Oil & Gas News | Permian Basin
Sweet Economics in the Permian Basin
December 3, 2010
In 2007, the US Geological Survey estimated that from conventional reservoirs in the Permian Basin there were approximately 100 Bbbl of original oil in place (OOIP), of which the industry had produced roughly 40 Bbbl to date. There is a growing belief that resources from unconventional reservoirs in the Permian could be just as large.
Today, production from the Permian Basin is closing in on 1 MMbbl/d of oil and more than 4 Bcf/d of gas. There are roughly 300 drilling rigs running in the Permian, with one-third of the activity Wolfberry/ Spraberry production.
One of the most active players in the Wolfberry is Concho Resources Inc., with 17 rigs currently drilling vertical wells at depths typically ranging from 7,500 to 11,000 ft. The drilling cost today is approximately US $1.35 million, with estimated ultimate recoveries (EURs) up to 140,000 boe and initial production (IP) rates around 120 boe/d.
Depending on depth, wells typically take 12 to 15 days to drill, with spud to sales in 30 days. Concho estimates internal rates of return (IRRs) at today’s commodity prices of around 50%.
In the Yeso play in the New Mexico portion of the Permian Basin, where Concho has seven rigs drilling, the company gets consistent results from vertical wells at less than 7,000 ft deep. Drilling cost today is approximately $1.45million, with payout in roughly 14 months. Average EURs are 140,000 to 150,000 boe with IP rates generally around 200 boe/d, and the company estimates IRRs at today’s commodity prices are approximately 70%. Since it started drilling Yeso wells in 2006, enhanced efficiencies have allowed Concho and others to drill more wells with the same number of rigs, further enhancing the economics of the play.
(Source: Pritchard Capital Partners LLC)
The strong economics of the Permian result in high cash margins. For example, in the first half of 2010, Concho had an unhedged cash margin of $45.73/boe, 65% higher than the median of a peer group of companies. Strong economics also have been a main driving force behind the Permian consistently being one of the most active areas for merger, acquisition, and divestiture activity.
In 2Q 2010, for example, the Permian saw four deals worth a total of $2.5 billion, with average metrics of approximately $19.25/boe of proved reserves (two thirds oil) and $112,500/flowing boe of daily production. The largest transaction was SandRidge Energy’s acquisition of Arena Resources for $1.4 billion. More recent transactions include Apache Corp. acquiring BPs Permian assets for $3.1 billion ($22/boe of proved reserves, $108,650/flowing boe of daily production) and Concho’s $1.65 billion acquisition of privately-held Marbob Energy Corp. ($21.70/boe of proved reserves, $117,860/flowing boe of daily production). While Apache Corp. is acquiring Mariner Energy mostly for its robust portfolio of deepwater Gulf of Mexico assets, it also was attracted to the company’s onshore assets, which primarily are in the Permian.
Permian Basin economics and the emerging horizontal plays contributed to a record-breaking lease sale for the University of Texas land program totaling $206.5million in September 2010, nearly four times the previous record. In all, there were more than 100 tracts of land that sold for more than $1 million. A total of 191,254 acres out of the 260,800 available in 15 West Texas counties sold during the sale. The average bonus of $1,079.89/acre also was a record. El Paso Corp. was the winning bidder for leases covering 123,100 acres in the emerging Wolfcamp Shale in the Delaware Basin, adding acreage in Reagan, Crockett, Upton, and Irion counties.