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Big Oil Discovery in Texas Not So Grandiose

A look at the news surrounding the Permian Basin and its recent oil development.

Jacob Runnels | Dix Communications Published: January 3, 2017 3:09 PM
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In November, 2016, the U.S. Geological Survey (USGS) released an evaluation of the Wolfcamp shale in Texas’ Permian Basin stating it could contain 20 billion barrels of oil.

If one were to look to news sources like USA Today, they would read how the shale play “contains 20 billion barrels of oil” — if one were to look to Bloomberg Markets, they would read how the shale play could have enough oil to be “second only to Saudi Arabia’s Ghawar field.” With this information, one would think a plentiful reserve of oil was just now discovered, putting the United States at a great advantage in domestic oil production.  

“They didn’t discover a damn thing,” said Jim Halloran, vice president at PNC Wealth Management. “[The word ‘discovery’] gets people confused as to what we have in the way of resources in this country.  It’s just someone wanting to quantify something that’s generally there.”

Halloran said the word “discovery” isn’t used properly when assessing the oil estimate made on the Permian Basin. He said the word is being misused along with “resource” and “reserve.”

With resources, he said those are what is estimated that could be extracted. He said resources are measured without considering factors like time or what technology would extract it.

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“They didn’t draw any wells, they didn’t tap into any existing wells and they didn’t look at anything that says we found oil here,” Halloran said. “We’re estimating there’s oil there and — forgetting time, cost and other things — we could get 40 billion barrels of oil there in the future but that could take anywhere from 20 to 200 years.”

However, he said a reserve is used to measure what is actually there. This means there were wells drilled to prove it’s there, it can be extracted using current technologies, and it can be done “on a commercial basis to make money on it.”

According to the USGS, while there’s an initial estimate of 20 billion barrels of oil potentially available, there is also a 95 percent chance it could actually be 11 billion barrels and a 5 percent chance it could be 31 billion barrels. There is also an estimated 16 trillion cubic feet of natural gas potentially available, with a 95 percent chance of there being 7.800 trillion cubic feet and a 5 percent chance of there being 27 trillion cubic feet.

With this in mind, Halloran said the same happened with the Marcellus formation in 2012, where the amount of estimated gas in Pennsylvania had predicted large numbers of available natural gas. He said this is a part of “continuing estimates” on national resources and is more about updating old information about what could be available.

The Bloomberg report shows there is a possible $900 billion to be made with the “discovery” made in the Permian Basin. However, because it’s a resource and not a confirmed reserve, the technology used or costs associated with extracting the oil can’t be accounted for yet.

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Geological consultant Art Berman, who has written about what the Permian Basin has to offer, said the estimated amount of oil could cost more to extract — given current technologies and costs associated — than the possible $900 billion (from Bloomberg) value offers. Berman said, in a theoretical situation involving the 20 billion barrels being a confirmed reserve, there could be a “huge money-losing proposition” if enough wells were to be constructed for such a large job at the current price of crude oil ($50 a barrel at the time of this writing).

In a situation where the estimate resource involves 20 billion barrels, Berman said there would most likely be 15 to 25 percent of that resource actually being available to extract, which would be around 2 to 3 billion barrels possibly extracted.

“If this play is 2 to 3 billion barrels, that’s a reasonable number and it’s… a considerable volume,” he said. “Although it’s speculative because it’s noncommercial today.”

If the Permian Basin was able to produce 2 to 3 billion barrels of oil a day, what would that mean compared to Saudi Arabia’s Ghawar field? In 2015, OPEC stated there are about 266 billion barrels of oil in reserve, which would place whatever would make the possible 2 to 3 billion barrels produced by the Permian Basin to be a drop in the bucket compared to the Ghawar field.

“I’m not trying to minimize this non-discovery, but I think it’s important you put it into some context,” he said. “It’s worth paying attention to, it’s not going to change the future of U.S. oil supply very much and it’s not very significant in the global scheme of things.”

Even though there’s not much oil that could be produced, Berman said the Permian Basin and the current technology being used to extract oil shouldn’t be underestimated.

According to the EIA, the United States consumed around 7 billion barrels of oil in 2015. Berman said, if it was possible to get 2 to 3 billion barrels of oil in reserve based on the USGS estimate, it would provide a “considerable volume of oil” for the United States. He said the Permian Basin estimate would  then be able to be considerable in the big picture of American oil consumption.

However, he said the news of the USGS estimate could be misleading to those who are unfamiliar with the technical side of oil and gas.

He said with the wrong kind of information, the farce of being energy independent could be spread around, which could influence politicians when deciding on policies for oil and gas extraction regulations.

Overall, Berman said there are areas the oil industry chooses to stay away from due to being less prospective. This USGS estimate was an example of what could possibly be extracted, but shouldn’t be considered a definite number available.

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