In late 2020, many E&Ps had two capital budgets—one for a Trump victory and one for a Biden victory, because of the latter’s rumblings about banning fracturing and other oilfield procedures. With results now in, favoring the smaller capex budgets, not everyone is pessimistic.
Dr. Ray Perryman, president and CEO of The Perryman Group, an economic research and analysis firm based in Waco, participated in an email interview with PBOG Magazine. In that, he discussed the Basin’s outlook for production of oil and renewables, exports, M&A activity, and more.
Dr. Ray Perryman, president and CEO of the Perryman Group
With 2020 and elections now behind us—culminating in a Democrat-controlled House, Senate, and White House—what are your thoughts about their impact on oil and gas, and particularly on the Permian Basin’s economy? Do you expect pipeline projects to be stalled or cancelled, drilling Federal lands to be restricted or ended? And how will the unleashing of federal funding to green initiatives affect energy markets?
I don’t see the political climate leading to rapid or dramatic changes for energy markets. While Democratic control will shift the trend line toward renewables to some extent, the appetite for major changes such as dramatically restricting frac’ing is simply not likely to be there. There are not the votes to enact such changes, and there likely will not be in the foreseeable future. President Biden has a relatively modest agenda that falls far short of the “Green New Deal.” While he has indicated that he may put some restrictions on oil and gas drilling on federal lands, very little of the incremental activity in the Permian Basin would be affected.
With abundant wind and sunshine in West Texas—the Sweetwater region is already host to one of the largest wind farm areas in the United States—do you think an uptick in renewables could offset some oil and gas setbacks there?
For Texas, support for renewables will encourage continued development of wind and solar, which will benefit the Permian Basin and many other parts of the state. Texas is already the national leader in wind power, and there are many wind farms in and around the Permian Basin. Large-scale solar operations are also being implemented. Clearly, the investment in installation and operation of wind and solar farms leads to notable economic benefits.
Ongoing royalty payments are also notable. West Texas is ideal for these renewables and growth will certainly enhance the economy as oil and gas recover. The world is going to need all types of energy as the pandemic eases and emerging countries resume their long-term growth paths, and the Permian Basin will be a vital part of the supply chain for decades.
The 2020 downturn only sped up an investment drop for oil and gas that was already gaining steam. What do you foresee regarding activity for bankruptcies, M&A, and investment as a whole for this year?
Whenever there is a downturn in the energy sector, consolidation occurs. This pattern has existed for decades. Well-capitalized firms acquire assets from those unable to weather the storm. In the present instance, much of the shakeout has already happened, but there will likely be more.
Many firms found themselves overextended as prices began to fall and have been forced to seek buyers or bankruptcy protection already. We will see more this year.
With the market beginning to recover, we should also begin to see activity (and profitability) pick up providing much-needed relief to companies. Obviously, there is an upside for those that have been able to obtain additional reserves and other assets at discounted prices.
While the last year has been extreme, much of the dramatic demand drop in the spring has been recouped, but full recovery will not occur until the virus is under control. The long-term availability of capital for the industry will depend on the value proposition offered by oil and gas relative to other sectors. Ongoing efforts at reducing cost and increasing efficiency will be critical as demand returns to prior levels.
The Saudis have announced unilateral output cuts, boosting oil prices at least temporarily. What is your view on its longer term impact on prices, drilling, and completion activity in the Permian compared to other major basins? And, how long might it last?
The willingness of Saudi Arabia and other OPEC+ nations to cut production is important not only to balancing supply and demand in the market, but also as a signal that price support will likely be part of the pattern going forward. As one of the lowest-cost production areas in the United States, the Permian Basin stands to capture a large share of whatever benefits are realized. Many areas of the Permian Basin can profitably produce at prices well below current levels. Once there is confidence of sustainable prices at these levels, activity should pick up.
Experts have stated that up to 50 percent of new Permian production is exported, either crude or refined. And the EIA reported record U.S. LNG exports for December of 2020. Do you have predictions on what the export markets hold for 2021 and how that might affect markets for Permian production? Please feel free to include pipeline issues as well.
The demand shock caused by the pandemic was global in scope. As we finally move past COVID-19, business activity will begin to trend upward. As demand rises around the world, U.S. exports will be positively affected.
For natural gas, LNG is essential to the electric power supply in some markets such as Japan, and natural gas production will be supported by recovery worldwide. Some pipeline projects have been put on hold, and it may take some time for the economics to support going forward. However, I see long-term viability for them, with the current delays a transitory reduction in the need for infrastructure to move oil and gas from the Permian to markets around the globe.
It is my expectation that the vast majority of Permian Basin production in the future will be exported in some form. The timing in 2021 will be heavily dependent on how quickly vaccines and therapeutics can bring the virus under control and permit a more robust global recovery.
Do you have numbers showing the economic impact of the energy industry on the Permian economy—mainly Midland/Odessa, and how that may have changed over the past year, with COVD-19, elections and other crises?
Obviously, oil and gas is the primary driver of the regional economy. While strides have certainly been made to diversify, when an area sits on top of one of the most important reserves anywhere, it is only natural for the economy to revolve around the industry. We’ve studied the importance of the industry to the economy and looked at what COVID-19 might mean; a link to one study is below.
perryman-keeping-it-together-05-15-20.pdf (perrymangroup.com)
What do you see as the biggest economic issue facing oil and gas regions like the Permian in 2021 and the near future? How can the industry prepare?
The biggest immediate issue for the Permian Basin as I see it is maintaining the ability to respond to recovery in the industry. (I discuss this in the report linked above). It has been crucial all through the health crisis to try to do those things that maintain the workforce and other infrastructure to restart activity when the time is right. While we see the light at the end of the COVID-19 tunnel, we’re not there yet.
How do you see the long-term prospects for oil and gas in the nation’s economy over the next 5-10 years?
I am projecting notable recovery in the industry over the next few years. While it’s important to keep that increase in activity in perspective—we’re starting from a much lower level than where we were a year ago—it is at least movement in the right direction. I recently wrote a column on the issue which might be useful:
Rumors of Oil’s Death Have Been Greatly Exaggerated | The Perryman Group
By Paul Wiseman