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Is the Permian Shale’s Oil Production Growth Reversing?

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Permian shale oil production

On June 13, 2016, the EIA (U.S. Energy Information Administration) released its latest Drilling Productivity Report. The EIA estimates that the Permian Basin’s crude oil production amounted to ~2.0 MMbpd (million barrels per day) in May 2016. This was marginally down from production in April 2016. However, it was 7% higher than production in May 2015. Before May, the Permian Basin’s shale crude oil production rose on eight occasions in the past nine months.

The Permian Basin’s shale oil production rose from 864,940 bpd (barrels per day) in May 2008 to ~2.0 MMbpd in May 2016. That’s a rise of 135% in eight years.

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Rigs in the Permian Basin

In May 2016, the number of rigs working in the Permian Basin was 137—down from 139 in April 2016. There were 234 active rigs in the Permian Basin in May 2015. The number of active rigs in the US has fallen significantly over the past 17 months.

Monthly additions from the average rig

The EIA calculates that the average Permian Basin rig added production of 480 bpd in May 2016—a 38% rise since May 2015. In the past eight years, the additional production per rig rose by ~5.8x.

What it means for oilfield services companies?

Rising Permian Basin productivity over the past year had a positive impact on drill equipment makers such as Schlumberger (SLB), National Oilwell Varco (NOV), Forum Energy Technologies (FET), and Halliburton (HAL). However, the Permian Basin’s crude oil production and drilling productivity can fall eventually as marginalized wells start replacing the declining wells to maintain production. So far, Permian producers resisted any steep production fall either by curbing the initial output rate or by producing additional barrels out of older wells. Schlumberger forms 0.6% of the SPDR S&P 500 ETF (SPY). For investors who would like exposure to the energy sector, energy accounts for 7.2% of SPY.

The Bakken Shale is one of the most prolific crude oil shales in the US. We’ll see why in the next part of this series.

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