Peak Permian is approaching faster than you think

THE heart of America's oil renaissance is found in the Permian basin, which is showing signs of maturing fast. And for shale basins, that's not a good thing. If the rich petroleum region wanes, US oil independence will remain elusive and the Opec cartel may finally see off its greatest threat.

The Permian, spread across west Texas and south-east New Mexico, yields more than a third of all US oil production and it has contributed about two-thirds of the past three years' worth of growth. Its boom has allowed America to export more than three million barrels a day of crude on a regular basis since May - more than every Opec country except Saudi Arabia and Iraq. But the US still imports twice that volume. A slowdown in the Permian would see that gap widen again.

Output from the region, where oil was first discovered by WH Abrams a century ago with a well that produced just 10 barrels a day, is hitting new heights. Production has continued to grow in recent months despite a drop in the number of rigs drilling in the basin, which fell by 17 per cent last year, according to data from the Energy Information Administration. But that cannot last forever.

The latest edition of the EIA's Drilling Productivity Report, published last week, shows that the Permian rig count fell to 402 in December, down from 485 a year earlier. Partly offsetting that decline, operators are getting more new oil per rig. But the biggest increases in efficiency coincided with the steepest declines in the rig count - suggesting the improvement came through a renewed focus on the most productive parts of the play, rather than some technical breakthrough. Those strong gains have not been sustained.

The report also breaks out production from new wells - those in their first full month of operation - and legacy production from all of the rest. This is particularly important in the shale deposits because of the rapid drop in output once a well is brought into use. Production from new wells has to more than offset the declines from a growing number of older wells for overall output to grow.

The EIA data allow us to generate production profiles under various assumptions about rig counts, new well production rates and legacy-well declines. The results are worrying for those depending on ever-growing Permian output.

Here are the basic parameters I used to generate production profiles:

With the rig count flat at 400 units and the average new output per rig at 810 barrels a day - where we are now - Permian basin production will peak in just over a year's time, in Feb 2021. After that it will start to fall at an accelerating rate as the burden of legacy-well declines continues to grow. If the rig count falls by just 10 more units by this April, the peak will occur this year.

Before anyone starts shouting that this is too gloomy, the outlook is perfectly compatible with the views of the companies such as EOG Resources Inc, Pioneer Natural Resources Co and Diamondback Energy Inc, which see their output growing by 12 per cent or more this year. Even in the most pessimistic case above, the year-on-year increase in production in 2020 is 12.7 per cent.

The dominant position of the Permian means that other shale basins will struggle to offset its decline. The peak may be delayed by the trove of drilled, but uncompleted wells - known as DUCs - which now stands at over 3,600 in the Permian. They can be brought into production without the need for rigs, but that stockpile is already being drawn down to support production growth.

Even when the Permian does peak, the US will remain a major oil producer and a significant exporter. But Opec oil ministers will breathe a sigh of relief at the first sign that the shale gale may be starting to blow itself out. BLOOMBERG