WSJ -- Permian Basin Oil Field Is Running Out of Workers, Materials -- and Cash ..............................
Apr. 28, 2022
The Permian Basin Oil Field Is Running Out of Workers, Materials -- and Cash
Drillers in America’s most prolific oil region face long delays, rising costs as supply-chain crunches mount
By Collin Eaton
MIDLAND, Texas -- America’s most prolific oil field is running out of the workers, cash and equipment needed to produce more oil.
In the Permian Basin, the sprawling oil-rich region in West Texas and southeastern New Mexico, drillers are facing long delays and steep competition for everything from roughnecks to steel to fracking pumps.
The region is the only place where U.S. crude production is expected to grow significantly this year, and the Biden administration is hoping production there can help alleviate high prices at the pump. But mounting supply-chain crunches are putting a ceiling on how much more frackers can produce there, said energy executives and analysts, despite the highest oil prices in roughly seven years.
Unlike the last time oil fetched about $100 a barrel, the vast service industry of steel suppliers, drilling-rig operators and fracking companies that develop shale producers’ wells is coming into the current price cycle malnourished. Service companies mothballed large fleets of equipment during the pandemic and investors remain wary of the industry, leaving companies short of capital and reluctant to invest in new fracking fleets and drilling rigs.
U.S. drillers are expected to raise domestic oil output by about 8% from last year to about 12.6 million barrels a day by December, according to the Energy Information Administration, and analysts say most of that growth will come from the Permian. By contrast, in 2014, the last time oil prices topped $100 a barrel, U.S. production grew by 1.6 million barrels a day, nearly 20% over the year, according to the EIA.
Several factors are holding back production, including publicly listed producers’ decision to return more cash to investors and limit spending on growth as well as the rapid depletion of some of the best shale wells. Now, supply-chain snarls mean that shale companies that want to grow production will be hard-pressed to do so.
The bottlenecks have forced some shale producers to pause operations for days, weeks or even months while they wait for steel casing, for which there is currently far less inventory than usual in the Permian, or to replace workers, many of whom haven’t returned to the industry since the pandemic. In some cases, entire crews have left projects before completion in search of bigger paychecks, executives said.
“If somebody walked in and put a pile of money on the table and said, ‘Drill me a well next week,’ it isn’t going to happen,” said Jamie Small, president of private-equity-backed oil producer Element Petroleum III. “You just can’t get the stuff to do it.”
It took Element a month to replace a crew that walked away from a job fracking several of the company’s wells, in favor of a higher-paying gig, Mr. Small said. Most of the fracking companies Element tried to hire asked it to source its own sand, a key ingredient used to prop open fissures in fossil fuel-bearing rocks, which was too expensive to do. It eventually hired two smaller entrants to begin work next month, he said.
Mr. Small said his company is looking to drill 10 to 12 wells this year, but even with high oil prices, it would be difficult to find the resources to increase that to 15 or 18 wells.
Steve Burleson, president of Burleson Petroleum, said he may have to wait at least nine months for an underground electric cable for parts of his oil-field operations, after a plant that makes the equipment shut down. Meanwhile, he said his other option is to incur an additional $35,000 per month energy bill to run a generator that will have to consume 500 gallons of diesel a day.
Mr. Burleson said he is concerned the supply-chain problems will raise costs beyond his estimated $11 million budget for a new well he is planning to drill next month. It is already 35% more expensive than the last well his company drilled in December, he said.
In the past three years, capital spending by the oil-field services sector has fallen roughly 70% compared with the three-year period 2017-2019, said Ann Fox, chief executive officer of Nine Energy Service. Deep budget cuts during the pandemic meant companies predominantly spent money on maintaining existing equipment rather than building new tools, she said. That left the Permian short on fracking equipment and drilling rigs.
Executives said daily rates for drilling rigs have run as high as $30,000, almost double the cost of last year’s prices. Walking through a Permian rig yard last week, Kurt Bailey, operations manager at rig company Patterson-UTI Energy Inc., said his company has virtually all of its locally available 56 top-end drilling rigs deployed in different parts of the Permian, and has just a handful of older models sitting idle.
Likewise, the price of steel pipe used in drilling and bringing oil wells online has climbed substantially in the past few months. Steel distributors in the Permian have little inventory, typically sending their steel pipe to oil companies soon after it reaches their yards, executives said.
Diamondback Energy Inc., one of the largest Permian oil producers, has seen costs for steel casing shoot up, with U.S. steel prices up nearly 40% since the end of 2020. Diamondback plans to keep oil production roughly flat this year, but if it tried to increase production, it would have to steer equipment away from smaller rivals by paying higher prices, Chief Operating Officer Daniel Wesson said.
The dynamic creates a zero-sum game in the Permian, where one producer’s decision to grow comes at the expense of a competitor and would be unlikely to lift the Permian’s net output, Mr. Wesson said.
“If we were going to change to growth mode right now, anything we’d do would be inflationary,” he said.
American shale companies have deployed some 250 fracking fleets into the nation’s oil patches, with only about 15 to 25 more available on the sidelines, said Robert Drummond, CEO of NexTier Oilfield Solutions Inc., a large fracking company.
Mr. Drummond said his company believes that until companies build more fracking equipment, U.S. oil-production growth will top out at less than 1 million barrels a day annually.
The shortfalls could persist into 2023 if oil-field service companies continue to keep capital investments low and relegate spending to maintaining, rather than building, equipment, according to executives in the industry, including at Halliburton Co., the largest U.S. service company.
“When you look at the capital that’s available to oil-field services, it’s not enough to make a meaningful difference,” in the oil-field-supply chain, said Casey Maxwell, vice president of the Permian Basin for Halliburton.
Write to Collin Eaton at collin.eaton@wsj.com
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