In World's Hottest Oil Patch, Jitters Mount That a Bust Is Near

In World's Hottest Oil Patch, Jitters Mount That a Bust Is Near
What's unusual, and unnerving, is that the Permian is still thrumming with activity after prices cratered for the stuff it pumps out.

(Bloomberg) -- Steve Pruett has seen more than his share of booms in three decades in the oil business. None, though, as strange as the one gripping the Permian Basin right now.

The telltale signs are the same as always, with companies like his desperate for skilled workers to man the drilling rigs that pierce the horizon in west Texas. What’s unusual, and unnerving, is that the Permian is still thrumming with activity after prices cratered for the stuff it pumps out. Crude is trading for around $50 a barrel, but this is the hottest oil patch anywhere on Earth, a swing producer influencing the trajectory of global markets and threatening OPEC.

That either means the industry has become so incredibly efficient that production can continue to rise even if prices don’t, or that it’s throwing money after a mirage. Pruett, chief executive officer of Midland, Texas-based Elevation Resources LLC, is more and more concerned about the latter.

“Oil men are innately optimistic,” he said, “and sometimes our optimism is our own worst enemy.”

This is the funny thing about the business. Ups and downs are so ingrained that crazy success is seen as an omen that the end may be around the corner. It has often been the case. Midland, a city of about 140,000 halfway between Fort Worth and El Paso, has ridden the roller coaster since oil was discovered in the Permian in 1923. Now the place is on a major upswing that’s permeated every sector, from auto sales to hotel bookings to home construction.

“You would think oil is $100 a barrel the way the real estate market is going,” said Victoria Printz, a Midland-based agent representing properties selling for more than $1 million. The average new-home sales price in the metro area shot up 8.5 percent in the past year, and permits for new construction climbed 76 percent. “This is extraordinary—even for Midland.”

What gives oil people pause is that costs for everything from pressure pumps to well casing have been been rising, up from 20 to 30 percent in the last year, a marker of an overheated situation that could burn out. Another is that possibly too-eager drillers are starting to venture from prime acreage to less bountiful formations, where they may get less bang for their bucks.

Experienced workers are harder and harder to find, and training newbies adds to expenses. The quality of work can suffer, too, erasing efficiency gains. Pruett said Elevation Resources recently had a fracking job that was supposed to take seven days but lasted nine because unschooled roughnecks caused some equipment malfunctions.

By this point, “we’ve given up all of our profit margin,” he said, referring to the industry. “We’re over-capitalized, we’re over-drilling and, if prices don’t rise, we might be facing a double dip in drilling.”

Pruett’s hands are tied: He’s working on University of Texas land and the lease requires development, so he has to keep boring drill bits into the ground. But other companies are slowing down or putting plans on hold as they assess whether what they’re spending will bear enough fruit.

Nobody wants this play to die out—and certainly not due to stupid boom-happy decisions that will flood the market and spur another crash. “It’s important that we try, during these periods that look pretty volatile to us, to pace,” said Al Walker, CEO of Anadarko Petroleum Corp., on a recent conference call with investors.

Anadarko is one of several large energy companies, Chevron Corp. and Occidental Petroleum Corp. among them, that have expanded operations in the Permian. It covers 75,000 square miles, nearly the size of Great Britain, in west Texas and southeastern New Mexico. The land is so flat that the horizon tapers off in the distance, as if you’re standing on an upturned bowl, while the sky stretches out to seeming infinity.

Hundreds of millions of years ago, it was a vast inland sea. The water evaporated and thousands upon thousands of feet of shale slowly built up, pressure-cooking deceased aquatic life and creating a massive reserve. By some estimates, there are 50 billion barrels of recoverable crude trapped in the fine-grained sedimentary rock, more than in all but 10 of the oil-producing countries in the world.

Other U.S. shale patches have petered out, but this one is special, blessed with unusually thick bands of the mudstones, 10 to 15 times the diameter of those in the Eagle Ford just down the road in southern Texas. Oil- and gas-soaked layers are stacked on top of each other like a tiramisu, bearing names such as Spraberry, Wolfcamp, Bone Spring and Avalon.


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