Pioneer Plans Big Capital Outlay for Permian Plays

Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Pioneer Natural Resources Company (NYSE:PXD) (Dallas, Texas) plans to spend billions of dollars over the next decade extracting oil & gas from the Spraberry/Wolfcamp area in West Texas. But the company's bold plans depend on planned expansions to the area's infrastructure and takeaway capacity keeping pace with forecasted production gains.

Pioneer is the largest acreage holder and producer in the Spraberry/Wolfcamp region of the Permian Basin. It owns about 825,000 acres of land there, and is producing about 100,000 barrels of oil equivalent per day (BOE/d) from that acreage as of the second quarter. The company's Spraberry/Wolfcamp proved reserves totaled about 432 million BOE as of year-end 2013. But between 2014 and 2016, it told investors this month, it expects to add more than 600 million BOE in proved reserves there, more than doubling its proved reserves in that play. Longer term, Pioneer believes its Spraberry/Wolfcamp acreage holds another 9.6 billion BOE of probable and possible reserves.

Click on the image at right for a map of oil & gas plays in West Texas.

Speaking about the potential of the Permian Basin, Scott D. Sheffield, Pioneer's chairman and chief executive, recently told an energy conference in Denver, "there is the equivalent of 12-14 Bakkens stacked on top of one another." Tighter well spacing could boost oil recovery rates to about 10%, up from the 3% to 4% recovery rates that are standard today, he told about 1,800 attendees at the 26th annual Rocky Mountain Energy Summit, sponsored by the Colorado Oil & Gas Association (COGA) (Denver, Colorado).

In an interview at that conference, Sheffield said Pioneer plans to drill up to 1,000 new wells in the Spraberry/Wolfcamp during the next decade. By about 2027, he forecast, Pioneer's production from that formation will reach about 1 million BOE, which is 10 times today's level.

That's going to take a lot of drilling capital. In 2014, Pioneer expects to spend about $2.4 billion developing the Spraberry/Wolfcamp. Sheffield told Industrial Info the company's capital spending will soar to about $10 billion in 2024.

Current outbound crude-oil pipeline capacity from the Permian is sufficient to accommodate current rates of production, but Sheffield said additional lines will be needed soon because the new ones fill up in their first year of operation. "Each year, companies operating in the Permian Basin are increasing crude oil production by about 250,000 barrels per day (BBL/d)," he told conference attendees. "Two new pipelines are scheduled to come online in 2015, but we'll need another 1 million BBL/d of new pipeline capacity by 2017-2018" to keep up with production gains.

Investors generally have been enthusiastic about Pioneer's Permian prospects, bidding the stock up to a high of about $222 per share in late June, an increase of more than 100% from early 2012.

Once thought to be mature, the Permian's crude oil production continues to rise through the application of horizontal drilling and hydraulic fracturing. Crude-oil production from all parts of that basin will be about 1.7 million BBL/d in September, according to the U.S. Energy Information Administration's Drilling Productivity Report for August. At that level, crude-oil production from the Permian will have roughly doubled since 2007. For more on the Oil & Gas industry's keen interest in the Permian, see the January 28, 2014, article-- Two Permian Plays Draw Increased Attention. For more on the potential economic impact of oil & gas production in that basin, see August 13, 2014, article-- Oil & Gas Production Leads to Economic Bonanza in Permian Basin.

Click on the image at right to see rising crude-oil production from the Permian Basin.

The hot pace of development and drilling activity in the Permian has pushed up the cost of doing business to the point where Pioneer found it more economic to in-source about 66% of its field-service costs, the Pioneer chief executive told the COGA audience. That's not something the company wants to do over the long term. So Pioneer is looking for additional strategic partners to help it fulfill its plans for the Spraberry/Wolfcamp.

In its second-quarter earnings release, the company said it is "developing a long-term growth plan to ensure that the infrastructure, takeaway and services required to support this (Spraberry/Wolfcamp) growth are identified and in place in a timely manner. The growth plan will focus on optimizing the development of the field and identifying the future requirements for gas processing, pipeline takeaway, field infrastructure, water, oilfield services, tubulars, electricity, systems, buildings and roads."

To support its development plans, Pioneer recently signed contracts with two West Texas cities for about 360,000 BBL/d of effluent water, for use in its hydraulic fracturing operations. "We're having tremendous success using brackish water in our hydraulic fracturing," Sheffield told the COGA conference. "Our plan is to have non-potable water account for more than 50% of all our water use in West Texas."

The company also recently sold properties in the Hugoton and Barnett formations for a total of about $495 million, so as to better concentrate its efforts on the Permian and Eagle Ford. Those transactions are expected to close in the current quarter.

Pioneer garnered some media attention recently when it exported lightly refined condensate from the Eagle Ford Shale to Asia. The U.S. Department of Commerce ruled the shipment did not violate the longstanding ban on crude-oil exports because the condensate had undergone sufficient processing that it could be considered a refined product, not crude oil. There are no restrictions on exports of refined products.

In the company's second-quarter earnings release, Sheffield said: "Our first cargo (of condensate) was shipped in late July and monthly shipments are expected through the end of this year at prices higher than domestic condensate sales. International interest for our processed Eagle Ford Shale condensate is growing, particularly from Asian petrochemical companies."

In his interview with Industrial Info, and his COGA conference speech, Sheffield reiterated the need for the U.S. to modify or repeal the ban on crude-oil exports, which he predicted would happen by 2017: "The EIA predicts crude-oil production will peak at about 11 million BBL/d. But if you remove the crude-oil export ban, production could reach 14 million BBL/d by 2024."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 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.