Unit operating costs in the oil- and natural gas-rich Permian Basin of Texas have risen significantly since 2004, with the average operating costs for gas fields up 45% to $1.35/Mcf, according to a study by Ziff Energy Group. Oilfield costs over the period climbed 34% to $10.42/bbl.
The Permian Basin, noted Ziff, remains the largest onshore U.S. oil-producing region, despite a steady decline in annual production since its peak 30 years ago in 1973. In the past five years, more operators have been focused on increasing gas production in the basin, both from shallow horizons (e.g., Sonora area), and deeper reservoirs (e.g., Ellenberger). The basin also is the most active center of carbon dioxide (CO2) enhanced oil recovery operations in North America and the world, with more than 50 such projects.
The Houston-based consultant’s study, conducted for six operators, is its sixth on the Permian Basin since 1996. The study assessed 134 fields (including 26 CO2 tertiary fields), examining operating cost data for the 12-month period from mid-2006 to mid-2007. The fields studied produce about half of the basin’s oil and a third of its gas, according to Ziff.
What Ziff discovered is that the oilfield cost increases were “in line with the oil price increase over the same period,” and the “leading” operators actually achieved average operating costs “below $6.50/bbl.” And even though the average operating costs in the gas fields rose, the “leading” gas field operators “achieved average operating costs of less than 80 cents/Mcf.” Ziff did not reveal which operators were studied in the basin.
Ziff noted a distinction between the oil and gas fields’ costs. “Unlike the oil price…the gas price has hardly increased, so gas margins are squeezed,” Ziff stated. “Part of the increase in average operating costs is associated with the large increase in commodity prices since 2004. Specifically…this happens via their impact on severance and ad valorem taxes, lease fuel and purchased energy. The remainder of the cost increases occur to what we call ‘core’ costs.”
Of all the oilfields assessed in the two previous studies of the Permian Basin, Ziff noted that only one was able to lower its unit costs between 2004 and 2006 (i.e., the reduction in total costs more than compensated for the cost impact of production decline). Operators, it said, are being challenged to control costs following a period of service cost inflation, compounding the impact of declining production.
The study also found that:
Since its last study in 2005, Ziff noted that the “evolution and restructuring” of producing assets has continued, such as Apache Corp.’s $1 billion acquisition of West Texas fields from Anadarko Petroleum Corp. last year (see NGI, Jan. 22, 2007).
Asset sales have also created opportunities for the entry of operators new to the basin, such as Loews’ acquisition from Dominion Energy of its Sonora gas assets (see NGI, June 11, 2007). Whiting Petroleum (with an $800 million Permian deal with Midland-based Celero Energy in 2005) and Arena Resources (with a $6.5 million acquisition of Permian properties in December 2007) are two other examples of independents with aggressive growth in the basin from acquisitions, Ziff noted (see NGI, Dec. 17, 2007).
According to Ziff, five of the six participants in the study are independents of various sizes, “reflecting increased awareness of and desire to improve costs among leaders in this vibrant sector.”
The 134 fields were grouped into seven oil asset groups and two gas asset groups for the benchmarking comparisons, so fields were compared realistically against “like kind” peers. Waterflood fields were compared based on the geologic formation produced, with higher well productivity fields compared separately from lower well productivity fields; CO2 flood fields were analyzed within a separate group.
Cost data was captured in 13 standard cost classifications, and participating companies received confidential, “blinded” asset-level comparisons of their fields’ performance to peer group fields.
“Our operations benchmarking methodology compares fields meaningfully against similar fields,” said Dean Donckels, manager of the Permian Basin project. “Trend analysis over time gauges participant’s performance managing costs in the face of declining production.”
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