ADL: For ambitious growth, Permian independents must change

By Luke Geiver | October 17, 2018

A U.K.-based consultancy believes the Permian can undergo massive production growth if operators make major changes. Arthur D. Little has released new analysis of the Permian indicating that the region of Texas and New Mexico could produce 5.4 million barrels of oil equivalent per day by 2023.

“However, to achieve these ambitious targets the U.S. shale industry will have to dramatically change how it operates,” the consulting firm said. “Traditionally it has been driven by independents, but to meet the $310 billion capital expense to unlock the Permian’s reserves and drill 41,000 new wells, companies will have to shift strategy and adopt new business models.”

The company outlined the main strategy changes that must take place for continued production growth in the region, and included more information on its assessment of the Permian here.

“The rush to develop the Permian will drive a level of activity not seen in the history of the oil and gas industry,” said Bob Peterson, partner and North American Energy leader at ADL. “Growing production to exceed that of every oil-exporter bar Saudi Arabia and Russia in just five years is an enormous challenge. To succeed, independent oil producers will need to radically change how they operate, increasing collaboration and creating new ecosystems to deliver the necessary infrastructure and investment. In short, independents must act in a much less independent manner if the Permian’s potential is to be realized.”

The changes independents must focus on include:

  • Build partnerships: Move away from current models of selling direct at the wellhead, instead creating demand-pull and long-term partnerships with refineries to guarantee steady cash flow
  • Command a price premium: Overcome the current discount of Permian prices against world benchmarks by investing in pipeline and export-shipping capacity, as well as adopting more sophisticated trading capabilities to reduce pricing differentials and guarantee profitability
  • Increase operator collaboration: Fully exploiting the Permian is not possible with existing infrastructure. Operators will need to work together to build vital, non-competitive services such as trucking, roads, water usage, power, housing, school and hospitals, or face unsupportable operational costs
  • Feed the capital machine: Financing is the biggest challenge for independents and they will require creative new funding solutions to raise the estimated $310 billion required for Permian expansion