Cockrell School of Engineering
The University of Texas at Austin

In late 2014, oil prices plummeted from $100 to $50 a barrel. Over the next three years, domestic onshore rig activity dwindled. Yet, production continued to grow in one domestic oil shale play: the Permian Basin.

Lying underneath the cities of Midland and Odessa and stretching into New Mexico, the Permian is about the size of New Jersey and spans more than 8,700 square miles. Oil and gas production has occurred in the region for nearly a century, but in 2007, activity exploded as hydraulic fracturing and horizontal drilling allowed operators to tap into the region’s unique, liquid-rich shale formations.

After production persisted through the latest downturn, the Permian is now home to half of the nation’s onshore rigs. Over the last 14 months, the U.S. oil and gas industry has shown signs of recovery. Onshore rig activity has doubled, rising from approximately 400 to 950 rigs at the time of publication, and experts predict prices to improve through the end of this year.

Scott Sheffield (BSPE ’75), chairman and former CEO of Pioneer Natural Resources, believes we have only seen a fraction of what the Permian is capable of producing.

sheffield power of permian

Scott Sheffield

“In the early 1970s, production in the Permian Basin peaked at 2 million barrels of oil per day. Now, it is hitting up to 2.5 million barrels a day even after the latest downturn,” he said. “The Permian has turned the U.S. into an energy superpower again, but this is just the beginning. Based on estimates from the U.S. Energy Information Administration, it is growing by 800,000 barrels per year, and it is on its way to reaching 8 to 10 million of barrels of oil per day in the next 10-15 years. Natural gas production will similarly skyrocket — increasing from 8 billion cubic feet per day to over 25 billion.”

U.S. Geological Survey estimates the Permian to be the largest recoverable oil field in the nation and the second-largest in the world — behind only the Ghawar field in Saudi Arabia. It is also the second-largest natural gas field in the country.

Thriving in a Low-Price Market

For generations, UT PGE alumni have spearheaded exploration and advanced production in the Permian. As the U.S. industry strengthens and the shale boom returns, Longhorns are still leading the way.

Under Sheffield’s leadership, Pioneer became one of the largest acreage holders in the Permian and one of the top producers in Texas. Efficiency gains and technological advancements have allowed the company to continue to thrive in the face of low prices.

“Today, we are drilling out 10,000 feet instead of 5,000 feet, and that is doubling and tripling the size of our frack jobs,” Sheffield said. “We are also drilling really good wells. That’s allowed us to compete in a $40-50 price environment. And that is why the Permian can now compete with Middle Eastern countries such as Kuwait, Saudi Arabia, Iran and Iraq.”

For Sheffield, the basin’s low break-even costs and robust industry infrastructure make it one of the best places to operate in the world.

“I have operated in Africa, Argentina, Alaska and Canada, but the Permian is a very special place,” he said. “The people of West Texas understand the oil and gas industry. It contributes about 90 percent to the Midland and Odessa economies, as well as a significant portion of the Texas economy.”

Gene Shepherd (BSPE ’81; MBA ’86), CEO of ATX Energy Partners, has also found the Permian to be the ideal environment for success.

“It is a unique region, and the sheer magnitude of the basin means that there is always an incumbent base of employees,” he said. “That is critical for the shale industry, which is very logistics-focused and people intensive.”

power of the permian

Gene Shepherd

As CEO of Brigham Resources before its sale to Diamondback Energy in February 2017, Shepherd helped grow the company’s position to more than 80,000 net acres in the Permian’s Southern Delaware Basin. His team established a skill set and aptitude for developing shale plays in the Bakken Formation. When the company came to the Permian, they worked with incumbent operators who had been drilling verticals for decades and helped them take their plays horizontal.

“Compared to other onshore shale plays, the optionality in the Permian is much greater,” Shepherd said. “You have five to six drilling objectives in the Southern Delaware Basin, as opposed to the Williston Basin, where you have one to two drilling objectives. There is a lot more running room.”

Confronting Scarcities    

As operators find success in the Permian’s layer-cake shale, they also face a number of challenges. The biggest is water.

Due to severe droughts and the needs of robust farming, ranching and oil and gas industries, the fresh water table in West Texas has been dropping. Therefore, companies like Pioneer have turned to other sources to find water for hydraulic fracturing.

“We have made investments with the cities of Midland and Odessa in order to use non-potable, effluent water,” Sheffield said. “We also use recycled water and look to non-potable zones located deeper than the fresh water table.”

Additionally, in the face of growing production, there are not enough pipelines to get product — including crude oil, natural gas liquids, natural gas and methane gas — out of the basin to the Gulf Coast.

“Over the last few years, we have been trying to convince more midstream companies to get aggressive about building new pipelines so we can export our product,” Sheffield said. “There are promising plans and expansions in the works, but their success often depends on commodity prices.”

A Promising Future

Despite the challenges, Shepherd and Sheffield agree that the outlook in the Permian is bright.

As the industry continues to stabilize, supermajors are returning to the basin after abandoning the region in the 1990s, believing it to be dried up. In January 2017, ExxonMobil acquired 275,000 acres in the New Mexico portion of the basin. But Shepherd says that local independents that have been the dominate Permian players over the last several decades have two key advantages: local knowledge and flexibility.

“Our organization is staffed with professionals with significant experience in the Permian," he said. "Further, our company is very flat and nimble, and our ability to move quickly and deploy capital is a huge leg up. Once an area is determined to be prospective by other operators and capital providers, then it is an arms race to see who can get in and build a position.”

With heavy production forecasts in the future, Sheffield and Shepherd believe opportunities will abound for UT PGE graduates.

“The Permian Basin is UT Austin’s backyard,” Shepherd said. “If production predictions over the next 10-15 years hold true, then the university and its students stand to be the beneficiaries of this migration of capital away from other basins around the world and across the U.S. to the Permian.”

And for those who are unsure given the recent downturn, Sheffield says that from here on out, so-called busts won’t hit the Permian as they have in the past.

“Midland and Odessa now have the world’s second-largest oil field underneath and around their cities," he said. "That will bring and keep a tremendous amount of people in the area. We will still have booms and busts in the industry, but times — and technology — have changed. The busts will be a lot more stable in the Permian.”