The Permian Basin, Gas Diversification, and Decommissioning – 12/1/16

In the U.S., drilling in the Permian Basin has shown impressive resilience to low oil prices. The number of rigs in the region has increased by 60% since May, whereas in other shale basins remain largely unchanged. Most of the $20 billion in Wall Street investment going to American oil companies goes to Permian assets and operations suggesting that output from the region will dominate future U.S. production.

Pioneer Oil LLC analysts suggest that global demand for oil may peak within the next 10-15 years because of slow global growth and the large-scale introduction of electric vehicles. To prepare for that day, Pioneer is considering focusing solely on the Permian region, which is cheap enough to compete even in a world of low demand.

European oil firms are also changing their bets on oil’s future as they pull out exploration efforts in expensive regions like the Arctic or Canada’s oil sands. Simon Henry, Shell’s chief financial officer, says the company expects a peak in oil demand within the next 5-15 years, after which those with the cheapest oil will survive longest.

Because OPEC countries have nationalized most of the world’s cheapest reserves, some oil majors are turning to gas as way to diversify. This year Shell completed a $54bn acquisition of BG, a British producer of natural gas and oil, bringing gas close to half its energy mix.

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Low crude prices that have hurt oilfield service companies for the past two years might be creating their next cash cow.

As the crude crash forces energy producers to decommission aging and unprofitable fields, more than 600 fields, mostly in China, Australia, Indonesia and Malaysia, could be shut down over the next decade, according to a report by industry analyst Wood Mackenzie Ltd.

Most of the fields are producing little to no oil, so the global supply balance won’t change much. Still, the decommissioning represents an golden opportunity for oilfield service firms now that drilling and exploration spending is almost non-existent following the oil price collapse.

Oil prices will decide how quickly the decommissioning work comes since a rebound in prices could make companies delay shutdowns.

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