America’s energy security just got a lot more secure. On November 28 The United States Geological Survey (USGS) published an assessment of continuous (unconventional or ‘tight’) resources in a part of the prolific Permian oil and gas basin that straddles Western Texas and Southeastern New Mexico. Located in the Wolfcamp Shale and overlying Bone Spring Formation, the unproven, technically recoverable reserves are officially the largest on the planet. But curiously this story isn't making waves in the mainstream media.
Nearly one third of the United States’ crude already comes from the Permian, making it the largest shale-oil producing region in the country. While numerous studies have been conducted on the Permian's half-dozen sub-basins and their many overlapping formations, this represents the first comprehensives USGS assessment of continuous resources in Wolfcamp and Bone Spring within the Delaware Basin.
And the findings are truly incredible.
The USGS estimates that over 46 billion barrels of oil, 280 trillion cubic feet of gas, and 20 billion barrels of natural gas liquids are trapped in these low-permeability shale formations. To better understand just how staggering these numbers are, think about this: at the end of 2017, total U.S. proven reserves of crude oil hovered around 40 billion barrels. For natural gas, figures stood around 465 trillion cubic feet (tcf). The new upward revision of Permian resources represents a more than 100% and 65% increase in U.S. oil and gas reserves, respectively, if they can be extracted economically.
It is important to note that the recent USGS survey includes estimates for unproven reserves (estimated resources based on geologic knowledge and theory) and technically recoverable reserves (resources available using current technology and industry practices). While reasonable conclusions can be drawn about the extent of resources in these basins, the approximations do not address future economic profitability. The future prices of hydrocarbons and their economic viability may vary due to environmental regulation, technology, specific geology, and cost of production. But don't let that detract from the scale of this find.
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Here's another way to look at it: the world consumes approximately 100 million barrels of oil and .36 trillion cubic feet of natural gas per day. This means that Wolfcamp and Bone Spring have sufficient reserves to meet global oil demand for over a year, and gas demand for several more. Not bad for a country that, up until early 2015, banned the export of crude oil for fear of running out of domestic supplies.
Still not impressed?
At $50 dollars per barrel (where West Texas Intermediate (WTI) is currently trading following a 35% price drop since October) the Wolfcamp Shale and Bone Spring Formation would be worth a whopping $2.3 trillion. As for natural gas, 280 trillion cubic feet will fetch you $1.1 trillion at today’s prices of $3.75 per million Btu (mmbtu). It won’t solve the national debt problem – which is now nearly $22 trillion – but windfall taxes for the companies operating in these basins (not including the taxes along every step of the oil and gas value chain) would be a boon for state, local, and the national economy. Tax revenues from this mass reserve could help fund our schools, social security, critical infrastructure, and national defense. This is very literally buried treasure.
But unlike your typical buried treasure, the hard part isn’t just finding this stuff, it's moving it.
The United States is currently suffering from a major mid-stream infrastructure bottleneck, meaning the country lacks sufficient pipeline capacity to move all the oil and gas we are extracting to willing buyers.
Shale producers in the Permian, for example, have some 300,000 barrels per day to ship, but are unable to do so. The capacity situation is so bad that for a brief period in November, natural gas prices in the Permian Waha hub actually dropped into the negatives, forcing gas traders to pay customers to take their product. Relief is expected to come by 2020, when a host of massive pipelines and railroad projects are due to be completed. Energy Trading Partners (NYSE:EPT-D), Phillips 66 Partners (NYSE:PSXP) and Andeavor (NYSE:ANDV) are among those companies pouring billions into the Permian's high-demand mid-stream sector. One would hope that overzealous regulators and judges not stand in their way.
But in the short term, the landscape does not look promising for energy investors on any side of the oil and gas equation. Return to the ‘lower for longer’ energy price environment, an impending global recession, higher interest rates, a global oil production glut, and weak demand – particularly from emerging markets – paint a bleak picture. The promised OPEC and friends 1.2 million barrel per day cut isn’t likely to help much, as this would just remove around 1% of global supply. Considering the lag time for any such cut to take effect, plus the tendency of OPEC+ producers to cheat, we shouldn’t expect an appreciable increase in oil prices any time soon.
The future of the Wolfcamp and Bone Spring treasure will be contingent on the direction of global oil markets and the North American natural gas demand, but it is good to know that the country can breathe easier if global instability threatens imports. The state of the Union’s oil and gas stocks is bright.
James C. Grant, Program Manager at International Market Analysis Ltd., contributed to this article