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Permian Surges on Innovation, Prices

Ten years ago the Permian Basin, first drilled nearly a century ago, was considered passe for oil and gas exploration. Today, however, a new generation of explorers and midstream operators has made the basin one of the hottest tickets on the reservoir circuit and there are no signs that the lights will be dimming anytime soon.

The massive stretch of prairie land straddles more than 50 counties in West Texas and southeastern New Mexico in an area about 250 miles wide and 300 miles long. The basin and its subbasins of tight sands and shale, stacked on top of one another, contain thick deposits of rocks that have squeezed out more than 40 billion bbl of oil since wildcatters first tapped into reservoirs. For today's explorers, there's never been anything like the rejuvenated Permian, which has come out from down under through technology, innovation, and oh yes, oil prices.

Today hundreds of old and new companies are ramping up activity in the area nearly 100 years after the first commercial Permian oil well was drilled and completed to a depth of 2,498 feet in 1921 in Mitchell County, TX. Production reached a peak of about 715 million bbl in 1974 before starting on a 30-year decline to a low of 307 million bbl in 2004. Production is again climbing with the Texas portion alone reaching 284 million bbl in 2011.

The Texas Permian accounted for about two-thirds of the state's 437 million bbl of crude oil output in 2011, and about 17% of the total 2 billion bbl of U.S. oil production, according to University of Texas of the Permian Basin statistics.

A good indication of activity is in the number of new drilling permits issued. Last year the Railroad Commission of Texas (RRC) issued 9,347 new drilling permits for Permian Basin operators, well ahead of 2010, when it issued 6,928 and triple the 3,369 issued in 2009. About 133,000 total wells in the Texas Permian are on the RRC proration schedule, a list of wells that are on schedule to produce and on which operators submit monthly production reports to the commission. About 22,000 are listed as active injection/disposal wells and 82,000 of which are listed as active producing wells.

An estimated 439 drilling rigs were working the Permian for the week ended July 13, 2012. Those 439 rigs represented 23.2% of the total rigs drilling in the United States at the time, a figure that is significantly higher than it normally is this time of year. NGI took a look back at the historical Permian rig count over the last 10 years, and from 2002-2010, the Permian rig count represented 11-15% of the total U.S. rig count for the second week of July.

The George Mitchell-led horizontal drilling/hydraulic fracturing (fracking) combo that turned the North American natural gas markets upside down got twisted about in the conventional Permian play, demonstrating how technology and engineering reign supreme.

Innovations in the venerable Spraberry oilfield, a conventional play in the Midland, TX, area are a prime example of how everything old has become new again. Conventional wells for decades typically were drilled straight down into one or two zones. However, operators began to experiment with their drilling techniques, still drilling their conventional wells but with a twist: adding multi-stage fracking techniques.

In unconventional drilling, horizontal laterals may be drilled up to 8,000 feet, with several fracking stages along the way. Conventional verticals can be drilled deeper, possibly opening up more oil and gas zones, which may be fracked several times. The wellbores in some Spraberry wells have begun to look more like the lateral section of a horizontal. As tight reservoirs were combined and commingled through staged fracking in the vertical drilling, the Spraberry commingled with the Wolfcamp formation to become the "Wolfberry" and the Bone Spring became the "Wolfbone."

Unconventional drilling techniques also have opened up tight formations in the rich shale on the western edge of the basin. The Delaware subbasin's Avalon, Wolfcamp and Bone Spring shales straddle land near Hobbs, NM, and four West Texas counties. Today the three formations are a big target for unconventional oil and NGLs.

Apache Corp.'s John Christmann, regional vice president of the Permian Basin division, began to put people on the ground in the Permian area in May 2011. The producer's workforce in a year's time has grown from 345 to close to 800. Apache's leasehold is considered the second largest behind Occidental Petroleum Corp.

"In 2010 we were running five rigs," Christmann said in June. Today Apache is running around 34 rigs, almost a seven-fold increase over a two-year period. Two years ago the company had drilled 20 horizontal wells, mostly in the Central Basin; today it's drilled more than 120. The total well count has tripled to almost 760 from 263.

"I tell you, the more we work these assets, the more excited we get," Christmann said. "Everything is working technically, and there are more and more horizontal candidates coming at us from all different locations. So today we see 35,518 [drilling] locations" versus about 5,000 when he arrived a year ago. "When you look at that, we do know there's a lot behind us and there's a lot underneath us."

The Permian "could be the most incrementally impactful trend" for the exploration and production (E&P) sector over the next five years, which means there's a big need to get incremental infrastructure up and moving, according to U.S. Capital Advisors LLC (USCA).

Today at least $5 billion of new infrastructure projects have been announced and more are likely to be launched over the coming months. As a companion report to a recent one by USCA on the Permian's exploration and production activity (see NGI, June 12), analysts Becca Followill and James Carreker took a deeper look at the infrastructure needs for natural gas, oil and natural gas liquids (NGL) operators in the basin to determine what's going to be needed as production continues to ramp up in various parts of the play.

