Looks like the Permian Basin is making a nice comeback.....
Permian Basin Revival
By: Richard Mason
September/October 2010
The last Permian Basin International Oil Show occurred just weeks after U.S. rig counts peaked in the heady days of 2008. Business was good, the outlook optimistic, and few, outside some grizzled old-timers, believed collapsing oil and gas prices were anything other than temporary.
The rest, as they say, is history. Within six months Permian Basin rig counts tumbled from 280 units to 76 active when the industry bottomed in May 2009. So this year’s PBIOS is likely to show business is good and the outlook optimistic once again in oil and gas.
You read that right. While it seems the entire oil and gas business is obsessed over the latest shale iteration, the plain old Permian Basin is arguably the hottest onshore market for oil and gas.
One big reason for that is a historic renaissance underway in the Permian Basin. The region sits in the sweet spot for two major trends. The first is the unusual circumstance of role reversal. The majors, long the dominant player in oil, are now focusing on shale gas while large independents, the pioneers of the modern shale gas revolution, are turning their attention to oil. For examples of the former, witness ExxonMobil’s $41 billion acquisition of XTO Energy in December 2009 as exhibit one. Exhibit two is Royal Dutch Shell’s $4.5 billion May 2010 acquisition of East Resources in the Marcellus Shale, followed by another $1 billion in land acquisitions in the Eagle Ford Shale of South Texas.
But the evidence piles up no matter where you look. Over the last two years, the European majors such as Total, Statoil, Eni and British Gas have executed several joint venture arrangements with U.S. independents to gain access to shale plays in Louisiana, South Texas, Pennsylvania and North Texas.
Joining the fray are players from Asia in the form of Mitsui E&P of Japan and Reliance Industries of India, who both now have a stake in the Marcellus Shale and, in the case of Reliance, in the Eagle Ford Shale as well.
According to Houston-based PLS, Inc., the U.S. is looking at more than $13 billion in foreign investment in U.S. shales that promises to keep rigs turning to the right in shale plays for years to come.
So it is notable that the U.S. independents who led the technological revolution creating the shale plays are now looking to become “liquids rich” in an industry transformation that is astounding in its breadth. In other words, while the majors go gas, the independents are turning to oil.
Secondly, the Permian Basin is witnessing the same downhole technological revolution that brought about the age of shales in the last half-decade. Only the technology target this time is oil, condensate and natural gas liquids.
Consequently, the Permian Basin is witnessing renewed leasing as companies such as Devon amass up to 700,000 acres, one-third of it over the last year. Devon is not alone. Cimarex, Chesapeake, EOG Resources and Anadarko Petroleum are on the prowl for Permian Basin leases.
Additionally, the region is witnessing a roll-up as oil and gas companies such as Concho Resources target smaller peers who have demonstrated success by exploiting new geological concepts.
At $8.4 billion year-to-date, the Permian Basin has witnessed more transactions on a dollar volume basis than any other onshore region except the Marcellus. Examples include SandRidge Energy, long a natural gas player in the West Texas Overthrust, who has tendered a bid for Arena Resources as the Oklahoma City independent attempts to increase accumulation in the Central Basin Platform. Arena found new ways to squeeze incremental barrels out of the San Andres/ Grayburg formation at shallow depths, meaning low well costs, low service inputs and quick payouts thanks to the magic of $70 oil. In all, SandRidge is spending $2.6 billion to consolidate the Central Basin Platform north of Odessa, including an $800 million purchase of legacy properties from Forest Oil in December 2009.
The second sweet spot involves getting more oil production through better downhole technology, such as the effort Pioneer Natural Resources is undertaking in the Spraberry Trend. The industry has known about Spraberry oil in the counties surrounding Midland for 70 years. Getting it out of tight formations in sustainable quantities is the challenge, leading old-timers to quip somewhat ruefully, that the Spraberry Trend, which ranks third in U.S. oil production, was the world’s largest uneconomic oilfield. Thanks to a combination of attractive oil prices and improved downhole techniques, the Spraberry is one of several bright spots in the pantheon of Permian Basin oil plays.
Pioneer, who has been attracting Wall Street interest for its Eagle Ford Shale holdings, garners less attention for its Spraberry ramp up where the independent is moving from zero rigs active in the summer of 2009, to 24 in August 2010 with 40 planned by 2012. Pioneer employs precision completions to exploit multiple formations in a stacked geologic play. Where operators formerly targeted four Spraberry intervals, Pioneer has increased that to six and will soon begin a program to deepen wells to tap additional targets. Hence, a representative Spraberry well that once yielded 40 BOPD, may soon yield up to 120 BOPD.
