Did you hear about the largest U.S. oil and gas field that’s in the Permian basin of west Texas?
That’s the one that’s not a field because it hasn’t been discovered yet. That’s the one whose 20 billion barrels are an estimate by the U.S. Geological Survey. That’s the one whose 20 billion barrels would lose $500 billion at today’s oil prices.
Wait a minute. What about the headlines?
Bloomberg: A $900 Billion Oil Treasure Lies Beneath West Texas Desert
USA Today: USGS: Largest oil deposit ever found in U.S. discovered in Texas
Deutsche Welle: Largest US oil and gas discovery made – USGS
Read the source–the U.S. Geological Survey. The USGS did an assessment of the undiscovered, technically recoverable resources of the Wolfcamp shale in the Permian basin.
“Undiscovered” means what it says–it has not been discovered. It’s an estimate, an educated guess. ”Technically recoverable resources” means the oil that could be produced if cost didn’t matter.
Where Did $900 Billion Come From?
Where did the $900 billion value come from? Multiply 20 billion barrels times $45 per barrel and you get $900 billion. In other words, if the oil magically leaped out of the ground without the cost of drilling and completing wells; if there were no operating costs to produce it; if there were no taxes and no royalties.
Sweet. Jeb Clampett shootin’ at some food.
In the real world, an average Wolfcamp well costs $7 million to drill and complete (Table 1 from my June 2016 post on the Permian basin plays). Average operating costs are about $12 per barrel. Severance taxes are almost 5% and the average net revenue per barrel after royalties is only 75%.
Table 1. Permian basin economic assumptions by play. Source: Company documents, SEC Filings and Labyrinth Consulting Services, Inc.
The obvious question that reporters apparently failed to ask is, What is all of this going to cost? The USGS document “Fact Sheet 2016–3092” that summarizes the Wolfcamp study includes a table that allowed me to calculate the number of wells required to produce the estimated 20 billion barrels of oil.
For each subdivision of the Wolfcamp play or “ AU” (Assessment Unit), the USGS provided a calculated mean number of potentially productive acres and the average drainage area of wells. By dividing the two, I was able to determine the number of wells (shown in yellow) for each Assessment Unit in Table 2.
Table 2. Key assessment input data for six continuous assessment units in the Wolfcamp shale in the Midland Basin of the Permian Basin Province, Texas. Source: USGS and Labyrinth Consulting Services, Inc.
According to the USGS’ input data, it would take 196,253 wells to produce the 20 billion barrels if it exists. At $7 million per well, that would cost almost $1.4 trillion in drilling and completion costs alone.
It would cost more than $1.4 trillion to generate $900 billion in revenue resulting in a net loss of $500 billion at $45 oil prices excluding all operating expenses, taxes and royalties–and no discounting.
That’s a discovery that no one can afford to make.