The Permian Basin is on fire.
And it’s not just the blazing West Texas sun, either. Rig count is back above 500 units for the first time since 2012, according Baker Hughes, while horizontal and directional rig count has climbed above 300 units—and counting.
The technological effort to develop tight oil via horizontal drilling and multi-stage fracturing has come full force to the Permian Basin, promising another new chapter in an historic narrative that spans 90 years.
Operators are delineating multiple benches in the Wolfcamp Shale in both the Midland and Delaware basins—the geologic gift that keeps on giving in both geographic extent and geologic column height.
Meanwhile, high oil prices are sustaining lucrative conventional drilling in traditional Permian targets, providing further support to the hottest domestic market in the U.S.
The Tao of the Permian Basin lies in two twin basins flanking both sides of a buried structure known as the Central Basin Platform. The Permian, in fact, resembles a butterfly with open wings. The yin and yang of today’s Permian is evident as horizontal Wolfcamp delineation efforts move south of the New Mexico line in the Delaware Basin on the west and, in the Midland Basin, migrate north out of the original core in Crockett, Reagan and Irion counties into Midland and Martin counties.
The numbers tell the story.
Horizontal well count was up 25% in the Permian’s Delaware Basin in 2013, according to a Morgan Stanley & Co. LLC research report, while horizontal permits jumped 33%—the largest regional increase in the domestic market during 2013. Only the Eagle Ford has witnessed more horizontal wells.
And it is getting better. While the 1,500 horizontal permits filed by Permian operators in the first quarter of 2014 ranked a distant second to the high-flying Eagle Ford Shale, momentum is clearly swinging toward the Permian, where horizontal permits jumped 87% sequentially in the first quarter of 2014.
Four Permian Basin counties account for the majority of the activity increase, including Midland and Upton counties in the Midland Basin and Reeves and Ward counties in the Delaware Basin. Reeves witnessed a 15-unit jump in horizontal rig count to 50 active during the first quarter of 2014 to pace the Delaware, while combined horizontal rig count in Midland and Martin counties rose from 15 to 37 units during the same time frame.
The transition to horizontal drilling is the main narrative in the ongoing Permian resurgence. Originally, operators employed horizontal drilling to exploit the Bone Spring along both sides of the Texas/New Mexico border. In 2011, for example, the Delaware Basin sported 60 rigs drilling horizontally, representing 75% of horizontal work in the Permian. Delaware horizontal rig count has added more than 100 units since. But the story of late centers on the rapid expansion of horizontal drilling in the Midland Basin, which has vaulted from 20 units in 2011 to 145 units at the end of April 2014. Currently, horizontal rig count is almost evenly split between the Delaware Basin at 52% and the Midland Basin at 48%. Combined, both basins support more horizontal rigs than any other region in the U.S.
Furthermore, the Permian is still in delineation mode when it comes to the Wolfcamp Shale. Operators are pushing lateral lengths, experimenting with downspacing, packing more stages along the lateral and tweaking downhole completion recipes as they extend the prospective Wolfcamp across the Delaware and Midland basins.
The optimization portion of the tight formation development cycle is evident, primarily in Bone Spring targets in southeastern New Mexico. However, the Permian as a region is still early in the overall tight formation development cycle, and widespread resource harvest sits a couple years out into the future. One proxy for the evolution is pad drilling. Multi-well pads were few and far between in early 2013—less than 10% of horizontal wells. Currently, pads are found on more than 20% of horizontal wells, and the number of wells per pad continues to increase, serving as a harbinger of the future.
Multiple operators are active in the play, ranging from the majors and former majors to privately held companies. Since most acreage is already leased or held by production, acquisitions have become the primary means of expanding positions in the Permian. The region tallied more than $25 billion in transactions in 2011-2013, leading all other regions, including the Gulf of Mexico.
A flurry of initial public offerings in 2013 focused primarily on the Permian as management teams backed by private equity capital found the stock market supported stellar pure play acreage valuations that would underwrite expensive horizontal exploration.
And it’s just getting started. The Permian will be to stacked formation plays what the Eagle Ford or Bakken are to unconventional shales. The latter feature 300 ft of hydrocarbon-bearing strata. In contrast, the Permian incorporates multiple benches in a stacked formation column spanning more than 1,500 ft and nine separate geologic targets, depending on locale.
It seems that after 90 years, it’s déjà vu all over again in the Permian Basin.
Horizontal drilling and hydraulic fracturing are a major reason Permian Basin oil production has increased 64% since January 2010. Source: EIA, Hart Energy