On the outskirts of a west Texan city, on top of one of America’s most prolific oil fields, sit 230 square miles of scrubland owned by one family for more than a century.
David Fasken, a Canadian lawyer, paid about $1.50 an acre back in 1913, hoping to make a fortune out of cattle. The land lacked sufficient groundwater, though. Before he died, some years later, he swore that it was the worst deal he had ever made.
Today the farm, still owned by a few Fasken heirs, is valued in the billions. Oil-rich land in the Permian Basin, a 250-million-year-old sea of oil lying as deep as 12,000 feet underground, has changed hands this year for an average of more than $25,000 an acre. On October 31 Occidental Petroleum, a large American oil company, said that it had paid $2 billion in cash for 59,000 acres in the Permian. Amid a flurry of such deals, Bernstein, a research firm, predicts that prices will go as high as $100,000 an acre. The nicknames range from “Saudi America” to “Texarabia.”
However, Tommy Taylor, head of oil at Fasken Oil and Ranch, smells a rat. He has worked on the Permian, where oil was first struck in the 1920s, long enough to sense its booms and busts.
“In the ’80s,” he recalled, “man, this place dried up and looked like it was going to blow away.”
He cannot afford to be swept up by the whiff of Wall Street hype. Fasken survives on its own cash flow, which means watching the pennies on each well it drills and on every hydraulic-fracturing crew it employs. Taylor said that it is hard to justify the high land prices with oil at less than $50 a barrel—especially the prices for the costly horizontal wells that run pipes for miles underground. Wall Street’s excitement perplexes him.
“Our recoveries suggest that it will be very difficult for wells to be economic at these prices,” he said.
Another Permian veteran, Scott Sheffield, chief executive of Midland-based Pioneer Natural Resources, told a more seductive story. The Permian, he argued, has as much oil beneath it as the biggest field in Saudi Arabia, Ghawar. The oil is cheaper to extract than in most countries within the Opec oil cartel, and it could last 100 years.
His view has helped stoke excitement on Wall Street. Of the new rigs deployed to drill oil in America since the nadir in May, more than 60 percent have been in the Permian. The vast majority are horizontal ones. Deloitte, a consultancy, says that more than $20 billion was raised in public markets in the first half of the year, much of it to finance acquisitions in the Permian. IHS, another consultancy, calculated in late September that access to oil in the Permian explained 40 percent of all upstream oil-merger deals in America this year, up from 7 percent in 2011 at the start of the shale boom.
According to the most recent figures from the federal government’s Energy Information Administration, the Permian is the only prolific shale bed in America where net production is still rising. The field’s resilience underpins the view that shale producers have weathered the storm unleashed in 2014, when Opec flooded the market to drive out high-cost producers.
Rabah Arezki of the International Monetary Fund said that producers have avoided bankruptcy by cutting costs to improve efficiency. He reckoned they have permanently added to supply which, combined with slower demand-growth in emerging markets and efforts to reduce consumption to slow global warming, will prevent oil prices recovering to the $100-plus levels of a few years ago.
However, analysts say that, if the excitement over the Permian is to last, oil prices will need to stabilize at more than $50 a barrel, and the banks will need to keep funneling money to Permian producers, because without it their cash flows are insufficient to finance expansion.
© 2016 Economist Newspaper Ltd., London (November 5). All rights reserved. Reprinted with permission.