Texas Independent Producers and Royalty Owners - Upstream Texas Magazine, Spring/Summer 2022

12 UPSTREAM TEXAS | SPR ING/SUMMER 2022 The Permian Basin has become one or the most important regions for the U.S. and the global oil and gas industry. So, it’s no surprise that as demand for oil and natural gas picked back up, activity also rushed back to the West Texas oil patch. There has been a steady but consistent return of rig activity (137 percent increase) and new well starts, though there was a bit of a slowdown toward the end of 2021 and in early 2022. Frac activity has also seen a return, going from 20 active crews at its lowest point to nearly 70 active crews this spring. All of this activity has breathed new life into the Permian and the industry. However, living in a world driven by just-in-time supply chain strategies has its negative consequences. Justin-time manufacturing is a lean process that is designed to meet demand and does not create a surplus or large inventories. When the demand for oil and gas products picked back up following the pandemic, the raw materials needed to extract these resources were, and some still are, in short supply. Additionally, with a globally integrated economy, different parts of the world picked the work back up at different times and at different paces, further aggravating the issue. Nowhere is this more evident than in steel-based products. OCTG products, such as casing, tubing and liners, have experienced a sharp uptick in prices driven largely by market pressures on either side, like high demand to support the additional drilling activity and supply restrictions due to a lack of raw material inventories. Furthermore, geopolitical situations in recent times have not helped this issue. Figure 2 shows the pricing trends for OCTG product sub-categories in the Permian. All types of OCTG sub-categories have seen an increase in pricing, though different sizes have been influenced differently. This is due to a variety of reasons: contractual differences and differences in individual demands and inventories of specific products with key suppliers. Regardless of the individual actual trend, there is a clear increase in pricing across all size buckets of OCTG. This in itself can have significant consequences for operators’ guidance and development plans for the coming year, especially if these escalations have not been modeled accurately. Additionally, prices do not change immediately as the market forces change. Existing inventories, contractual structures, buying power and relationships have a large part to play here as well. Figure 3 shows the price distribution of 4-6-inch casing in the Permian Basin. This is the size bucket for most intermediate casing and some of the most widely used products within this space. FEATURE 02 Permian Activity Returns to Rapidly Changing Markets BY AKASH SHARMA DIRECTOR OF PRODUCTS AT ENVERUS “As the world continues to return to normalcy, strong activity should be expected in the Permian Basin. Organizations well prepared to deal with the challenges associated with sourcing key materials will fare a lot better in the times to come.”