Oil’s $5 Trillion Permian Boom Threatened by $70 Crude

By Joe Carroll and Edward Klump - Oct 25, 2013

Bryan Sheffield, a third-generation oil wildcatter in Texas’s Permian Basin, knows what he’ll do if crude drops to $80 a barrel: shut down half his drilling rigs and go on a takeover hunt for weaker rivals.

Sheffield is among producers who’ve together invested $150 billion in the Permian since 2010 seeking their piece of an oil trove estimated to be worth as much as $5 trillion. As the money pours in, risks are mounting of a bust as analysts including Marshall Adkins of Raymond James & Associates Inc. forecast crude is heading down to $70 a barrel next year, a price that would slow drilling in the most expensive U.S. shale formation.

While traditional wells have been drilled in the Permian since the 1920s, shale producers have become giddy over the potential of the region’s vast overlapping layers of oil-soaked shale rock. Pioneer Natural Resources Co. (PXD) estimated the remaining yield at the equivalent of 50 billion barrels, more than any field on Earth except Saudi Arabia’s Ghawar. The varied geology, though, makes it more costly to explore and develop.

“That’s the double-edged sword,” said Benjamin Shattuck, an analyst at Wood Mackenzie Ltd. in Houston. Multiple oil zones layered one atop another provide ample potential for riches, “but you also have to be a knowledgeable and good operator in order to drill economic wells out there.”

If oil drops another 18 percent to $80 a barrel, wells in some parts of the Permian that sprawls beneath Texas and New Mexico will become money-losers, said Tim Rezvan, an analyst at Sterne Agee & Leach Inc. in New York.

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http://www.bloomberg.com/news/2013-10-24/oil-s-5-trillion-permian-boom-threatened-by-70-crude.html