Permian Basin

The Permian Basin’s long history is characterized by ups and downs. W.H. Abrams drilled the first well in 1920, but it produced only 10 barrels of oil per day. Although many experts considered the region a “petroleum graveyard,” Texon Energy tried again in August 1921. It spudded a well in Reagan County, near Big Lake, Texas. Its cable-driven drill descended less than 5 feet per day, so progress was slow. After several months without success, a particularly nervous investor sprinkled rose petals over the site and christened the well Santa Rita in honor of the Patron Saint of the Impossible. His commitment paid off after nearly two years of drilling when oil burst out of Santa Rita No. 1 in May 1923. The well produced for nearly 70 years before it was capped in 1990.

The Santa Rita discovery prompted many investors to explore the Permian Basin, which is noted for its size and diversity. It covers over 75,000 square miles in West Texas and southeast New Mexico, consisting of several layers of rock that contain vast reserves of oil and natural gas. In the three decades following Santa Rita, discoveries of these resources led to large and steady increases in oil and gas production. Oil production peaked at nearly 2 million barrels per day in the early 1970s and gas production soared to almost 10 billion cubic feet per day (Chart 1). During this boom, the Permian Basin accounted for over 20 percent of U.S. oil supply and 15 percent of U.S. natural gas supply (Chart 2).

Shortly after hitting its peak, though, production began declining in the Basin and continued to do so for several decades. By the mid-2000s, oil production had declined by almost 60 percent from its high point in the early 1970s. This trend would likely have continued into the present day were it not for the introduction of horizontal drilling and hydraulic fracturing in the early 2010s, which has led to a major revival of the Basin over the past decade.

Horizontal wells require more capital expenditures than traditional vertical wells, but they generally produce much more oil and gas. A growing number of operators decided to apply these techniques in the Basin and by the end of 2014, the share of rigs dedicated to horizontal drilling exceeded 65 percent (Chart 3). This went hand in hand with a significant increase in the number of rigs operating in the area and the number of wells placed online (Chart 4), as well as a turnaround in crude oil production (Chart 1). The share of rigs dedicated to horizontal drilling has continued rising over time, reaching 90 percent in 2018 and 95 percent in 2022.

Over time, companies have found a variety of ways to improve upon the original processes used to drill and complete horizontal wells. For example, advances such as pad drilling, 24/7 operations and simul-frac have helped service companies reduce drilling and completion times significantly. Companies have also found ways to increase the lateral length - the distance the well goes horizontally. This length has increased from roughly 4,000 feet in 2010 to near 10,000 feet in 2022 (Chart 5). As a result of these and other improvements, companies were able to vastly improve production rates for new horizontal wells over time (Chart 6).

Although the boom was spurred in part by technological advances, drilling activity has remained sensitive to the price of oil. In particular, the first phase of the boom in the Permian Basin was supported by a period of relatively high crude oil prices and investor interest in the industry. At the end of 2014, though, the price of oil fell precipitously. This led to a wave of bankruptcies in the industry and a sharp cutback in drilling activity both in and outside the Permian. Spurred by lower prices and a greater push by investors to achieve profitability, companies that survived the bust directed drilling activity towards their most productive assets and made efforts to cut costs and increase productivity.

These efforts were particularly fruitful in the Permian. Drilling activity began recovering in 2016, as did production, which reached 2 million barrels per day at the end of the year. Production continued rising and by the end of 2019 reached 4.8 million barrels per day. The coronavirus pandemic, which dramatically reduced the world's demand for oil, put an end to that trend in 2020 but production started growing again the following year. By early 2023, crude oil production had grown to 5.6 million barrels per day. If it were a country, the Permian Basin would be one of the largest producers of oil in the world. And while the area receives much attention for its oil production, it has also become a major producer of natural gas and of natural gas liquids.

Sources

• Santa Rita taps Permian Basin, American Oil & Gas Historical Society.
• Drilling Productivity Report, U.S. Energy Information Administration.