Robin Mills: How Opec’s leaders can smash the Texas upstarts

The Permian period, which ended 250 million years ago, was a good time for the global oil industry. The rocks of that time now hold much of the Middle East’s gas, including the world’s largest field, between Qatar and Iran. But Permian rocks on the other side of the world are now a threat to Opec, and an alluring but dangerous prize for international oil companies.

The Permian Basin of west Texas and Mexico has emerged as the most resilient play in the US oil sector. Proximity to pipelines, low drilling cost and a layer cake of geology that offers multiple drilling targets have kept activity high. A well that cost up to US$11 million in 2014 can now be drilled for about $7m.

This month, the United States Geological Survey published its estimate that just one rock formation – the Wolfcamp Shale – in this area contains another 20 billion barrels of oil and 16 trillion cubic feet of gas yet to be found. In September, the oil corporation Apache estimated it had found 75 trillion cubic feet of gas and 3 billion barrels of oil in part of the basin it called the Alpine High area.

While the number of rigs in other leading US shale areas has plummeted, the Permian rig count has been rising since May. Its production is forecast to reach 2.065 million barrels per day by next month, twice the total of Oman.

The Permian Basin has become this season’s must-have accessory. Even companies with strong assets in the Middle East, such as Occidental, or in Africa, such as Anadarko and Apache, spend most of their time on investor calls talking about their US prospects. Apache gets 28 per cent of its output from Egypt but spent just $52m out of a ­total $415m of capital in the third quarter of this year in the country. Almost half of spending went to the Permian Basin.

Rising output and falling costs in west Texas have slowed the drop in overall US production, frustrating the strategy of major Opec producers such as Saudi Arabia to squeeze out shale oil producers. As prices have risen modestly amid chatter of an Opec deal, rigs have gone back to work in the Permian.

Opec itself expects oil prices to reach $65 per barrel by 2021, from just below $47 on Friday. In the current mindset, honed by a few years above $100 per barrel, this seems low. But the inflation-corrected average since the first oil shock of 1973, the era in which the exporters’ organisation has exerted market power, is $57 per barrel. In the age of shale, with Russian output also remaining strong, it’s a bold bet that a fractured Opec could hold prices above historic norms.

Instead of comforting the market with talk of a production cut, which would anyway be modest, leading Opec countries could pursue the opposite strategy. With reservoirs still far larger and better quality than any in the US, they could continue boosting output, gaining market share and driving out high-cost competitors. They can adapt US tight-oil production technologies, make their national oil companies nimbler and more cost-effective and open up more difficult fields to international investors.

The weak, such as Venezuela, Nigeria and Libya, would be left to the wolves. Other high-cost oil around the world – in mat­ure fields, China, the North Sea and deepwater – would be forced into decline. Investors’ confidence in shale, outside the very best plays and companies, would be broken.

The Permian period ended in the greatest ever mass extinction, when about 90 per cent of all species died out. In today’s ruthless struggle for oil market survival, Opec’s best option may be to make some of its Texan competitors extinct.

Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis

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