The Resurrection of the Permian Basin
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The Permian Basin recently achieved a milestone that went almost unnoticed by many investors active in the energy sector. The rig count in this basin moved above 500 rigs during the second quarter of 2012, passing levels reached during the energy boom of the early 1980s. This is an extraordinary event for the Permian Basin, which was once disdained by many as a mature oil and gas producing area that had little value.
Bentek, an energy industry consultant, expects oil production from the Permian Basin to increase rapidly for the next five years and reach 1.62 million barrels per day by 2016. The Permian Basin, located in parts of west Texas and eastern New Mexico, currently produces 1.29 million barrels of oil per day.
Energen Resources (NYSE: EGN) has made a major effort to increase its position in the Permian Basin and has made six major acquisitions of properties here since 2009, boosting its position to 275,000 net acres. The latest purchase for Energen came in February when the company added 3,200 net acres for $68 million. Energen estimates that these properties have 50 drilling locations into the Wolfberry and plans to develop the acreage beginning in 2013. In 2012, Energen plans to spend $890 million on drilling and development, with approximately 95% of this capital destined for the Permian Basin.
Another exploration and production company with almost a singular focus on the Permian Basin is Laredo Petroleum (NYSE: LPI), which has 188,000 net acres in Texas. The company is targeting various formations here including the Cline Shale and all three sections of the Wolfcamp Shale.
Laredo Petroleum estimates that wells drilled horizontally into the Upper Wolfcamp will earn a rate of return ranging from 30% to 58%. This estimate is based on a $90 per barrel price for oil and lateral lengths from 4,000 to 7,500 feet.
One major difference between developing plays in the Permian Basin compared to ones in other resource basins in the United States is that many formations in the Permian Basin are economic to develop using vertical drilling.
Apache Corp. (NYSE: APA) is one of the operators developing properties in the Permian Basin with vertical drilling. The company is targeting many formations including the Wolfcamp, Wolfberry, Wolfwood, Strawn and Fusselman.
Apache estimates that a typical vertical well drilled into one of these formations will cost an average of $2 million to drill and complete and have an estimated ultimate recovery (EUR) of 144,000 barrels of oil equivalent (BOE). If the company is correct on these assumptions, it will earn a 27% rate of return for these vertical wells.
Another company developing some properties in the Permian Basin with vertical drilling is Concho Resources (NYSE: CXO), which has 750,000 net acres under lease here. The company estimates that it has nearly 1,600 vertical drilling locations into the Yeso formation in New Mexico.
Concho Resources is operating seven rigs in the Yeso as of August 2012, with three of these rigs dedicated to drilling vertical wells. The company was involved in 93 gross horizontal or vertical wells into the Yeso and Lower Abo plays during the second quarter of 2012.
Whiting Petroleum (NYSE: WLL) has a smaller development program in the Permian Basin and plans to spend $97 million, or 5% of its capital budget here in 2012. These funds will cover the drilling of 19 wells during the year. Most of the company’s acreage in the Permian Basin is located at the Big Tex prospect in Texas where Whiting Petroleum has almost 88,000 net acres under lease. The company is targeting the Upper Wolfcamp formation on this acreage.
The Permian Basin was once derided as a mature basin undergoing a perpetual decline in an energy world dominated by large national oil companies dangling international projects to desperate western oil companies. This conventional wisdom has been exposed as nonsense by an industry using technology to unlock oil and gas resources thought to be uneconomic.
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