details they simply reply they don’t know the numbers (any numbers) off the top of their heads. Even Apache’s grand presentation back in the summer gave hints that their current operation is not really making a profit.

    But who knows, maybe we are mistaken.


  31. A simple “abacus” will do this trick. Great simplified solution to the great Permian $1T mystery.


  32. Thanks for the insight. I was very skeptical about the hoopla about this so-called find. I was equating Wolfscamp to the Monterrey Shale that was to make California very wealthy and it started at 25 billion barrels to 15, to 13.7 billion barrels and finally 600-800 million barrels of recoverable oil.


  33. […] essence of depletion is not how much of it there is, it is how much it costs to extract it. Here, Arthur Berman notes that Bloomberg had calculated the value of this "treasure" at $900 billion as if "if […]


  34. Not sure what you are getting at. Logic is correct but premise does not seem correct. Meaning, why would the industry spend all that money to extract all that oil at the same time. First it would flood the market reducing the price and second it is cost prohibitive. So your conclusion that there would be a $500 billion loss cannot follow your logic because this scenario would never take place.


  35. Stan,

    Publicly held independent oil companies care less about making money than about getting money. Investors have shown willingness to fund non-commercial tight oil and shale gas projects for many years in search for higher yields than other investments in a zero-interest rate world. Companies are glad to take their money.

    All the best,

    Art


  36. If the field is “undiscovered”, how do they have any reason to believe that there is any oil there at all? It would sound more like a discovered, but undeveloped field, where you know that there is oil present, and you can make some guesstimates as to how much oil there is.

    Antoinetta III


  37. Antoinetta,

    Read the report. The USGS clearly states that these are “undiscovered resources.”

    Your comment is correctly directed, however, and underscores the uncertainty behind this kind of guesstimate. USGS bases their assumptions on the fact that oil from the same or similar reservoirs has been produced nearby and is either commercial or will be commercial at some price. I suspect that approximately 15-25% of this resource may ultimately become a reserve at some higher oil price.

    All the best,

    Art


  38. […] de 900 miljarder US dollar hur kom dom fram? Det är som Arthur Berman skriver att Bloomberg bara tror att oljan hoppar upp ur marken utan några kostnader för borrning, […]


  39. […] essence of depletion is not how much of it there is, it is how much it costs to extract it. Here, Arthur Berman notes that Bloomberg had calculated the value of this “treasure” at $900 billion as if […]