What comes after the Permian for IOCs?

US energy dominance could not have happened without the fracking-led renaissance of the Permian basin. A dwindling conventional oil play at the turn of the century, today the Permian bows only to Saudi Arabia and Russia on the global stage as the world’s biggest producer of crude oil and condensate. US companies, public and private, have powered the growth and many now hold huge positions in the basin. David Clark, VP in our Corporate Strategy and Analytics team, shared his thoughts on the strategic implications for Permian producers operating in a play approaching maturity and seeking to build portfolios to last through the 2030s.  

Is there much growth left in the Permian?

Yes, there’s more tight oil growth to come. We expect crude and condensate production from the basin to increase by 0.2 million b/d to 6.6 million b/d this year despite drillers cutting back on rigs in response to weaker oil prices. Though the growth rate is slowing, there is still material future upside. We forecast another 1.1 million b/d of growth before production reaches a plateau of 7.7 million b/d in 2035 (assuming WTI US$70/bbl real). Through this period, Permian growth more than offsets declines in all other US plays.

How much value have companies created in the Permian?

The prospect of substantial production growth and low-cost barrels has been a magnet for the US industry for more than a decade. Organic investment complemented by M&A and consolidation have made the Permian a huge store of future value. Eighteen companies in Wood Mackenzie’s coverage hold over half a trillion US dollars of NPV in the basin, the top end of a tight oil corporate ecosystem with a long tail. ExxonMobil has the single biggest stake with an NPV10 of over US$100 billion, as big as BP’s and TotalEnergies’ entire global upstream portfolios. The rest of the big six – Chevron, Occidental, Diamondback, ConocoPhillips and EOG – each have Permian portfolios valued at over US$40 billion.

Do the biggest tight oil players perform better?

The ‘haves’, the Permian’s bigger players, not only hold the most but also the best acreage. At current rates of drilling, an elite group of seven companies will have almost all of the remaining inventory with breakevens below US$45/bbl WTI by 2030. The ‘haves’ continue to drive down costs and improve performance trends through scale, repetition and value chain integration. In contrast, the ‘have nots’, generally smaller players, are already finding well performance trends deteriorating. To grow into the 2030s, they face having to drill out mostly higher-cost inventory.

Can companies have too much of the Permian?

On our current projections, portfolios become increasingly concentrated, arguably over-concentrated, in the Permian through the next decade. Among the large Independents by 2035, the Permian will account for more than 70% of upstream operating cash flow for Occidental, EOG, Devon and Apache. For ExxonMobil, Chevron and ConocoPhillips, it will be almost 50%. It’s no bad thing to be concentrated in the best places in an advantaged play in terms of returns, margins, carbon intensity and investment flexibility. But operators will need to start thinking about whether they need additional portfolio ballast as they strategise for the 2030s.

What options do companies have to build next-decade portfolios?

The Permian has been a portfolio gem that will likely be impossible to replicate for many of those invested. Companies will want to at least maintain Permian oil and gas production to position for stronger-for-longer oil and gas demand.

For the ‘have nots’ focused solely on the Permian, moving into new unconventional basins in the US or overseas offers growth opportunities but comes with risk. Their likely best option is consolidation within the Permian, which will mainly be about combining two maturing portfolios and cutting costs.

The ‘haves’ with advantaged Permian positions, diverse skill sets and existing international portfolios have more options and will have to leverage most, if not all, of them. One will be to max out the Permian itself. Building on their technological advantages, enhanced oil recovery and AI offers significant upside to the current modest expected recovery rates of 10% or less.

Besides the other US tight oil basins, successful shale plays outside the US have potential, albeit on a smaller scale, including the Montney in Canada and the Vaca Muerta in Argentina. Emerging basins in Saudi Arabia and Mexico have substantial upside and have already attracted the US Majors and top-tier E&Ps. Nascent shale opportunities are being assessed in Algeria, Australia, Bahrain, Turkey and UAE.

Conventional options include discovered resource opportunities in various geographies, including the Middle East. These may offer access to large-scale volumes but won’t have anything like the value proposition.  

We also anticipate the ‘haves’ will swing more aggressively to high-impact, frontier exploration, which can deliver the large volumes of low-cost, low-carbon intensity barrels the big companies need to strengthen their next-decade portfolios. The most successful explorers can also create material value.

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