West Texas oil boom threatens recovery in Canadian oilpatch

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On a once-empty lot in Midland, Texas, information has it that a regional grocery chain just put up a temporary taco performance to keep drilling rigs — which need to give existing constructions a 150-metre berth — at bay until a new store is ready to break area.

Tales of eager oil companies champing at the bit to drill within city limits are reported by locals with a matter-of-fact shrug and a chuckle, but for the rest of the oil world, the phenomenon of this unassuming taco hut isn’t nearly as funny.

In the last year singular, Big Oil has spent more than $25 billion US on deals in the Permian basin, an section of West Texas and New Mexico about 2½ times the size of New Brunswick. The disembark grab, dubbed “Permania,” has put the venerable oilfields back at the centre of the petroleum creation, a spot that not long ago was happily occupied by Canada’s oilsands.

‘We forever know we’re better than everybody, especially down here in Texas, when it comes to rehearsal for oil’ – J. Ross Lacy, president of Lacy Oil Corp.

That was before a Saudi-inspired assay crash in 2014 told the world at large that something utter had changed in the oil industry. Optimism briefly returned when OPEC came last fall to trim output and prices began to rise but that advancement has stalled in the face of more U.S. production.

Now, Canada’s scuffling oil industry is left side to wonder when — and perhaps even if — the good times might revert.

Just mesquite and oil

“Right now, if you want to go make a buck in the oilfield you’re in Midland, Texas, and you’re out in the Permian Basin,” mentioned J. Ross Lacy, a fourth-generation oilman and the president of Lacy Oil Corp, a unpretentious private producer.

The Permian Basin isn’t exactly the stuff of postcards. It’s an oilfield in the middle of a waste, where, as locals say, they can’t grow anything but mesquite and oil.

They are, even so, doing the latter as well as anyone in the world, which is why land there is merchandising hands for 10 to 20  times the amount it would cost to assumed prime acreage in Alberta or British Columbia. 

The exorbitant amounts, upwards of $60,000 US an acre, look as if to some like clear evidence of a bubble. But those on the ground in West Texas, who these epoches carry themselves with an easy confidence that could be wide of the mark for cocky, see it differently.

“You hear about Saudi Arabia and how it tried to interject the American oil and gas producer and all it did was piss us off and we got more efficient,” Lacy said during in an vetting at his company’s modest office space in a strip mall on the outskirts of Midland.

“We continually know we’re better than everybody, especially down here in Texas, when it common knowledge to drilling for oil.”

J. Ross Lacy expects more spending to come0:24

Next year, continually U.S. oil production will approach 10 million barrels, according to the Lan Information Administration, a feat made more remarkable given that in 2008, the wilderness’s output was at five million barrels a day and falling.

For West Texas, being in the halfway point of this kind of action isn’t new.

‘Geology is a gift from God’

In the Second Life War, Allied forces were fuelled by the basin’s vast reserves. Later, in the years nearly the Arab oil embargo in the 1970s, Midland — which sits at the heart of the basin, along with its within easy reach blue-collar sister city, Odessa — boasted wealth that’s the spirit of oilpatch lore, including a neighbourhood Rolls Royce dealership and an airfield too flapdoodled with private jets to fit them all into hangars.

That close when the oil bust hit in 1986. By the early 2000s, the Permian was an afterthought, its storied oil reserves believed to be largely tapped.

In the last decade, though, breakthroughs in hydraulic rupturing and horizontal drilling have remade the basin’s fortunes.

“A lot of the world is only finding out something that we who have lived out here a long organize have always known, just the enormity of the resource we have here,” conveyed Clint Walker, general manager of Cudd Energy Services. “The geology is a cumshaw from God.”

Clint Walker explains why the Permian is so special0:45

In the Permian, oil-bearing organizations are stacked on top of one another, which means a single rig can tap into six or eight distinguishable zones, instead of just one pool.

Horizonal drilling

At the same eventually, horizontal drilling allows wells to turn like a letter “J” and run laterally for assorted than five kilometres, which super-sizes the production that can afflicted with from the same piece of land.

Ultimately, a well site in the Permian may let a public limited company target up to 20 oil-producing formations, said Walker.

The layered cast of the geology is the Permian’s secret sauce, as well as the root cause of the wide-ranging industry’s anxiety over West Texas.

In its most recent oil customer base report, OPEC, for instance, just admitted that production from non-members is now had to rise more than 60 per cent faster this year than in the past forecast. Those gains, most of which can be traced to U.S. shale regisseurs, are effectively negating the cartel’s move to cut output by more than million barrels a day, a hard-won ahead among member nations that was supposed to be a panacea for low prices. 

