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US oil producers face new challenges as top oilfield flags

Shariq Khan and Georgina McCartney  Thu, March 27, 2025

NEW YORK/HOUSTON (Reuters) - U.S. oil producers are grappling with geological limits to production growth as the country's top oilfield ages and produces more water and gas and less oil - and may be nearing peak output.

The Permian basin was the centerpiece of the shale revolution that began nearly two decades ago and spurred the U.S. to become the world's top oil producer, stealing market share from the Organization of the Petroleum Exporting Countries (OPEC) and other top producers.

Slowing output growth and rising costs would make it difficult for oil producers to pump more and bring down oil prices to consumers, as envisioned by U.S. President Donald Trump in his "drill, baby, drill" mantra.

The Permian is pumping 6.5 million barrels per day (bpd), a record level and nearly half the all-time high 13.5 million bpd of crude that the U.S. produced in December.

But the Permian is flagging. Since the widespread introduction of hydraulic fracturing, the technique that enabled the shale revolution in the mid-2000s, thousands of wells have perforated the Permian and fractured the rock to extract oil and gas.

Relentless drilling to reach record production has exhausted the core of the Permian's two largest sub-basins: nearly two-thirds of the Midland formation's core has been drilled, and slightly more than half in the Delaware formation, according to data from analytics software company Novi Labs.

"We've never been in a position before where we were on the back-half of the inventory story of the Permian basin," Novi Labs head of research Brandon Myers said.

That has rung alarm bells across the industry, as drilling in the fringes of the basin, on lower-quality prospects, means less oil output and more water and gas. At conferences and on earnings calls, analysts and executives are discussing the issue with a growing sense of urgency.

"We think that between 2027 and 2030 it's likely that the U.S. will see peak production, and after that some decline," Occidental CEO Vicki Hollub said earlier this month at an industry conference in Houston.

Harold Hamm, founder of shale producer Continental Resources and a key figure in the U.S. shale boom, agrees. He said at the same conference that U.S. oil production is already beginning to plateau.

For now, output is still rising.

Shale executives expect oil output growth from the Permian to slow by around 25% this year to 250,000 to 300,000 bpd. The government estimates higher growth, of about 350,000 bpd, but even that would be the smallest increase in the basin's oil output since the COVID-19 pandemic.

TAPPED OUT?

Producers are dealing with rising levels of water and gas per barrel produced, which is slowing growth and driving up costs.

In the past decade, gas output in the Permian has increased eight-fold, while crude production rose six-fold, according to a review by the U.S. Energy Information Administration.

The gas-to-oil ratio (GOR) has risen steadily from around 3,100 cubic feet of natural gas per barrel of oil produced (cf/b), or 34% of total production in 2014, to 4,000 cf/b, or 40%, in 2024, the EIA said.

The EIA classifies wells with a GOR of more than 6,000 cf/b as gas wells, not oil wells.

Energy companies market the gas. But that raises costs - they must treat it, and build or lease space on pipelines to deliver it.

The Permian's geology adds another layer of complexity: drilling in the basin on average produces four barrels of water for each barrel of oil, while in other basins the ratio is closer to one-to-one, oilfield water analytics firm B3 Insight data showed.

The water-to-oil ratio can rise to as high as twelve-to-one from wells drilled in the fringes of an oilfield, said Christine Guerrero, a veteran petroleum engineer who is a strategic advisor to asset manager Octane Investments.

"The Permian is much of a water and gas business with oil as a secondary product there," Chris Doyle, CEO of Civitas Resources, one of the newest entrants to the Permian basin, said on the company's fourth-quarter earnings conference in February.

Producers dispose of the water by pumping it back into the ground, but regulators in recent years have cracked down on reinjection due to its links to increased seismic activity.

The issue has not yet forced producers to abandon drilling plans, but will ultimately drive costs higher, said Shannon Flowers, director of crude and water marketing at producer Coterra Energy.

"There are only so many places to drill, inject and frac, and as that goes down, you still have to find a home for the rest of your produced water," he said.

At a four-to-one water-to-oil ratio, that translates to water disposal costs of about $2 for each barrel of oil produced in the basin. At 12-to-1, it would be nearly $8 a barrel.

Breakevens to drill a new well in the Permian averaged $65 a barrel in 2024, up $4 on the year, according to the Federal Reserve Bank of Dallas.

Less desirable acreage breakevens can hit $96, per Novi Labs, some $26 above where a barrel of crude is trading.

NEVER BET AGAINST THE PERMIAN

The shale revolution has beaten expectations for growth again and again as new techniques and technologies allowed producers to wring more oil out of the same rock.

Now, executives are talking about the potential for artificial intelligence to cut drilling costs further and fuel new gains in production.

The Permian has produced more than could ever have been imagined when the first well was drilled more than a century ago. Conventional production peaked in the 1970s, nearly 30 years before the shale revival.

Even as producers face higher gas and water output, the sheer volume of oil they can pump justifies production, said Clint Barnette, director of geology at Indigo Energy Advisors, a unit of advisory firm Efficient Markets.

"It's how the Delaware basin stays economic even though those wells produce six to seven times the amount of water as they do oil," he said, referring to the Permian's second biggest sub-basin.

Producers such as Chevron and Coterra have been recycling their produced water for future fracking, helping to reduce transportation and other disposal costs.

And in mid-March, the Environmental Protection Agency (EPA) said it will look into ways to ease recycling of produced water for artificial intelligence data center cooling, irrigation, fire control, and other needs.

"I would never bet against the Permian," Barnette said.

(This story has been refiled to correct the analyst quote to say 'Permian basin' in paragraph 7)

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