Decline in Drilling Permits Points to Production Plateau

Evidence of the producer caution reflected during first-quarter reporting is beginning to show up in ways that could hint at longer term planning.

Drilling permits submitted to the Texas Railroad Commission in April declined from March and as much as 20% since January in the Permian Basin. But in just a few more days, the May numbers will reveal if the drop-off is a trend.

“Generally, if I am trying to judge the E&Ps’ attitude or sentiment, I'll look at the submitted date because the Railroad Commission gets to [them] on their own pace,” said Mark Chapman, senior vice president for OFS Intelligence at Enverus.

Historically, activity metrics dive during November and December, accounting for U.S. holidays. In December 2023, the Texas permit submission total was 579. It was the lowest figure in two years, Chapman said. But last month’s total of 570 brought the state’s permit submissions tally closer to a four-year low of 550 set in February 2021.

The decline in Texas reflects a trend that’s unfolding across North America. Macroeconomic fallout from U.S. President Donald Trump’s tariffs and trade are on a collision course with ongoing geopolitical concerns, the caprice of OPEC+ and a tug on oil prices. The net effect on U.S. producers is caution, which may slow the roll of crude production for years.

Of the permits submitted this year throughout North America, March peaked at 1,639, following February’s 1,555. But in April the trajectory changed, declining by 13 in April, Chapman told Hart Energy.

The pattern offers some insight into how producers are looking at drilling plans for the next 18 to 24 months, he said. But not all permits that are filed and approved will necessarily lead to drilling.

“It is easy—it's very cheap—to have plenty of permits filed and ready to go so you have options at the same time,” Chapman said.

“It is a signal that the operators are a little more wary, but it's also a signal that the sky isn't falling and they're not going to go to zero activity either; they're still submitting.”

Active rig numbers are coming down, too.

“But it’s not super dramatic either.”

Whether it’s an anomaly or the beginning of a real industry slowdown will be clearer in the coming days, when the final tally for May is released.

“If we start to see month over months where it's really suppressed to levels that we haven't seen during this upcycle, then I think that that's really telling for the long-term activity levels,” Chapman said.

Evidence of a recalibration in producers’ drilling plans was abundant during earnings season. Chief executives of the largest U.S. E&Ps tempered expectations for the rest of 2025 as they reported on their first-quarter performance in April and early May. Companies including Diamondback Energy, EOG Resources, Occidental Petroleum and Coterra Energy have already initiated reductions in both capital spending and rig activity.

Still, the general feeling isn’t one of widespread panic at this point.

EOG Resources is cutting its capex at its guided midpoint by $200 million and reducing its rig count by three. Nevertheless, leadership anticipates ending 2025 with some year-over-year growth, chairman and CEO Ezra Yacob said.

Modest, incremental reductions during the first quarter came sooner than analysts anticipated and will have little impact on 2025 production numbers, said Nitin Kumar, a senior equity research analyst at Mizuho Securities, in a note to investors on May 23.

“Depending on the duration and severity of any further oil price deterioration, the bigger potential impact to production will be for 2026,” Kumar said.

“The sector seems to be in no man's land. Oil prices have weakened, but at ~$65/bbl (Brent) QTD [quarter to date] average, are not in distressed territory. Rhetoric on tariffs/recession is easing, but supply is likely to increase (OPEC+ tapering, Kazakhstan volumes, offshore projects) putting pressure on stocks.”

Self help

Diamondback Energy’s outgoing CEO Travis Stice sounded an alarm for oil-weighted interests on May 5 in his quarterly letter to shareholders.

“We believe we are at a tipping point for U.S. oil production at current commodity prices,” Stice wrote.

“On an inflation-adjusted basis, there have only been two quarters since 2004 where front-month oil prices have been as cheap as they are today (excluding 2020 which was impacted by the global pandemic).”

Diamondback estimated that the U.S. frac crew count had dropped 15% since January. In the Permian Basin, the decline was closer to 20% from the beginning of the year.

“As a result of these activity cuts, it is likely that U.S. onshore oil production has peaked and will begin to decline this quarter,” Stice wrote.

Most of producers’ first-quarter cuts were part of a corporate “self-help” cycle designed to recoup cash following a whirlwind of M&A and continue the industry’s ever-present pursuit of lower break evens, Kumar said.

But regardless of the motivation, finding a plateau or even reductions in North American oil production this year might be a prescient strategy.

“Softening global demand driven by macroeconomic volatility, accelerated return of curtailed OPEC+ volumes and resilient non-OPEC supply could lead to an oversupply of ~1.1 MMbbl/d by YE2025,” Kumar said, adding that the imbalance should moderate through between next year and 2027.

Mizuho is lowering its oil price outlook for the next 12 months between 10% to 11% as accelerating oversupply likely overshadows any stabilization of demand; at the same time, the firm is raising its U.S. natural gas price forecast by some 15% as structural undersupply continues.