Permian Basin benefits from shift to more lucrative liquids-rich plays

With oil prices hovering around $90 to $100 a barrel and new technologies for extracting hydrocarbons, the prolific Permian Basin of West Texas and Southeastern New Mexico is enjoying a renaissance. It's enough to make a jaded, leathery roughneck cry tears of joy in his beer. Oilfield jobs are plentiful as a result of new opportunities that have opened up for operators and producers as well as oilfield service companies.

The Permian Basin is booming due to the shift among US independents from unconventional gas to the more lucrative oily and liquids-rich plays, which are common in the Permian Basin. Historically, the basin has produced around 20% of all US oil.

Active since the 1920s, the Permian Basin has extensive production and seismic data stretching back many decades. This legacy of well logs and core data has proved beneficial to long-time operators as well as new companies entering the Permian.

Current exploration and production is aimed at three main targets - the Bone Spring, Wolfcamp, and Spraberry subsurface formations. The term "Wolfberry" is often used when referring to the combined Wolfcamp and Spraberry formations, which include intervals of shales and carbonates. Depths typically run from 7,000 to 11,000 feet.

California-based Occidental Petroleum is the largest leaseholder and producer in the Permian Basin. Oxy derives more than half of its production in the basin from enhanced oil recovery (EOR) projects, mainly CO2 injection. The company is active in the Wolfberry, Delaware, Bone Spring, and Avalon formations.

Other major producers in the Permian include a Who's Who of US companies: Apache Corp., Anadarko Petroleum, Chesapeake Energy, Devon Energy, Concho Resources, SandRidge Energy, ExxonMobil, Chevron, and ConocoPhillips. Newer players include Comstock Resources, Energen, and W&T Offshore.

Yep, you heard that last one correctly. W&T, a long-time operator in the Gulf of Mexico, decided to diversify its business during the 2010 drilling moratorium in the GoM and acquired approximately 31,000 acres in the Permian Basin at a cost of $377 million. Most of W&T's current production in the basin comes from 70 wells in the Wolfberry trend.

Recent M&A activity

Frisco, Tex.-based Comstock Resources said on Dec. 29 that it has closed on its acquisition of oil and gas properties in the Delaware Basin in West Texas from Eagle Oil & Gas Co. and certain other parties for $331.9 million. The acquisition includes approximately 68,000 gross (44,000 net) acres in the Southern Delaware Basin in Reeves County, Texas, which are prospective for development in the Bone Spring and Wolfcamp shales.

The acquisition consists primarily of leasehold but also includes an estimated 21.5 million barrels of oil equivalent of proved reserves as of Nov. 1, 2011 and net daily production which averaged 1,445 barrels of oil equivalent per day during November 2011. The properties acquired included 33 producing wells and six wells in various stages of completion.

In August, Southern Union Company approved construction of the $235 million Red Bluff Project, a 200 MMcf/d natural gas processing plant and associated gathering, compression, and treating facilities, through its midstream segment, Southern Union Gas Services (SUGS).

The Red Bluff Project builds on an existing multi-phase midstream expansion developed as a response to producer needs in the Avalon Shale in the Permian Basin. The new facilities will enable SUGS to accommodate natural gas production from existing and future producer commitments in the rapidly expanding Avalon, Bone Spring, and Wolfcamp plays of West Texas and Southeastern New Mexico.

As part of the project, SUGS will construct about 60 miles of pipeline to deliver up to 20,000 bpd of natural gas liquids into Lone Star NGL's recently-announced Permian-to-Mt. Belvieu pipeline expansion, under a 15-year firm arrangement. The project is expected to be completed in mid-2013.

"This project is a continuation of SUGS' commitment to being the leading midstream service provider in the Avalon, Bone Spring, and Wolfcamp production areas," said George L. Lindemann, Southern Union's chairman and CEO. "With existing Permian Basin midstream infrastructure nearing capacity, Red Bluff provides long-term customer solutions for treating, processing and NGL take-away and significant earnings growth opportunities for our stockholders."

In June, San Antonio-based Cross Border Resources executed a participation agreement in the Big Star Six Shooter project targeting 320 gross acres within the Wolfberry Trend, Dawson County, Texas.

"We're pleased to have this opportunity to increase our interest in the Permian Basin's unconventional Wolfberry Trend," said chairman and CEO E. Will Gray II. "We believe the Wolfberry has great promise and our initial results in the nearby Tres Amigos project, also targeting the Wolfberry, have been encouraging."

The entire Big Star Six Shooter project covers around 800 acres in the Wolfberry, located along the eastern shelf of the Midland Basin. The trend encompasses the Spraberry/Dean, Wolfcamp, Canyon, Strawn, and Mississippian formations.