Over the course of the last six years or so, U.S. shale has drastically changed the landscape of how supply meets demand and what those dynamics must be to achieve global market equilibrium. When prices increased so dramatically in 2011, there was a rush to begin drilling and entering into domestic shale plays, where operators focused on optimizing drilling techniques and establishing a large inventory of wells. Despite the development rush, there was still a global factor that needed to be monitored and maintained, which is the global supply and demand balance. The increased production from onshore shale combined with other lucrative supply sources, as well as the recovering global economy, all worked to widen the gap between the world’s supply and its consumption needs.

In the U.S. the Permian often has been regarded as the workhorse of the shale plays in the U.S. and is one of the oldest producing regions (Figure 1). With its first wells drilled in the 1920s, the basin has produced billions of barrels from its legacy wells. The basin benefits from established infrastructure throughout the region, easy access to the Gulf Coast and multiple target zones that are productive for oil and gas exploration. Within the Permian there are three well-known formations that contribute to the play’s success: the Spraberry, Wolfcamp and Bone Spring. Since 2009 it is estimated that 75% of the production increase within the play can be attributed to these formations. Historically, the Midland sub-basin has been the more actively drilled area and most cost-competitive. However, operators have begun to move more heavily into the Delaware sub-basin and have been garnering more productive well results and better economics.

Utilizing 6,800 wells drilled since 2012 across the Permian Basin, Stratas Advisors calculated the median 30-year EUR for each county. It was determined that median EURs typically range between 100 Mboe per well to greater than 500 Mboe per well, with the best results focused within Loving and Reeves counties (Figure 2).

The Permian has weathered extremely well since the initial downturn in market prices toward year-end 2014. The basin has beaten
many production estimates and continues to outpace other regions in terms of output. Despite the overall production increases the play has shown, the basin has begun to show minor month-over-month declines since April 2016. Even though these declines have begun in recent months, Stratas projects that the play will continue to show year-over-year growth from 2016 to 2017. Stratas estimates that market prices will increase to average about $50/bbl West Texas Intermediate (WTI) in 2017, with 2018 expecting to recover further to average close to $60/bbl. When the median well-level economics from 6,800 wells across the basin is compared and ranked by vintage, the median breakevens have continuously trended downward since 2012. Currently, the median breakeven across the basin ranges from about $54/bbl to $64/bbl. When focusing on the top 25% of these wells by economic and production performance, the median breakeven decreases to a range of about $30/bbl to $33/bbl. Under market conditions fluctuating between $40/bbl and $48/bbl, the top 25% of wells drilled within the Permian remain economic (Figure 3).

Whether focusing on the Permian Basin or any other shale basins across the U.S., it is becoming increasingly paramount to focus within the “core of the core” acreage to achieve economic returns and generous well results. The Permian offers unique opportunities for producers within the region, with the core counties producing a median breakeven below $40/bbl for the top 25% of wells drilled. As operators continue to drill more efficient wells with much larger returns, Stratas expects to see the basin continue its production increase and lead the industry in its recovery.

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