Two Permian Plays Draw Increased Attention

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Two emerging Oil & Gas plays in the Permian Basin of West Texas hold significant production potential, but a recent forecast of lower prices for West Texas Intermediate (WTI) crude oil may limit the ability of highly leveraged producers to exploit that resource.

"People in the Oil & Gas business tend to be enthusiastic by nature--the glass is always half-full. When you're in the middle of developing a play, the view is always great," remarked Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "It's only after the fact, after prices rise or fall, that you can go back and say if you were too optimistic or pessimistic."

"Advanced technology and high prices have combined to dramatically increase U.S. crude-oil production in recent years," Davis continued. "Are we at the top of the market? We'll know for sure in six months or a year. Right now, it doesn't look like it."

Davis said he's seen no slowdown in enthusiasm for two emerging West Texas plays--the Bone Spring and Wolfcamp--that lie on the eastern edge of the Permian Basin. "There are a lot of benefits to operating in or near the Permian: There's an established Oil & Gas infrastructure and a plentiful supply of skilled craft labor. Demand for crude oil is high, and prices remain high by historic standards. But until U.S. law is changed, domestic producers are unable to export their crude oil to overseas markets, which imposes a bit of a price penalty on producers."

Click on the image at right for a depiction of different Oil & Gas plays in the Permian Basin.

Industrial Info's experts will be on hand to discuss strategic trends and project spending in the North American Oil & Gas industry at the upcoming 2014 Industrial Market Outlook executive briefing in Houston on January 29. Registration is complimentary but an RSVP is required.

Once thought to be mature, the Permian's crude oil production has grown sharply in recent years through the application of horizontal drilling and hydraulic fracturing. Crude oil production from all parts of the Permian Basin is projected to reach about 1.37 million barrels per day (BBL/d) this year, up from about 425,000 BBL/d in 2008, according to the U.S. Energy Information Administration (EIA), the statistical and analytic branch of the U.S. Department of Energy (DoE) (Washington, D.C.).

But in a separate report, released earlier this month, the EIA projected WTI crude oil prices will fall by about $4.50 per barrel this year--to about $93.33--and another $4 per barrel, to $89.58, in 2015. These annual average price projections are contained in the EIA's Short-Term Energy Outlook, released January 7. In that report, the agency said U.S. crude oil production averaged about 7.5 million barrels per day (BBL/d) last year, an increase of 1 million BBL/d from 2012. The EIA predicted domestic crude oil production will increase to about 8.5 million BBL/d this year and 9.3 million BBL/d in 2015. If the 2015 production estimate is attained, the EIA said, it would be the highest level of domestic crude-oil production since 1972.

Click on the image at right for historic and projected prices for WTI crude oil.

Strong domestic demand for crude oil pushed up WTI prices in the years leading up to the Great Recession of 2007-08. WTI fell by $40 per barrel during that recession, but gradually rising demand has brought the price back to pre-recession levels.

Energy consultants at Wood Mackenzie Group (Edinburgh, Scotland) say two plays in the Permian Basin--the Bone Springs and the Wolfcamp--could account for up to 1 million barrels of oil equivalent per day (BOE/d) by 2018, as long as the necessary capital is supplied and the industry is able to successfully decipher the riddles posed by the area's stacked plays.

Under the right conditions, production from the Bone Spring play could more than double, to 600,000 BOE/d, by 2018, and 70% of that will be crude oil and natural gas liquids (NGLs), Wood Mackenzie upstream analyst Benjamin Shattuck wrote in a report released last year. He added that the Wolfcamp has "moved out of its pilot phase and into full-scale development," which is expected to reach 400,000 BOE/d by 2018. If the two plays produce a total of 1 million BOE/d, it would constitute about 38% of overall Permian Basin production, the firm said.

Last year, roughly $14 billion was invested to develop the Bone Spring and Wolfcamp areas, but the combined annual demand for capital for those plays could reach $22 billion by 2018, Shattuck predicted. A $22 billion annual capital spend is about 25% of annual oil capital spending for the Lower 48 states, according to the Houston Chronicle.

The Wood Mackenzie report noted several producers already are operating in these two Permian plays, including Concho Resources Incorporated (NYSE:CXO) (Midland, Texas), Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma), Anadarko Petroleum Corporation (NYSE:APC) (Houston, Texas) and Cimarex Energy Company (NYSE:XEC) (Denver, Colorado). Last week, Cimarex announced it was increasing its 2014 capital budget to $1.8 billion, which is $200 million more than last year's budget. The company said 78% of this year's capital investment, about $1.4 billion, will be spent in the Wolfcamp's Delaware Basin. In the Permian Basin, Cimarex is in the process of adding four horizontal drilling rigs to the 12 it already operates there.

Looking forward, Shattuck predicted other producers--including Apache Corporation (NYSE:APA) (Houston, Texas), Chevron Corporation (NYSE:CVX) (San Ramon, California), Occidental Petroleum Corporation (NYSE:OXY) (Los Angeles, California) and ConocoPhillips (NYSE:COP) (Houston)--would rapidly ramp up their activities in these two plays and become production leaders over the next five years.

The report emphasizes that the Bone Spring and Wolfcamp plays are composed of several sub-areas with different attributes. Shattuck said the most attractive sub-areas have average break-even points of between $66 and $70 per barrel. But even producers with experience in unconventional Oil & Gas development may need to drill 15 or 20 wells in these formations before they can "crack the code" and cost-effectively produce in the complex geology of the Wolfcamp and Bone Spring, he said.

Costs to drill in the Permian Basin are among the highest of all U.S. shale formations, according to a Bloomberg News report, and projections of a decline in WTI prices could render some planned drilling projects in that basin uneconomic. The report said producers have invested more than $100 billion in the Permian since 2010, pursuing oil that could be worth up to $5 trillion. The Bloomberg article was published when WTI fetched about $100 per barrel; prices have since declined by about $10 per barrel, which likely puts added pressure on producers in high-cost areas, like parts of the Permian.

In some parts of the Permian, including the Cline Shale and the Northern Mississippi Lime, producers need to average $96 per barrel to break even, according to Mike Kelly, an analyst at Global Hunter Securities LLC quoted in the Bloomberg report. For more on the Cline Shale, see October 7, 2013, article - Cline Shale: Too Early to Say if it's the Oil Industry's 'Next Big Thing'. But in some other areas in the Permian, producers can break even when WTI is priced at $70 to $74 per barrel. By contrast, he said producers in the Eagle Ford break even when WTI is priced at $78 per barrel, and Bakken Shale producers need $84 per barrel to cover their costs.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.