The Permian Basin's Wolfcamp Delaware play is providing a handful of producers strong results and shows promise of being one of the most economic liquids-oriented unconventional plays around once it matures, according to an analysis by IHS.
Located in the western portion of the Permian, which straddles the Texas-New Mexico border, the Wolfcamp Delaware is a story of promise, potential and testing limits.
Unlike its more developed cousins, the Eagle Ford and the Bakken, the Wolfcamp still has some growing to do to be considered mature, according to the IHS Energy Wolfcamp Delaware Review. The Wolfcamp Delaware has some of the best normalized production of any U.S. onshore play, with average peak production of about 120 boe/d per 1,000 feet of lateral well drilled, which is nearly double that of the Wolfcamp Midland Basin average of about 63 boe/d per 1,000 lateral feet, according to IHS.
In the Central Gas and Southern Liquids sub-plays, two early sweet spots developing in the play, IHS said normalized productivity has increased by more than 40% since first quarter 2013. The Southern Liquids sub-play has had more activity, with nearly twice the producing horizontal wells of the Central Gas sub-play (127 wells and 60 wells, respectively).
"The Wolfcamp Delaware has promise, but right now it is considered an adolescent in terms of its maturity," said Reed Olmstead, manager of the North American supply analytics service at IHS Energy, and the principal analyst behind the analysis. "The sweet spots are still being defined because these normalized production rates have not shown signs of flattening, which means the limits of the play have not yet been fully delineated and operators are still learning how to best produce from this reservoir."
As of May, the IHS review said, there were more than 3,200 wells producing in the Wolfcamp Delaware, with nearly 75% of those drilled as horizontals. Of these 3,200 producing wells in the Wolfcamp Delaware, more than 475 began production since January 2014.
"Additionally, a very high number of operators, 150, have produced from the play to date," Olmstead said, "as compared to fewer than 90 operators in the Eagle Ford Shale. Despite that high number, you have just two operators who are dominant in the play: Concho Resources and Cimarex Energy, who are delineating and testing the limits of the various sweet spots and production streams of the play."
Concho has been active in the Southern Liquids sub-play, while Cimarex has been focused on the Central Gas sub-play. Economics for both operators in their respective sub-plays, IHS said, are sufficient for drilling through the pricing downturn, but future delineation and possible expansion might be halted until oil prices recover and/or costs fall even further.
As a result, IHS said it expects a good bit of movement as more operators enter the play and some, who lack quality assets, the financial stamina to wait for better breakeven prices, or those who don't consider the play core to their strategy, will exit.
"The [Wolfcamp Delaware] is a little bit constrained because when you look at a play like the Eagle Ford at this stage in its life, there were a lot more active operators," Olmstead told NGI's Shale Daily. "The way these plays take off is you have a lot of operators trying a lot of different things and learning from each other. The Delaware Wolfcamp is a little bit constrained because of the number of prominently active operators..."
"It's primarily due to the fact that the Permian Basin was developed so long ago that you don't have the incentive to drill to hold acreage because so much of the acreage is held already."
Despite being major operators in the play, Cimarex, Concho, Occidental Petroleum and Clayton Williams still have relatively low well counts in the sub-plays that are expected to drive future production, IHS said. Thus, while their well economics are representative of average historical returns, operators may be able to significantly improve their economics as the play is further delineated and developed.
"We're pretty aggressive on the economics," Olmstead said. "We think the main operators, Concho and Cimarex, both break even well below current prices on average. I have below $50/bbl breakevens for both of those. So the current market environment isn't really hindering the activity [in the Wolfcamp Delaware]; it's more of a risk and delineation issue than a pricing issue, delineating the acreage, making sure that you've got a good inventory of drill sites."
"Our long term view on oil is it won't be going back below $50 for any sustained period of time. So the economics are not what's challenging this play at all."
Additionally, oil patch costs have come down and are not expected by IHS to rise anytime soon. Operators will retain their pricing power over service providers "for the next couple of years," Olmstead said.
For those wanting to get into the Wolfcamp Delaware, Olmstead said they should be looking at operators holding acreage there now and see who ends up letting some of it go through high-grading activities.
"...[A]s opposed to a land grab that we had in the Eagle Ford back in 2009 and 2010...more has to do with how this acreage fits in a portfolio than just sort of a greenfield opportunity," he said.
"I think that as the call on U.S. production grows in 2016 and oil prices come back a little bit, there's really only one place in the U.S. that can rapidly respond to the demand increases and that's going to be the Wolfcamp Delaware and the Bone Spring, so combined, those two plays we're very optimistic on."
Olmstead mentioned the acquisition of Rosetta Resources Inc. by Noble Energy as giving the former a strong foothold in the Wolfcamp Delaware. Last month it was announced that Noble Energy Inc. would take over struggling Rosetta in an all-stock deal worth $2.1 billion plus debt assumption of $1.8 billion. Rosetta is active in the Eagle Ford Shale and Permian Basin (see Shale Daily, May 11).