Less publicized perhaps is Occidental Petroleum, which has been the region’s number one oil producer following earlier roll-ups. The company has been a major player in CO2 recovery, which accounts for 58 percent of its Permian Basin daily production. Occidental has attracted attention of late because of new discoveries in some legendary long-lived California oilfields. Less attention has accrued to Oxy’s activities in the Permian Basin where the company acquired holdings from two dozen firms at a cost estimated to top $1.5 billion over the last year. Occidental manages 2.2 million acres in the Permian Basin where it produced 160,000 BOPD and 125 MMcfd in the first quarter of 2010.
Operators cry “wolf”
One doesn’t have to spend much time in the Permian Basin before discussion turns to the Wolfberry. The Wolfberry play lies along the flanks on both the east and west sides of the Midland Basin. Wolfberry is a combination target involving completions accessing oil and gas in both the Spraberry and the Wolfcamp formations — hence the name Wolfberry.
Long-time Midland independent Henry Petroleum was among the play’s early pioneers, employing horizontal drilling and fracture stimulation to obtain a mix of oil and gas.
Henry sold its original properties to Concho Resources for $565 million in June 2008, just before oil prices peaked. The deal provided Concho Resources a second anchor complementing its efforts in the Abo and Yeso plays on the New Mexico shelf. Since then the Wolfberry has attracted the likes of Mariner, Devon, Berry Petroleum and Callon Petroleum as independents jockeying for footholds in a play that requires horizontal laterals and fracture stimulation to generate up to 200 BOPD in new production.
It seems operators of all stripes are after Wolfberry action. Linn Energy, an E&P MLP, spent $395 million in 2010 acquiring Wolfberry assets in two transactions that added 3,750 BOPD and 25 MMbo in reserves to a business model that normally involves acquisition of mature properties and producing them at low cost to generate a steady income stream for unit holders. The fact that an MLP is involved in higher risk, higher cost exploration says a lot about industry confidence in the Wolfberry.
Similarly, many view Apache Corporation’s $3.9 billion acquisition of Mariner Energy as a deepwater story. But the reality is that Mariner had been acquiring Permian Basin acreage prospective for the Wolfberry for a couple of years. Apache, whose “acquire and exploit” roots stretch back more than 35 years in the Permian Basin, followed the Mariner acquisition with a separate $3.1 billion purchase of legacy Permian Basin properties as troubled major BP exited the region. That transaction doubled Apache’s Permian Basin holdings to 1.5 million acres with production of 93,500 Boepd along with 696 MMboe in proved reserves. BP’s properties include acreage in the nascent Bone Spring play along with bolt on additions to Mariner’s Wolfberry prospective acreage.
Now there is talk of extending Wolfberry wells deep enough to tap the Strawn formation, leading to yet another combination term — the Strawberry — that may
bring additional momentum to the Permian Basin.
Give a dog a bone
On the same day Apache bought BP’s Permian Basin properties, Concho Resources executed a $1.6 billion acquisition of Artesia independent Marbob Energy Corporation. The acquisition marked the debut of the Bone Spring formation as a major exploration target. Marbob had drilled 20 percent of the 250 Bone Spring wells extent in southeast New Mexico. The Bone Spring and associated Avalon Shale constitute the leading edge of industry attempts to fully exploit Leonard-era reefs and back-reef lagoons, which may hold as much as 28 percent of the original oil in place in the Permian Basin along with 32 percent of its natural gas resources.
The event was significant in that it called attention once again to how the oil and gas industry continues to uncover new opportunities in a region — the northern Permian Basin — that has produced 12.2 billion barrels of oil over eight decades. In August 2010, EOG Resources became the latest large independent to cite the Bone Spring/ Avalon as a target in its leasing campaign as the company joins peers among large independents seeking to become liquids rich in an oversupplied natural gas market. Of course, the liquid everyone wants is oil, which is why the Permian Basin continues to amaze in a world generally distracted by shale gas.
Permian Basin Facts
•The U.S. Geological Survey estimates the Permian Basin had an original base of 95.4 billion barrels of oil in place.
•Traditional oilfield methodologies have produced or discovered 33.7 billion barrels of recoverable oil and/ or reserves.
•Permian Basin oil production peaked in 1974 at 1.96 MMbopd
•Production fell to 841,000 BOPD in 2004
•As of 2005, the U.S. Geological Survey identified 49 active CO2 enhanced oil recovery projects from 35 Permian Basin oilfields, generating 170,000 BOPD.
•After reaching a low of 76 units in May 2009, Permian Basin rig count, at 300 units, edged above the 2008 peak in August 2010.
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