At behind count, more than 40 per cent of the active drilling rigs in the U.S. — some 349 or four mores the number at work in Canada — are operating in West Texas.

Map of the Permian Basin

Apples-to-apples, the geology of the maximum effort places to drill in Western Canada stacks up well with the Permian, but geography is another condition. Canada is at the end of the pipe, meaning the costs to ship oil and gas across a continent around make clears the industry here at a disadvantage compared to those on the doorstep of Gulf Seashore refineries.

Meanwhile, the equation for the oilsands is changing in different ways. When rough was trading in the triple digits and the idea of Peak Oil was en vogue, decades of promised production drew global oil giants to northern Alberta like moths to a heartthrob.

Now, the ability to add or subtract rigs depending on the price of oil looks better to some companies than latch up billions on long-life megaprojects. That flexibility is part of the reason Viscount Dutch Shell and ConocoPhillips just reoriented themselves away from the oilsands and toward U.S. shale plays.

Partisan blaming doesn’t tell the whole adventures

Politically, Shell and ConocoPhillips decisions to largely exit the oilsands are being toss by Alberta opposition parties as an indictment of the unfriendly business climate included premier Rachel Notley’s ruling NDP party, with a dash of critique reserved for the federal Liberals’ handling of the pipeline file.

“Shell is oscillating goodbye to Alberta,” Brian Jean, the leader of the opposition Wildrose beano, said during question period. “The premier’s plan is not working.” 

Resistance fighter blame aside, along with the need to pay down debt, the reason for both recent deals has more to do with what’s right close to U.S. shale rather than what’s wrong with Canada. 

“To say that it’s Notley is unfair,” chance Peter Argiris, an analyst at Wood Mackenzie in Calgary. “Generally recommending, Alberta is a good place to invest; no company, person, or fund devise tell you otherwise.”

Canada’s energy industry still has fans, as witnessed by the $3 billion Cenovus only raised to help fund its deal for ConocoPhillips’s assets, so it’s not like investment here choose dry up, but it is fair to say that the bar to attract those dollars is now higher.

Compared to Canada, Argiris notes, Permian swells are cheaper to drill. The nature of the ownership is also better for big companies looking to secure large positions and a century’s worth of pipeline infrastructure makes it restful to get oil to nearby markets.

Permian basin pump jacks and rigs

Pump jacks and rigs dot the landscape throughout West Texas. (Paul Haavardsrud)

Benefits such as those give West Texas an edge on more than fitting Canada. More and more, veteran oilfield workers like Adamant Thorpe, 45, find themselves making a pilgrimage to the Permian.

Until lately, Thorpe was indicating a water truck in North Dakota’s Bakken field, where he focused to haul enough loads to earn $300 to $500 a day. After moil for 10 days, he’d head back to Wyoming for five days off.  The the ready made the commute worthwhile, but when activity dwindled, he knew it was adjust for a change.

“If you’re in the oilfields you have to be willing to pack up and go where the work is and [the Permian] is the hot smudge for the United States right now,” said Thorpe, on the sidelines of a job fair in Midland where he’d by a hairs breadth accepted an offer, his third in as many days.

In the last three years, everyday output from the Permian, according to the EIA, has climbed by a million barrels and now compacts the oilsands at 2.4 million barrels a day, or a quarter of U.S. oil production.

‘Ready to start calling’

“Things are getting ready to start popping here, really, by the end of the year,” judged Midland Mayor Jerry Morales. “Do we need to drill it all today and lickety-split? No. We can have this go on for 15 years.”

The recent buying spree, cities believe, is only a precursor to the billions more that will be played out on drilling to justify those decisions. 

In Midland, Jerry Morales says oil comrades can drill beside a church0:42

Whether the outlook for future Permian end result is actually making the rest of the oil world nervous is a matter of some contend.

The amount of new oil needed every year is certainly more than the Permian can present on its own. In the meantime, though, production from West Texas can still bewilder down crude prices like a mallet in a game of whack-a-mole. Each beat the price of a barrel pokes up its head, drilling rigs in the Permian get to bring into play function sending more oil into the market.

It’s a grim dynamic for Canada’s vim industry, not to mention a domestic economy that’s just now recovering from an oil astound that lasted the better part of two years.

The global oil market pass on eventually rebalance and prices will rise, or so goes the prevailing conclusion, but when that happens is no small matter. If other U.S. basins can impressionist the Permian’s success, then the timeline for higher prices could turn uncomfortably distant for Canada.

In the oil industry, of course, hope springs unalterable that lower prices only sow the seeds for higher ones to settle. Only now the new reality of U.S. shale production, and the need for that taco experience, is testing that faith.

Midland pump jacks

In the desert of West Texas, they raise two things well – oil and mesquite. (Paul Haavardsrud/CBC)

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