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Thursday, January 02, 2020
Challenges on Permian Basin Shale Gas Exploration

Permian Basin is a huge oil field located under a grey underground at West Texas and New Mexico; it accounts for about one third of America's total oil production. At this current moment, the oil and gas manufacturers for Permian Basin in the United States will need to go through a large number of drilling in order to maintain the production level and to expand the production. The benchmark of the declining rate (which is also the declining speed of its annual production) for more than 150,000 oil and gas wells is rapidly increasing. At the beginning of the year, the production in Permian Basin has reached 3.8 million barrel per day, which is an increment of 1 million barrel per day compare to the previous year. However, prediction points out that at the end of 2019, the basic production will have a fall of 40%, which is 1.5 million barrel per day. IHS predicts that the reduction of production will speed up, whereas companies that are in cash tight situation trying to maintain stable production will face a huge challenge. The previous main producers in Permian Basin are Chevron Corporation, Occidental Petroleum, Concho and others. On December 12, Chevron Corporation has dropped 1.41%. It is estimated that the expanses of the company for the fourth quarter is US$ 10 billion to US$ 11 billion, and there is a plan of selling the assets.

According to the data from the United States Energy Information Administration, over the past year, the oil production in Permian Basin has increased by 17%, and nearly 40% of increment for the year before. Different from the previous production slowdown happened in five years ago, this time, the main reason of growth drop is due to the oil's price. This issue is in fact the investors' problem. Fund managers are fed up with years of abandoned promises and false prediction in the sector, where in the year of 2019, they sold off the oil and gas stocks massively. This has then cut off the funding source for shale oil producers that are eager to invest, and prevented private company entering the capital market through Initial Public Offering (IPO). When this happens to the world's largest shale basin with highest production capacity, people start to doubt the life span of America's hydraulic fracturing revolution. This technical revolution has transformed the United States to become the world largest oil producer. People generally thinks that the prosperity of shale gas is due to the invention and combination of both hydraulic fracturing and horizontal drilling by the manufacturers, hence able to obtain a large amount of oil from the impermeable shale. However, the financial breakthrough is as big as the technical breakthrough where the Federal Reserve System (Fed) has highly reduced the interest rates in response to the 2008 economy crisis. Cheap funding has entered the oil field in the United States which has been forgotten by the public. This has consequently increased the production. Returns from these investments are not able to match with the rate of production growth, and was not even close. For the past 10 years, the sector has loss nearly US$ 200 billion and meanwhile, the exploration index for S&P 500 oil and gas has dropped 32% whereas the whole market has a rise of 172%. Senior Energy Analyst Todd Heltman from Neuberger Berman Group expressed that the sector has used up too much capital in a long-term period, and many investors have exited. As the rate of oil production is rapidly decreasing, hence access to capital is particularly critical for shale oil miners. The production for hydraulic fracturing well in the first year will have a fall of nearly 70%, where for traditional horizontal drilling is only 5%. Hence, shale oil miners shall keep adding in new wells. Since November 2018, the quantity of driller in Permian Basin has a reduction of 14%, with only 422 drillers left.

In the past, shale gas industry in the United States has suffered a shock. In 2014, Organization of the Petroleum Exporting Countries (OPEC) has tried to trap American producers by high production and low price. In contrast, this has increased the tenacity of the sector because America producers have strengthened their operation by cutting down the cost of the supply chain. However, in this round the survived companies from the previous oil price crash have not been so lucky. A few small and medium producers have declared bankruptcy, while others have merged with their competitors in order to maintain their survival. This has created opportunities to Exxon Mobil Corp., Chevron Corporation and other main players in the industries, where they are able to obtain more lands for drilling in the coming years. These main players might have stronger financial compare to those shale gas miners. However, Wall Street is still cautious about projects related to shale gas.

According to the researchers from ANBOUND, shale gas exploration in the United States requires huge capital, yet at the same time there are uncertainties on the life span of the United States' shale gas exploration without the financial backing from Wall Street and the investors. As there are large scale of shale gas exploitation, the United States became a net oil exporter in 2019. For international crude oil market, it means that the market will be more competitive. Although OPEC+ has already compromised in the reduction offer agreement, however, due to huge demand and the downturn cycle of economic, it will not be easy for international crude oil price to get as high as they want. On the contrary, lower crude oil price might continue to be an obstacle to the exploration of shale gas. In other words, due to several factors, the exploration of shale gas in the United States are now facing its boom-bust test.

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