Permian Reserves May Be Much Smaller Than You Think: Tight Oil and Long-Term Debt Cycle Arthur E. Berman Labyrinth Consulting Services, Inc. September 11, 2017 Slide 1 Houston Geological Society Labyrinth Consulting Services, Inc.
New Age of American Energy Dominance The U.S. is the 10th Largest Oil Reserve Holder in the World 301 Venezuela 266 Saudi Arabia Canada 172 Iran 158 Iraq 153 Russia 110 102 Kuwait 98 UAE Libya 48 US 48 Nigeria 37 Kazakhstan 30 26 China 25 Qatar Brazil 13 Algeria 12 Angola 12 Ecuador 8 Mexico 8 8 Norway 0 50 100 150 200 250 300 350 Proved Reserves of Liquids (billions of barrels) Source: BP & Labyrinth Consulting Services, Inc. We are entering a new age of American energy dominance: Rick Perry. • “…we’ve got underneath us more oil than anybody, and nobody knew it until five • years ago.” ---Donald Trump • Trump referring to tight oil and today, that means the Permian basin. Global energy dominance by the U.S. is somewhere between aspirational and absurd. • 9 mmb/d average 2017 crude oil imports & 7 mmb/d net imports. • U.S. is 10 th largest world reserve holder between Libya and Nigeria. • Not bad but hardly in same class as Venezuela, Saudi Arabia, Canada, Iran, Iraq & • Russia that have on average 4 times more proved reserves than the U.S. Slide 2 Houston Geological Society Labyrinth Consulting Services, Inc.
John Mauldin: An Energy Amateur Masquerading as an Energy Expert Rystad Energy Global Oil Recoverable Resource Estimate Saudi Arabia 276 U.S. 263 Russia 181 158 Canada Iran 135 Iraq 110 110 Brazil Venezuela 72 Mexico 68 0 50 100 150 200 250 300 Billions of Barrels of Oil Source: Rystad Energy & Labyrinth Consulting Servces, Inc. Perhaps the President & Secretary Perry read John Mauldin’s recent work of magical • realism, “Shale Oil: Another Layer of U.S. Power .” Mauldin features a chart showing U.S. is largest reserve holder in the world. • • So wrong that it defies explanation. Rystad Energy source reveals Maudlin mis-represented recoverable resources as • reserves . Didn’t even show Rystad’s data correctly. • Saudi Arabia—not the U.S.—is the largest holder of recoverable resources according • to Rystad. What weight do recoverable resources have in a $50 per barrel world? Slide 3 Houston Geological Society Labyrinth Consulting Services, Inc.
EIA Reserve Estimates Table 2. Crude oil production and proved reserves from selected U.S. tight plays, 2014-15 million barrels 2014 2014 2015 2015 Basin Play State(s) Production Reserves Production Reserves Williston Bakken ND, MT, SD 387 5,972 421 5,030 Western Gulf Eagle Ford TX 497 5,172 565 4,295 Permian Bone Spring, Wolfcamp NM, TX 53 722 66 782 Denver Niobrara* CO, KS, NE, WY 42 512 58 460 Appalachian Marcellus* PA, WV 13 232 16 143 Fort Worth Barnett TX 9 47 5 33 Sub-total 1,001 12,657 1,131 10,743 Other tight 56 708 83 859 U.S. tight oil 1,057 13,365 1,214 11,602 The more practical question is, What about the growth potential of the Permian • basin? Pioneer CEO Scott Sheffield claims Permian production may exceed 160 billion bo! • • Even credible sources like Wood Mackenzie believe that Permian Wolfcamp growth alone will add 3 million barrels per day by 2024. The EIA estimated that 2015 Permian tight oil reserves were only 782 million barrels. • Seems low and much less than the 5 billion and 4.3 billion barrels attributed to the • Bakken and Eagle Ford plays, respectively. Slide 4 Houston Geological Society Labyrinth Consulting Services, Inc.
