What Do New Oil Production Records Mean For The Oil Industry?

US crude oil output just hit another record high of 13.84 million barrels per day (MBPD).  That’s roughly triple the amount of crude oil produced in the US 20 years ago.  Our country’s new oil wealth comes from learning how to drill horizontal wells in shale plays like the Bakken (North Dakota) and Permian (Texas and New Mexico).  Due to the shale miracle, US oil production has increased 9 MBPD from 20 years ago.  Today the US is the world’s largest oil producer by far…with 2/3 of that oil coming from the shale plays.

In comparison, PA conventional oil production is small.  But there are commonalities.  Both industries are capital intensive, risky, and at the mercy of commodity prices far beyond either industry’s control.

Let’s dive into the numbers.  The largest shale play is the Permian basin, producing over 6 MBPD.  That miracle comes from 55,000 new horizontal wells that produce, on average, 109 barrels per day.  The cost of a new Permian well tends to range between $10 and $12 million.  Using the conservative number, that means the average drilling cost to produce 1 barrel per day, in the Permian, is $92,000.

Let’s compare that to a PA conventional well.  The cost of a new PA conventional oil well tends to range between $115,000 and $140,000.  Assume that over 10 years, that PA well will produce 3000 cumulative barrels, or an average of about .82 barrel per day.  Again, using the conservative number, that means the average drilling cost to produce 1 barrel per day, in PA’s conventional play, is over $135,000.  That’s 50% worse than the Permian.  PA’s conventional oil sands are not as good as Permian shale.

So we have it tough in PA—granted.  But looking at operational factors, the scales come back into balance.  Shale wells are heavily burdened by royalties.  The shale land grab was a hasty circus, resulting in a lot of people (landmen, assignors, etc.) with their fingers in the pie.  The average Permian royalty is slightly over 20%, meaning the shale oil producers own less than 80% of every barrel sold.  The Permian is also a prodigious water maker, generating nearly 4 barrels of water for every 1 barrel of oil produced.  While Texas has a robust system for disposing of that produced water, there is still a cost associated with handling all that Texas water.  And the market for the associated natural gas produced by Permian wells is weak—Permian producers are only paid 25-30% of the NYMEX Henry Hub price.

The PA oil patch is more mature, and many producers own the entire barrel of oil.  Where a royalty does exist, it is usually only 12.5%, leaving the oil producer with at least 87.5% of every barrel produced.  Water production is generally much lower in PA—usually less than 1 barrel for every barrel of oil produced.  (However, PA does not enjoy a robust water handling system.)  And, while not as strong as it used to be, the market for the associated natural gas produced by PA oil wells is much more favorable. A PA producer is currently paid about 75% of the NYMEX Henry Hub price.

Combined, those factors make the economics of the two industries similar.  And, where the two industries are unquestionably joined at the hip is the price of oil.  When the shale miracle took flight 20 years ago, oil prices were in the $90 to $100 range.  In fact, oil hit a peak of $147/barrel in 2007.  Inevitably, the abundance of shale oil fundamentally altered the market.  Since the oil price crash of 2014, oil prices have only occasionally flirted with the $100 benchmark.  And since June of 2022, prices have steadily slid from $120/barrel to today’s price in the upper $50’s. 

The strain in Texas is showing.  To stay afloat, shale oil producers are implementing mass layoffs.  “The economics are completely upside down from where they were just in January.  It's more expensive to drill a well and you're getting 20% less for your oil” said Kirk Edwards, president of Texas-based producer Latigo Petroleum.

The strain is also present in PA.  But since the price crash of 2014, Pennsylvania drilling has been far more restrained than the Permian circus.  While the Permian drillers have accumulated $200 billion in drilling debt, Pa producers, instead, took their foot off the throttle.  New conventional well drilling in PA is down over 75% since 2014.

Ironically, the debt in the Permian and other shale plays is a big driver of low oil prices.  To meet debt payments, shale operators must produce MORE oil at low prices to pay down their debt mountain.  Oilprice.com makes the wry observation that “…the pervasive perception of unrelenting production growth in the U.S. shale patch has become the chief reason for bearish oil price predictions, expecting supply to exceed demand for oil for a prolonged period of time.”  The EIA projects that the worldwide glut caused by shale oil production will drive oil prices even lower in 2026.

So…although US oil production continues to hit new record highs, those new highs do not mean that the US oil industry is on solid footing.  The shale miracle has become a runaway treadmill, where shale drillers must drill faster, to overcome low oil prices, in order to service their already significant debt load.

Fortunately, PA conventional producers are not saddled with staggering debt.  But projections of $50 oil in 2026 are troubling even in PA.  We will survive.  But it is a challenge to pay our employees enough to stay ahead of inflation.  And health care costs have taken a particularly nasty jump this year.  Perhaps most important, there are new regulations—mostly methane related—that are ill-fitting for our industry, and which carry some unreasonably heavy costs.

We publish this long blog to let you know that PGCC is aware of the challenges, that PGCC continues to advocate for cost-saving measures, and most important, that PGCC is keeping close watch on new regulations and working diligently to insure that the regulatory framework fits the unique needs of our conventional industry.