ExxonMobil Corp. and Chevron Corp. proved during the second quarter that it’s possible to turn a profit even at stagnant commodity prices. In the U.S. onshore, there’s no better place today to work than in the Permian Basin, where their rig counts are rising along with production.
Chevron’s upstream chief Jay Johnson last Friday offered a Permian primer for investors during the second quarter conference call. The San Ramon, CA-based operator today has its onshore focus strictly in West Texas.
“We're investing for value,” Johnson said of the legacy play, “applying technology and learning from others to drive capital efficiency,” such as using seismic data to detect variations in the properties of reservoirs to identify the optimal areas.”
Data analytics optimize horizontal well placement and well spacing decisions, “to keep the well path within the most productive depth, often within a 10-foot interval,” he said. As well, an integrated operations center supports Permian field personnel, who have access to real-time, operational data on mobile devices.
Chevron has 13 rigs in operation, with plans to add a rig every eight to 10 weeks, with 20 operated rigs expected by the end of 2017.
The real key in all this is effectively applying the technology to deliver better outcomes,” Johnson said. We also learn by watching others.”
Chevron’s unconventional Permian business is making money, despite stagnant commodity prices. The unit generated positive after-tax earnings for the first half of 2017.
“At actual 2017 oil, gas and natural gas liquids prices, our year-to-date operating cash flow per barrel is approximately $20 and is accretive to Chevron's overall portfolio,” Johnson said.
“Second, our unit development and operating costs are competitive and declining...Cost reduction progress has been encouraging, and we are increasingly competitive. And third, the Permian is an attractive place to make future investments. We estimate...that our 2017 investments in the Permian, fully loaded with overhead, will generate greater than 30% returns at a $50/bbl West Texas Intermediate price.”
Today Chevron is managing the Permian portfolio through acreage swaps, joint ventures, farm-outs and sales. To date it has identified 150,000-200,000 acres in the Midland and Delaware sub-basins to generate “immediate value,” Johnson said.
“A recent transaction effectively more than tripled the value of our acreage simply by enabling longer laterals. Generally, the highest value transactions are swaps to core up acreage and enhance value through long laterals and other infrastructure efficiencies."
This year to date Chevron already has completed seven transactions and has grouped the remaining acres in packages that are being marketed.
“Production continues to track ahead of expectations as we continue to see efficiency gains and improved well performance,” Johnson said.
During the second quarter, Chevron’s Permian output was 178,000 b/d, about 44,000 b/d higher year/year. The company’s compound annual growth rate expected in the Permian is 20-35%, “and we’re currently near the top end of that range,” Johnson said.
ExxonMobil Eyes Delaware Growth
During a second conference call last Friday, ExxonMobil’s investor relations chief Jeff Woodbury also singled out the Permian during his prepared remarks.
ExxonMobil today has 16 operated rigs in the Delaware and Midland sub-basins combined, and expects to reach 19 total rigs by the end of August.
Besides working in the Midland, ExxonMobil is upping its game in New Mexico, where it spud its first well in newly acquired Delaware sub-basin acreage, a 12,500-foot lateral section. ExxonMobil also is expanding its midstream capabilities in the basin through partnerships, including its recently signed agreement with Summit Midstream Partners LP.
“Strong drilling and completion execution in the Midland Basin has to date yielded unit development costs of about $7/bbl oil,” Woodbury said. “We've been steadily increasing our Permian drilling activity through 2017.”
Current net production from the Midland is more than 165,000 boe/d, an increase of 20% from 2Q2016.
“Despite growing industry activity in the Permian, we have successfully offset inflationary pressure through increased efficiencies and higher recoveries per well,” he said. “And this includes, amongst other factors, a continuing reduction in drilling days and cost per foot, as well as further improvement in completion designs.”
As Delaware development progresses, “we anticipate extending lateral lengths, including leveraging our learnings from our recent completion of Bakken horizontal wells of over three miles,” Woodbury said.
Estimated unit development costs for the full northern Delaware acreage today are around $5-7/boe.
“Despite growing industry activity in the Permian, we have successfully offset inflationary pressure through increased efficiencies and higher recoveries per well,” Woodbury said. “And this includes, amongst other factors, a continuing reduction in drilling days and cost per foot, as well as further improvement in completion designs.”
Drilling longer wells “is in our wheelhouse,” with the potential to drill up to 20,000-foot laterals, Woodbury said. “It's all about leveraging our technology to achieve these types of aspirational objectives.”
He used a couple of data points to illustrate his point. “One is, we've got very strong success with our drilling execution. We've got a number of execution processes that allows us to fully analyze the physics associated with drilling that allows us to overcome some of the impediments to be able to achieve those types of outcomes.”
Like Chevron, ExxonMobil has taken its learnings from other unconventional plays and applied them to the Permian. Already drilled three-mile-plus Bakken Shale wells have “allowed us to really inform ourselves, and that's all been integrated real-time into our ongoing...unconventional drilling program, but notably in the Permian,” Woodbury said. “So it's a very strong focus on thinking about what are those limiting factors, and how do we push it out even further.”