American Oil and Gas Reporter - March 2020 - 71

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SpecialReport: Permian Basin Activity

New Tools Yielding Nimble Operators
By Kala D. Schmidt
When Warren Buffett makes a significant investment in an unlikely industry,
the world takes notice. So when Berkshire
Hathaway put up $10 billion to help Occidental Petroleum win the Anadarko Petroleum prize, it sent sparks through the
energy sector.
Backing Occidental seemed an unlikely
move for Buffett. The last major energy
investment came when Berkshire Hathaway bought about 26 million shares of
Kinder Morgan. Berkshire Hathaway's
energy investments primarily are in power
generation and transmission and include
renewables such as wind and hydroelectric
generation. Buffett's latest investment
signaled a vote of confidence in the oil
industry's largest takeover in years-even
if Occidental had to quadruple its debt
and sell $4.55 billion of its assets to
make the deal happen. The acquisition
included 10,000 drilling locations in the
Permian Basin, which produces a third
of all U.S. oil.
Mergers and acquisitions in the energy
sector have since quieted alongside lower
price decks. Nevertheless, the Permian
Basin will be a bellwether for the heretofore unquestionable vitality of U.S. shale
oil and the production growth it has ushered in. Fortunately, computing power
has evolved to the point as to make a real
difference in today's industry conditions.
Astute operators can take advantage of
cutting-edge software, information technology solutions and consulting services
to shrink their costs and make smart decisions with the sort of agility the market

requires. In a fast-paced world where decisions in China can influence the best
course of action in Midland, it is the
nimble companies that flourish.
Infrastructure Growth
Major players have joined middle-market companies and startups exploring for
oil in the vast Permian. While the playing
field may have become overly exuberant
with acreage acquisitions and unbridled
growth through the drill bit, the good news
is that take-away capacity from the infrastructure build-out is well under way. Multiple Permian-to-Gulf pipelines will provide
the necessary take-away capacity at least
through the end of 2020.
Of course, in the brave new era of unconventional resources, multiphase production also requires pipelines to transport
natural gas to markets. The industry has
seen continued funding and progress on
both the build-out of crude oil and natural
gas infrastructure. The new Gulf Coast
Express, for example, transports about 2
billion cubic feet a day. The early completion of this pipeline represents the industry's resolve to move Permian oil and
gas production to export markets.
Although companies are expected to
continue the upward trajectory of Permian
production during the next several years,
producers drilling from the basin's western
side are extracting a new stream of light
crude oil. It has become well known that
many U.S. refineries are not configured
to process this lighter American oil; they
were designed for the heavy crude that
the United States imports from its neighbors
to the north and south. That demand has

Kinder Morgan's Waha compressor station moves natural gas through the Gulf Coast
Express Pipeline to Agua Dulce near Texas Gulf Coast infrastructure. In service ahead
of schedule, the GCX pipeline added approximately 2.0 Bcf/d to Permian Basin takeaway capacity.

grown amid embargos against Venezuela,
bottlenecks in Canada, and production
slowdowns in Mexico. As a result, producers have started to sell the light oil,
effectively securing a new market that
can help increase U.S. crude exports.
While plenty of excitement pervades
the Permian Basin, major players have
suggested their smaller rivals are overly
optimistic about their hoped-for prices. If
these big companies are not buying what
their smaller rivals are selling, some may
conclude that the consolidation taking place
is not indicative of a new wave of shale
oil, but rather a bunch of small players
trying to squeeze blood from a stone.
More indicative still are the rumblings
that a growing number of companies now
face the possibility of bankruptcy associated
with excess U.S. shale production. Others
are trying to sell noncore assets in the
Permian to improve their balance sheets.
Shale Light Oil
While industry consolidation may make
production more efficient, the oil coming
from the ground in the Permian Basin and
elsewhere in the United States needs those
foreign markets. Shale oil is ill-suited for
producing jet fuel or diesel, and its low
octane levels make it a poor fit for newer
cars' high-efficiency engines. Although
U.S. crude exports are projected to continue
growing, existing refining capacity requires
balancing increased domestic light oil production with heavier crude imports.
With their higher break-even points,
shale projects are especially vulnerable
during an economic slump. Most new
Permian wells break even at about $50 a
barrel. This keeps production profitable
when oil prices hover close to $60 a
barrel, but producers feel the pinch when
oil prices dip below that.
While the boom in the Permian Basin
provides the Trump administration enormous political leverage in the Middle
East and at home, shale isn't going to
solve every U.S. energy problem. On the
surface, it has spawned economic growth
and lowered prices for American consumers. After all, shale production is on
pace to help the United States surpass
the Organization of Petroleum Exporting
Companies in crude oil output during
the next several years. Even so, problems
arise when trade issues become so entangled with national security.
MARCH 2020 71

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