USCA's report, which overlays forecasts of hydrocarbon production against current and planned infrastructure, also provides maps and summaries of companies' regional assets. The big infrastructure needs are for crude oil and natural gas liquids (NGL), according to USCA analysts. Infrastructure for crude oil is "tight" and will be until early in the second half of 2014, when four "major" pipelines, new or expanded, are to more than double takeaway capacity from its current 725,000 b/d. New capacity is expected to eliminate bottlenecks through 2018.

Oil gathering infrastructure still will be lacking in some of the wide open prairie, said Followill. "Generally, drilling is occurring in areas with established infrastructure, but we identified several significant areas of activity with little or no pipeline infrastructure."

NGL pipeline capacity also is squeezed. Two systems now being built should add 400,000 b/d of capacity by the second half of 2014. "Both are expandable, so we don't see additional projects announced," said Followill.

Don't look for any new natural gas pipeline projects in the near-term, but gas processing expansions are a possibility. Gas production peaked at around 9.5 Bcf/d and today it's about half that.

"Permian gas production is down 50% from the early 1970s highs, so plenty of capacity abounds," said Followill. Gas processing capacity in aggregate appears to be sufficient at around 4 Bcf/d, "but with the Permian spanning 10 million acres, it's all about location and plant vintage. Look for more processing to be announced." USCA is estimating another 1 Bcf/d will be needed down the line.

Federal Reserve Bank of Dallas economists Robert W. Gilmer and Jesse B. Thompson III said in June moving NGLs to the 1 million b/d market on the Gulf Coast has posed the "greatest problems" for basin growth. However, with its "rich infrastructure in place,"the basin "enjoys the advantage of expanding on existing transportation systems rather than starting from scratch." New gathering systems and fractionation capacity is under way in the Avalon shale, with a rail terminal and several pipelines under construction that would move product to Houston, they said.

The Permian Basin's "tight labor markets are the stuff of legend," said the economists. Finding workers in the Delaware subbasin was difficult "before the shift to shale began and they remain so." The labor shortages "in the lucrative oil sector drive local wage increases, leaving other segments to compete for workers." The "frenetic activity level is increasing," said the economists. While overall drilling activity in some unconventional plays may have "cooled in recent months, the Permian Basin has picked up the pace."

Lease auctions in New Mexico and Texas point to heightened interest in the Permian. On Wednesday, July 18 a lease auction conducted by the U.S. Bureau of Land Management's state office in Santa Fe, NM, resulted in bids on 14 parcels in New Mexico that brought in more than $25.6 million and 15 parcels in Texas that attracted $2.7 million. The highest bids all were for New Mexico parcels in the Permian Basin.

Charles D. Ray of Midland, TX, offered to pay a total of $10.08 million for an 800-acre parcel of land ($12,600/acre) in Lea County, NM. Adventure Exploration Partners II LLC of Midland bid almost $7.3 million total for 640 acres with an $11,400/acre bid for some New Mexico Permian acreage. The third-highest bid of $2.11 million was made by Midland-based Marshall & Winston Inc. for 319.7 acres at $6,600/acre.

The land auctions by the Texas General Land Office (GLO) over the past couple of years also show where the money is being spent. A GLO auction in April 2011 brought one bid of $9.9 million: $3,264/acre for 30,000 acres, which compared with an average bid of $906/acre in the same area just six months before.

This past April the GLO auction brought no bids close to the $9.9 million bid, but GLO tabulated high bids for several Permian leaseholds: $456,000 on 80 acres (Heritage Land Services LLC); $397,680 on 240 acres (Double Nickel Oil and Gas LLC); $367,200 on 240 acres (LE Norman Operating LLC); $324,800 on 320 acres by Magnum Operating LLC; $210,000 on 120 acres (Comstock Oil & Gas); $202,080 on 80 acres (Permian Basin Land Associates Inc.); $200,160 on 160 acres (Clayton Williams Energy Inc.); and $189.571 on 151.5 acres (Double Nickel). Several went for more than $100,000.

According to analysis conducted by NGI's Shale Daily, there are 439 rigs operating in the Permian currently. The top five operators are Apache with 34 rigs, COG Petroleum with 33 rigs, Occidental (32 rigs), Pioneer Natural (30 rigs) and Cimarex Energy (14 rigs). The top five contractors in the basin are Patterson-UTI Energy (48 rigs), Helmerich & Payne (32 rigs), Nabors Drilling (26 rigs), Capstar Drilling (19 rigs) and Big Dog Drilling (18 rigs).

For information on NGI's Unconventional Rig Count data, including the full listing of operator- and contractor-level rig counts in each basin, email a request to analytics@shaledaily.com.

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