For all the woes the Permian Basin energy industry is currently experiencing – demand destruction from the COVID-19 pandemic and low oil prices – it still has a bright future.
“We think there’s a very bright future for the Permian Basin,” Bobby Tudor, chairman of Tudor Pickering Holt & Co. stated during the Permian Basin Petroleum Association’s 58th Annual Meeting, held virtually this year. “It will be different than what we were expecting. The Permian has great rock, great people, great companies and a great regulatory environment. The Permian Basin will continue to be a critical part of the global energy picture.”
Tudor said his company expects oil prices to remain rangebound at current levels and not rising above $50 for the next five years.
Still, he said Permian Basin oil production will continue its upward trajectory.
“We’re actually projecting the Permian will continue to grow; we’re showing 5.6 million barrels per day in 2025. It’s not as if the Permian will fall off a cliff, it’s just the growth rate will moderate,” Tudor said.
He said the questions are: Who will be generating that growth? Will growth be concentrated in fewer companies? There likely will be meaningful consolidation around Permian companies, and larger companies will be the consolidators, Tudor said.
“Markets demand scale and return of capital, and smaller companies find that very hard to meet,” he said.
There are a lot of general & administrative efficiencies that could be wrung out in consolidation, he said. “The G&A picture would look very different in a highly consolidated Permian; our expectation is that is likely to happen over the next several years.”
The challenge is the industry’s record of losses over the last decade has made it difficult to attract investors, he said.
“Access to capital is limited to the largest, highest quality operators,” Tudor said.
Investors are now focused on return on capital. They want operators to generate cash flow, lower their reinvestment rates and moderate production growth, and investors want much lower leverage, he said. Some Permian-focused companies are already adjusting their operations to meet those new demands, he said.
Looking forward, Tudor said the upcoming presidential election will be a meaningful catalyst for energy markets. Emerging markets – India, Southeast Asia and Africa – will determine the energy mix.
ESG – environment, social and governance – issues matter and are a focus for investors as well as energy companies, he said.
“All that is actually healthy; the industry is responding appropriately, working to lower its environmental footprint, make operations cleaner and being partners in driving toward a cleaner globe as opposed to being a hurdle to lowering emissions.”
Globally, and certainly in the U.S. and Europe, “the general populace believes climate change is real and we need to lower global emissions. That is driving behavior and, ultimately, I think it’s going to result in lower emissions. That is good for the world. The question is, how do we provide affordable energy to the world while learning how to do it cleaner and with lower carbon dioxide emissions? It’s a big challenge and it’s critical the energy industry, the U.S. energy industry in particular, be seen as partners in the drive to lower emissions. I think we’re on the right path. It’s a long slow path; the nature of transition will be difficult without real breakthroughs in technology.”
There will be politicians and people who will only be happy if the oil and gas industry goes out of business, Tudor said.
“That will never happen, never happen in our lifetime. The world needs what we do,” he said.