Reserve Estimate Using 2016 10-K SEC Filings (Annual Reports) Permian 2016 Proved 2016 Tight Oil PCT OF Total 2016 Oil Reserves (kbo) Production (kbo) Production CONCHO 321,026 37,315 9.3% PIONEER 283,647 45,538 11.3% ENERGEN 199,575 10,468 2.6% LAREDO 167,100 9,146 2.3% RSP PERMIAN 164,700 11,040 2.7% DIAMONDBACK 139,174 14,892 3.7% PARSLEY 136,536 11,763 2.9% EP 81,800 3,973 1.0% DEVON 81,000 16,211 4.0% CIMAREX 74,300 17,920 4.5% CALLON 71,145 8,509 2.1% SUBTOTAL 1,720,003 186,776 47% TOTAL 3,696,999 401,459 100% • I estimate that there are approximately 3.7 billion barrels of proved Permian tight oil reserves using 2016 10-K SEC filings of leading operators in the plays. • All the companies in the table differentiated Permian reserves from other company reserves. Those companies accounted for 47% of all tight oil production in 2016. I used that as a • scaling factor to estimate the contribution of companies such as Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 10-K filings. The estimate is founded on a reliable base of 1.7 billion barrels from company filings. The • assumption that undifferentiated company reserves will follow 2016 production ratios is reasonable but uncertain. Slide 5 Houston Geological Society Labyrinth Consulting Services, Inc.
Assessing the Growth Potential of the Permian Basin Concho & Pioneer Proved Undeveloped Future Production Expected to Peak in 2019 80,000 70,000 Proved Undeveloped Future Production (Barrels of Oil Equivalent Per Day) 13,299 9,538 Source: Company 2016 10-K Filings & Labyrinth Consulting Services, Inc. 7,128 60,000 10,373 50,000 Pioneer Concho 40,000 61,515 60,093 30,000 57,047 53,132 4,907 20,000 22,600 10,000 0 2017 2018 2019 2020 2021 • Only 3.7 billion barrels may surprise those who buy into the vision of American energy dominance. • Others may accept the estimate but argue that Permian plays have significant growth potential that the Bakken and Eagle Ford do not. Concho and Pioneer included tables in their 2016 10-Ks that projected future • production from proven undeveloped (PUD) reserves: peak PUD production in 2019. PUDs only ~25% of their combined 2016 daily production from the Permian basin. • • Future PUD production may only offset legacy production decline rates. Also, PUDs already included in proved reserves. • Slide 6 Houston Geological Society Labyrinth Consulting Services, Inc.
Tank Theory Permian Tight Oil Production Has Reached The Eagle Ford Peak & Is Still Increasing 1.6 1.4 Eagle Ford Permian 1.2 Bakken Millions of Barrels of Oil Per Day 1 Source: Drilling Info & Labyrinth Consulting Services, Inc. 0.8 0.6 0.4 0.2 0 Jun-00 Nov-00 Apr-01 Oct-03 Jun-05 Nov-05 Apr-06 Oct-08 Jun-10 Nov-10 Apr-11 Oct-13 Jun-15 Nov-15 Apr-16 Jan-00 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Mar-04 Aug-04 Jan-05 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Mar-09 Aug-09 Jan-10 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Mar-14 Aug-14 Jan-15 Sep-16 Feb-17 Implied Permian tight oil reserves less than accepted estimates for the Bakken and Eagle Ford • plays. • Permian production, however, has already reached peak Eagle Ford levels and is still increasing. Doesn’t this mean it will continue to increase & eclipse output from older plays? • Without additional reserves from new plays or deeper layers, it may only reflect rate acceleration • followed by steep decline once peak production is reached. • Tank Theory—you can drain the tank with the best technology at very high rates but ultimate production is limited by the size of the tank. Concho’s and Pioneer’s future production forecast suggests that peak production may occur • sooner than later. Already, some operators are having problems with increasing gas production. • Slide 7 Houston Geological Society Labyrinth Consulting Services, Inc.
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