The booming Permian Basin could reach its zenith early if oil stays cheap

Oil rigs drill into the Permian Basin outside of Midland Saturday, Sept. 17, 2016. ( Michael Ciaglo / Houston Chronicle ) Oil rigs drill into the Permian Basin outside of Midland Saturday, Sept. 17, 2016. ( Michael Ciaglo / Houston Chronicle ) Photo: Michael Ciaglo, Staff Photo: Michael Ciaglo, Staff Image 1 of / 5 Caption Close The booming Permian Basin could reach its zenith early if oil stays cheap 1 / 5 Back to Gallery

The West Texas drilling frenzy that sparked one of the biggest oil booms in U.S. history could fizzle out in just four years if crude prices stay too low to spur innovations needed to overcome the region's geological constraints.

For months, oil has gushed from newly drilled wells and pump jacks erected across the plains of the Permian Basin, a prolific shale play that has drawn billions of dollars of investment from major energy companies and speculators, and become the epicenter of the oil industry's recovery. But the glory days in West Texas may not last as long as expected.

The booming oil field could reach its zenith and begin a slow decline as early as 2021, much sooner than anticipated, a new analysis indicates. If today's zealous oil drillers keep running full tilt in the Permian, they may pump too much crude to allow oil prices to rise much, which in turn would kill incentives to develop technologies to recover reserves that are today unreachable or uneconomical, according to the analysis by the energy consultancy Wood Mac-kenzie.

In other words, companies that have found ways to produce more oil and make profits at lower prices may become victims of their own success.

"With every barrel they produce, they're shooting themselves in the foot," said Ed Hirs, an energy economist at the University of Houston.

While much of the U.S. oil patch has languished in the aftermath of the recent energy bust, the Permian has boomed, not only attracting wildcatters and independents, but also some of the biggest oil companies in the world, including Exxon Mobil and Chevron, each spending billions there. The Permian accounts for more than half of the oil rigs in operation in the country.

Wells may be less productive

Wood Mackenzie said that by 2021 the surge of drilling and fracking in West Texas could reduce the underground pressure that pushes oil from the earth within the Permian Basin, with daily oil production reaching its limit at 3.5 million barrels, up from today's 2.5 million barrels. Within four years, oil companies could be drilling wells that pump almost one-third less crude than the ones that spurred the recent boom, said Robert Clarke, a research director at Wood Mackenzie in Dallas.

"We're drilling so many wells," Clarke said. "Should we really expect well No. 5,000 to perform like well No. 5 did?"

It's impossible to predict exactly when drillers might reach the limits of the Permian Basin or what new or better technologies might come along to exploit hard-to-reach reservoirs. Some believe that day is still far off. But it wouldn't be the first major U.S. oil field to slow down after a few go-go years.

In South Texas, for example, oil companies discovered that the sweet spots of the Eagle Ford Shale were much smaller than anticipated. The industry had expected the Haynesville Shale, primarily in northwestern Louisiana, to thrive for years. But development there slowed dramatically after natural gas prices tumbled.

The Permian Basin has its own problems. Land prices have exceeded $30,000 an acre - by a lot, in some cases. And the combination of hydraulic fracturing and horizontal drilling, the techniques needed to extract oil from the region's dense rock, is too expensive for many of the smaller companies at today's prices.

"The cost of entry in the Permian is astronomical, and the cost of the wells are really high," said James Mayer, chief executive of Green Century Exploration & Production, a small Midland oil company. "We're trying to stay away from that."

On Wednesday, oil prices settled above $50 a barrel for the first time in almost two months. But in coming years, shale drillers will need higher prices to invest in technical solutions needed to boost declining underground pressures the Permian and expand operations, analysts said.

"At $50 a barrel, the industry isn't earning out on its cost of capital," said Bill Herbert, an analyst at Houston investment bank Simmons & Company International. Herbert said the oil industry for years has spent more money than it makes from pumping oil, meaning companies have relied on lenders, corporate bond investors and the stock market to cover the difference. In the Permian, companies spend 15 percent more than they make on drilling and production costs, not counting the cost of acquiring land.

"For an industry that relies on external sources for financing, that's untenable. That can't continue," Herbert said.

Some are more optimistic

Wood Mackenzie said that production growth has slowed in several major U.S. shale plays after about five years.

That's not to say the Permian Basin's oil production will drop dramatically after reaching its peak.

Wood Mackenzie expects the region's output to continue to pump a little less than 3 million barrels a day through 2030.

Some analysts are still betting the Permian will pump increasing amounts of oil for more than a decade, whatever the difficulties.

"I'm sure there are going to be a hundred problems," said Rusty Braziel, president of the consultancy RBN Energy in Houston. "I just think they're going to be solved. Folks who said the shale phenomenon would come to a screeching halt have been wrong so far."