Devon Energy Corp. is increasing its oil-directed drilling this year across the Permian Basin and in the emerging Mississippian Lime as it continues its transition from a natural gas heavyweight, CEO John Richels said Tuesday.
The Oklahoma City-based operator, which has been streamlining its portfolio to focus on oily targets, today holds an estimated 3 billion boe of proved reserves and is producing roughly 680,000 boe/d. The company still is 61% weighted to gas, but last year oil output jumped 20%.
That's a trend that the company's management wants to continue, Richels told the audience at the Independent Petroleum Association of America's 19th Annual Oil and Gas Symposium. In 2011 and 2012 Devon had no dry gas activity in North America. Expect none this year as well.
All of 2013's capital expenditures are allocated to oil and natural gas liquids (NGL) projects. Nearly 90% of spending is directed to development, with 7% for exploration and 3% for leasehold capture. That compares with 2012 spending that focused 75% on development, 17% on leasehold capture and 8% on exploration.
The difference in spending can be traced to the joint ventures that Devon secured last year, which came at a particularly vulnerable and opportune time.
Sumitomo Corp. bought a 30% stake and agreed to pay for some drilling costs in Devon's 650,000 net acres in the Permian Basin's Cline and Midland-Camp shales (see Shale Daily, Aug. 2, 2012). Sinopec Group paid $2.2 billion and is paying a drilling carry for stakes in the Tuscaloosa Marine Shale, Niobrara formation, Mississippian Lime, Utica Shale and Michigan Basin (see Shale Daily, Jan. 4, 2012).
The big investments reduced capital investments as Devon was attempting to deal with a multitude of challenges, Richels noted.
"We certainly faced challenges during the year, with over 90% of our output impacted by weak price realizations, Canadian oil differentials, low natural gas prices and a drop in NGL realizations at mid-year," Richels said.
The "shifting to a more oily profile, a focus that leads us to lower natural gas production, was the right thing for us to do. We're not chasing molecules. We're putting rigs where we can make money."
Dry gas holdings in the Haynesville/Bossier, Carthage and Groesbeck plays in Texas and Louisiana, the Rockies' Powder River and Washakie, and Canada's Horn River Basin and Deep Basin will wait for higher prices as the transition continues to more oily drilling.
The biggest target is the Permian Basin, said the CEO. However, there are plums to be picked across North America.
Devon is using unconventional techniques to flush oil from tight Rockies formations. Likewise, the Barnett Shale now has become a liquids haven, as have the Cana Woodford Shale and the Granite Wash.
In Canada, heavy oilsands growth lifted Jackfish production 37% year/year, and development also is underway at Pike, the Ferrier Corridor and in Deep Basin liquids targets.
Total oil production in 2013 is forecast to grow in the "mid-teens," with U.S. growth rate roughly 40%, said Richels.
"We are concentrating our capital in oil-driven development projects," with "accelerated" drilling in the Permian Basin and reduced activity in liquids-rich gas regions.
Drilling carries from its partners are to be used to minimize exploration costs and to further derisk the promising Mississippian acreage and increase Permian exploration activity.
The plan is expected to pay off. In 2006 Devon produced about 66,000 b/d of oil. In 2012 it produced 146,000 b/d of oil. This year oil production is expected to hit 169,000 b/d.
The top target, the Permian Basin, is to capture $1.5 billion in spending this year. The massive leasehold has a net risked resource estimated at 2.8 billion boe with around 8,000-plus drilling locations, Richels said. With 1.3 million net acres across the basin from which to pick and choose, activity will target "several play types."
Twenty-nine rigs are slated to be in operation and more than 300 wells are scheduled to be drilled. The company currently has 19 rigs in the play according to SmithBits data.
Oil development projects in the Permian are planned in the Bone Spring/Delaware formation, where the company has about 185,000 net acres. Plans are to drill 100 wells, which would more than double the 2012 inventory. Net output in 4Q2012 was 20,000 boe/d, 65% weighted to oil.
In the Permian's Wolfberry trend, 80 wells are planned on 160,000 net acres. Conventional drilling is to exploit Central Basin targets in the Tubb, Wichita-Albany, Strawn and Clear Fork formations.
Holding "strong" potential is the Mississippian Lime, where Devon is drilling for light oil on its 600,000 net acre position. On initial strong drilling results, the company plans to up the rig count to 15 operated rigs, with the potential to add five more by year end. According to SmithBits data the company currently has 12 rigs in the Mississippian Lime.
"Early results were in line with expectations," said Richels. "We expect 3-D seismic to enhance results." Devon has 60 wells awaiting completion and 400 more wells are planned this year. Early forecasts are for 10-15% production growth this year.
"We have a deep opportunity of repeatable opportunities," said Richels.
Devon's 260,000 net acres in the Cana-Woodford hold an estimated 11.4 Tcfe, with 5,400 risked locations, Richels said. The leasehold had 326 MMcfe/d net production in 4Q2012, up 31% year/year, with 18,000 boe/d of oil and NGL output.
"We have a significant undrilled liquids-rich inventory" with about 3,000 locations, noted Richels. Plans are to drill 150 wells this year. Devon currently has 14 rigs in the play.
With more liquids production slated, Devon plans to expand processing services in the Cana-Woodford, adding about 30,000 b/d of NGL capacity by mid-year.
Devon still has 620,000 net acres in the venerable Barnett Shale, which produced 1.4 Bcfe/d, including 48,000 boe/d of liquids, in the final three months of 2012. Because of low NGL prices, the rig count was reduced to six in the first half of this year, and plans are to drill about 150 wells.
To pay for its expanded drilling program elsewhere, the company is selling Utica Shale properties in eastern Ohio (see Shale Daily, Feb. 4). "Nothing is off the table," Richels has said.
In addition, Devon is contemplating a midstream master limited partnership. This year it is spending close to $1 billion on its midstream assets, and by spinning them off, it could create more value in the exploration portfolio, Richels noted.
"We are leaving no stone unturned in an effort to bring value forward...Whatever we do will be for the long-term."