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US growth machine

The Permian has transformed from a dying giant to one of the world's most important oilfields in less than a decade

Already the hottest oilfield on the planet, the Permian tight oil play in west Texas shows no signs of cooling off.

Output through the first nine months of this year has soared along with drilling activity. The rig count doubled from August 2016 to August 2017, to 373. Production over that period is up nearly 30%, close to 0.6m barrels a day, to 2.6m b/d. To put that growth in context, the International Energy Agency reckons global-oil demand growth over that same period was around 1.2m b/d, meaning the Permian alone met half of it.

There is plenty more to come. The torrid rate of drilling over the first half of this year has built up a backlog of wells awaiting completion in the coming months. The number of drilled-but-uncompleted wells, the now famous Ducs, is at a record 2,300, representing hundreds of thousands of barrels a day of production potential. Permian producers are guiding close to 30% growth over the course of 2017. That would put output at around 2.75m b/d by the end of the year, which looks to be in reach according to Energy Information Administration data. Another year of 30% growth in 2018 would deliver 0.82m b/d over the course of the year, putting output at around 3.5m b/d, which would start to test the basin's pipeline capacity.

Remarkably, the Permian growth machine is able to keep cranking at $50 oil. The Permian's producers have managed to cut breakeven prices at the wellhead to around $50 a barrel from $85/b at the start of 2014, according to figures from consultancy Rystad. Given that producers continue to bleed cash, this is clearly not a corporate breakeven, though investors still largely back the Permian's producers so long as they post impressive volume growth. According to Rystad, around a third of the improvement in breakevens has come through wrenching lower costs from drilling-service providers. The rest has come thanks to drilling in the core, where the most productive wells are drilled and breakeven costs are often less than $40/b, and from learning how to get more from each well by sinking longer laterals and pumping more sand and other proppants to coax more crude from each frack job.

The latest round of results reporting from the Permian did throw up a potential red flag for future growth. Pioneer Natural Resources and a couple of other producers said they were seeing higher ratios of gas to oil in their wells. As drilling intensifies, pressure in the basin will fall, leading more gas to be released into the reservoir. The concern raised more recently is that this is happening quicker than expected, which could lead to a reduction in oil growth models. However, the data is far from conclusive so far and analysts at Raymond James, among others, have argued that the fears are overblown for now.

It is something investors and producers will be watching closely. For now, the only direction for the Permian is up.

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