The Permian Basin, known for its booming oil and gas production, is facing new obstacles in 2024.
Rising associated gas production and increasing breakeven prices for new wells are creating significant challenges for producers in this region, which spans Texas and New Mexico.
Slower growth in production
According to Argus, oil production in the Permian Basin is growing more slowly than previously expected. The U.S. Energy Information Administration (EIA) revised down its forecasts for 2024, predicting a 6.1% growth this year and 3.6% in 2025. This slower pace is putting pressure on producers as they struggle to balance rising costs with lower-than-expected output.
Low gas prices and production cuts
Permian gas prices, particularly at the Waha natural gas hub, have been a major issue. For several months, prices were so low that companies had to pay buyers to take the gas, as pipeline capacity couldn’t keep up with rising associated gas production. As a result, some companies cut back on production or delayed drilling new wells. However, the situation has slightly improved with the opening of the new Matterhorn Express pipeline, which has started to ease the bottleneck.
Rising gas-to-oil ratio (GOR)
Another challenge is the increasing Gas-to-Oil Ratio (GOR) in the Permian. Wells are producing more gas in proportion to oil over time. Since 2012, the GOR has risen from 2 to over 3.5, making it harder for producers to manage the excess gas, especially when pipeline capacity is limited.
Running out of prime drilling spots
The best drilling spots in the Permian are being exhausted. Producers initially target high-quality (Tier 1) locations, but as these sites become scarce, they are left with lower-quality wells, which are less productive and more expensive to drill. According to industry data, less than 40% of remaining drilling sites in the Midland Basin can break even below $60 per barrel, with the rest requiring much higher prices to be profitable.
Rising breakeven prices
The cost to drill new wells has been steadily rising. In the Midland Basin, breakeven prices for new wells now range between $40 to $85 per barrel, averaging $62 per barrel, up from $46 per barrel five years ago. This increase in costs, combined with less favorable drilling locations, is making it harder for Permian producers to maintain profitability.
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