World will still need Permian Basin oil, Pioneer CEO says
Scott Sheffield, CEO of Pioneer Natural Resources, addresses the Permian Basin Chapter of Division Order Analysts during a luncheon Wednesday, Feb. 18, 2015 at the Petroleum Club. Photo by James Durbin/Reporter-Telegram. Article by Mella McEwen
Midland’s economic landscape is expected to look very different, even compared to November when Scott Sheffield celebrated the opening of his company’s new regional office building.
Fueled by a thriving oil and gas industry powered by strong commodity prices, Midland has boasted one of the strongest, if not the strongest, economies in the nation.
But current crude prices are half of the $107 peak that was reached in June, companies have slashed budgets and activity plans, and layoff announcements are becoming a daily occurrence.
Already the nation’s rig count has fallen from a high of about 1,960 to 1,300. The Permian Basin rig count may fall to 300 rigs before beginning to rebound this summer.
Sheffield, chairman and chief executive officer of Pioneer Natural Resources, said during a visit to Midland last week that this is the industry’s fifth major downturn since he arrived in Midland in 1979.
This downturn is more significant, in part because the root cause is different, he said. He discounted the 2008-2009 downturn, caused by the Great Recession that depressed demand globally, because prices rebounded quickly.
Previous downturns were caused by other nations trying to take market share from the Organization of Petroleum Exporting Countries, particularly Saudi Arabia. They would then react by increasing supplies that would exceed demand, sending prices lower.
This time, “we were too good at our jobs” and developed shale plays that have added 4.5 million barrels of oil a day to the nation’s output. The United States has become the world’s largest producer of oil and natural gas and the nation’s crude inventories are at 80-year highs.
“The additional production is a game-changer for the Permian Basin, for the Untied States, for the industry,” he said.
Permian Basin production has soared from about 750,000 barrels a day in 2007 to a little more than 1.9 million barrels a day today.
The New Cycle
Midland will recover, “but not as strong as six months ago,” Sheffield said.
He stands by his prediction that Midland’s population will grow to 200,000, but thinks it will take longer — maybe 12 years — to reach that figure.
“We know the oil is here; it will always be here. We know in the Midland Basin, in the Delaware Basin, you can always make a well,” he said.
The Spraberry-Wolfcamp formation that lies under Midland contains an estimated 75 billion recoverable barrels of oil equivalent, he said.
The Midland Basin has several stacked plays, and operators already have proven 10 zones reaching down about 4,000 feet, he said. The Delaware Basin has an estimated 25 billion barrels, but “not enough work is being done there,” he said.
He predicted the industry will become more cyclical and hedging of oil prices by operators will be a major component of their operations.
“The Permian Basin will come back; I just can’t tell you if it will be at $60 or $70 or $80 oil,” he said.
The world population will rise from 6 billion to 9 billion people and they will need oil for their energy needs. “The world needs the Permian Basin,” Sheffield said.
He said Saudi Arabia doesn’t want to eliminate the nation’s shale production but to slow it down because the Saudis know the world will need that oil in the future.
Sheffield said lifting the 40-year ban on exporting domestic crude could be a key to improving the industry’s fortunes.
He said he has spent a lot of time in the nation’s capital educating lawmakers, regulators and President Obama’s staff on the benefits of lifting the ban.
“My main point is the differential is widening,” he said, referring to the price differences between West Texas Intermediate and Brent grades, and even between West Texas Intermediate-Midland and West Texas Intermediate-Cushing.
For most of the past 40 years, WTI and Brent brought prices within $1 or $2 of each other, he said. But over the last three years, that gap has widened to an average of $15 a barrel. Currently, it is about $8 a barrel and is expected to increase. There is also a gap between Midland and Cushing grades because Cushing storage is expected to reach capacity in the next couple of months and there is still limited pipeline transportation to send Midland crudes to other markets, such as the Gulf Coast.
Pioneer and other producers want the flexibility to send their product to the Gulf Coast or to overseas refiners that are configured to process the light, sweet crude coming out of the shale plays. This would help narrow the differential, he said.
“That extra $8 or $10 a barrel would have a tremendous impact on production, on jobs, on investment,” he said.
It could also benefit consumers because gasoline prices are based on the price received for Brent, with is about $8 higher than West Texas Intermediate. Eliminating the ban now, while crude prices are low, could lessen the impact of higher gasoline prices should they rise in response, he said.
He thinks the ban has a 50-50 chance of being lifted this year but virtually no chance next year — an election year. “I’m 80 to 90 percent confident it will get done by 2017,” he said.