Permian, PUDs + PDs, Productivity & Premiums.

The Gist: (1) The Permian has the lowest development costs in non-OPEC. This is the figure to watch because it helps set the structural floor for oil prices which I put as $54-$63/bbl. (2) Permian F&D and well productivity are the figures to watch as well. (3) Paraphrasing T. Boone Pickens “It is cheaper to drill for oil on the New York Stock Exchange than it is to drill directly.”

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Over the holiday weekend, when I wasn’t indulging in my Thanksgiving dose of tryptophan, I was digging into oil and gas reserve data.

Turkey and reserve disclosures share one thing in common—they both have the uncanny ability to put you to sleep.

My focus was on calculating Proved Developed (PD) Finding & Development costs.

For reference: PUD + PD = total reserves reported by a company. (I’ll delve into this further below.)

Proved Developed (PD) F&D is a more concrete metric for assessing how much a company spends to replace its reserves. It excludes PUD (proved undeveloped) reserves, where capital has yet to be committed in a meaningful way, and avoids the variability in PUD reserve measurements across different companies.

(1) The Permian has the lowest development costs in the non-OPEC world. This is the figure to watch because it sets the structural floor for oil prices.

Below, I rank the oily E&Ps and Integrateds based on their PD Finding & Development costs since 2010.

The Permian Basin has emerged as the most important non-OPEC source of supply, thanks to its status as the basin with the lowest development costs.

If you'd like a printable version, simply click the PDF link below.

Pd F&d

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In my framework, short-term price movements are driven by narratives around supply, demand, and inventory levels. However, over the long term, the cost of the marginal barrel becomes the key determinant for price.

This next chart is a bit dense, but bear with me. It builds on the above chart.