*

Slowest Permian oil output growth forecast since pandemic

*

Permian slowdown in contrast to Trump's 'drill, baby,

drill'

mantra

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Gas and water output rises as the field ages, increasing

costs

*

Gas-to-oil ratio rises as gas output up eight-fold in past

decade

*

Water-to-oil ratio already high at Permian's core, even

higher

in the fringes

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Breakeven costs rise $4 to $65/bbl last year

*

Recycling water for fracking, cooling data centers may

lower

costs

By Shariq Khan and Georgina McCartney

NEW YORK/HOUSTON, March 27 (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 a burning 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 ( CIVI ), 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 ( CTRA ).

"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 ( CVX ) 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.