Booming oil production in Texas' Permian Basin has driven tremendous growth in the local economy, helping the state encourage businesses to create jobs and attract new residents. However, the so-called shale revolution has been fueled by high crude prices and some observers are asking questions about how price shifts could affect the pace of drilling and production in 2014.
NPR affiliate KXWT spoke to local industry stakeholders about this issue. Bob Randolph, a consultant who supervises oil production equipment at a field operated by Arabella Petroleum, told the news source that although things are "real good" in the area right now, he does see a reason to be concerned about potential changes in oil and gas prices.
"The drilling industry is doing good," Randolph said. "Price of oil's hanging in. Need the price of natural gas to come up a little bit but the oil field's doing real good right now."
There are several factors that could put downward pressure on the price of crude oil in 2014. For instance, with vehicles becoming more efficient, there may be a ripple effect within the supply chain as retailers sell less gasoline. Expansion of the global supply base is also a problematic development. With production increasing steadily in Iraq and Iranian oil and gas wells moving back into the picture due to a recent nuclear deal, crude prices could drop if there isn't an uptick in demand.
Advances in production equipment may help well operators overcome pricing obstacles
Oppenheimer's Fadel Gheit, a widely followed industry analyst, told West Texas Public Radio that he believes crude prices are significantly inflated and will fall in 2014. At the same time, KXWT spoke to one investor who said that, despite pricing concerns, the industry will remain strong in the coming year, buoyed by technological advances that reduce extraction costs and improve production performance.
Although both of these market watchers said they expect the economy in the Permian region to remain robust, Gheit said smaller, independent companies could end up being absorbed by larger firms as declining prices put pressure on their business models. The investor, Bill Dingus, said he also sees a consolidation coming, "because this is a big boy game."
"It's expensive drilling," Dingus explained. "And if the [price of crude] does drop the margins get smaller and it squeezes out the people who can't live on a 12 per cent rate of return."
'Best operators' still looking at 'very bright picture' in Permian Basin
Wood Mackenzie analyst Benjamin Shattuck told KXWT that he believes some observers are raising too much alarm about crude prices. He said that he doesn't expect any dramatic shift in the value of oil during 2014, although a more modest drop is likely. Regardless of how much prices decline, well operators need to be prepared to remain competitive.
Implementing hydraulic jet pumps may be a smart move for many companies. This versatile solution can be used to improve the recovery rates of vertical, horizontal or deviated wells. The unit can even be deployed at sites where issues with the completion of well casing would render other artificial lift solutions ineffective, which means it can be used to start or resume production at wells that would otherwise have to be abandoned.
Shattuck explained that in spite of the uncertainty surrounding supply, demand and prices, the situation is still "promising" for companies that can continue investing in new production opportunities. He added that "the best operators [are] looking at a very bright picture going forward."
If you can't confidently say that your firm is among this group of top players, it may be the right time to find out how new hydraulic lift equipment can improve your operations.