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Thursday, January 19, 2017

I Fly High On Fire-Scorched Wings: Companies Re-Invent Themselves in the Delaware Basin

The Delaware Basin is the habitat of the fire-scorched Oil Phoenix, which rises from the ashes of a 3-year oil industry meltdown that has savaged companies that have held acreage, operations, and infrastructure in the costly resources plays of Colorado, Texas, Pennsylvania, North Dakota, and more.

The mythical Phoenix (image credit: wikipedia)
It is also the place where companies that have invested heavily in gaining expertise in the latest techniques used in shale plays (such as the Eagle Ford) can have a tremendous pay-off, as their knowledge allows them to effectively produce a complex stacked play, that combines conventional reservoirs with resource plays. Companies such as Devon can use their knowledge and experience to bring in wells that can initially flow 6,000 bopd in the prolific sub-basin that straddles southwest Texas and southeast New Mexico reaches of the Permian Basin. The formations "stacked" in the Delaware Basin are the Delaware, Glorieta-Yeso, Bone Spring, Wolfcamp, and the Abo-Yeso.

The competition for the sweet spots in the Delaware Basin is fierce. In January alone, several massive acquisitions were announced, including WPX Energy's acquisition of Panther Energy Permian holdings for $775 million in cash, Noble Energy's acquisition of Yates Petroleum for $2.5 billion (partially debt-financed), and the record-breaking ExxonMobil's acquisition of the Bass Family's Permian assets for $5.6 billion in stock. Last September, EOG Resources bought Yates Petroleum for $2.5 billion.

The result is that there are 105 active horizontal rigs in the Permian, and the number is expected to rise as companies acquire acreage before the price of oil goes any higher, while there are still productive leases to be had.

Why invest so much in a basin where land prices have risen dramatically in the last year to in some places as much as $40,000 per acre?

The answer has to do with the persistently low price of oil and the presence of stacked pays. The Delaware Basin is one of the only places in the U.S. where companies can drill, complete, and produce at a relatively low price. In some cases, some operators are able to make money even at $25 per bbl.   With companies able to hedge at $50 per barrel through the 2nd quarter of 2018, it's all about doing efficient factory drilling, and really understanding your reservoir, which involves very detailed geological, geomechanical, and geochemical studies as well as typical reservoir simulations. Economics are based on right around 1,900 Boe/d at more than 70% oil.

So, in an environment where most experts do not expect to see oil prices rise much in 2017, the Delaware Basin is a perfect place to test just how low one can go in operating costs.

 The Delaware Basin also a great place to implement green technologies, and on any given day, you'll hear the whine of drones doing facilities inspections to detect and report fugitive methane emissions, and churn and whir of new water recycling plants.

Now, if you are one of the companies that has invested heavily in the Delaware Basin, you are going to need to learn from the successful operators. And, you're going to have to learn fast.

The quick, effective knowledge transfer from the engineers and geologists who are doing the hands-on work in the Delaware Basin is the goal of the one-day AAPG Midland Playmaker Forum to be held in Midland on February 22.  Companies such as Devon and Parsley Energy will be making presentations. Parsley will discuss how it plans to complete 120 - 140 gross operated horizontal wells (Midland and Delaware Basins) in 2017, with an average lateral length of 8,000 feet, which is 75% more lateral footage than the previous year.

So, imagine yourself as a refugee from a currently uneconomic play such as the Haynesville or the Mississippian Lime. You're currently riding on the fire-scorched wings of an Oil Phoenix ready to rise to where technology and fey luck will take it.

You yourself feel scorched from the last few years, and more than a little bit skeptical, but like all the new developments in recent times, much has to do with the mysteries of disruptive technology and innovative financing. Maybe this time you'll be one of the lucky ones.

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