Study notes jump in Permian basin operating expenses

By OGJ editors
HOUSTON, Dec. 5 -- Permian basin unit operating expenses (opex) jumped during 2002-04 for all but the leading area operators, according to a Ziff Energy Group benchmarking study conducted for nine basin operators.

The study examined 2004 operating cost data for 201 fields operated by the participants, which include six of the top nine operators. The fields represent nearly half of the basin's oil production and about a third of its gas production.

The 2004 average oil field opex increased 25% to more than $7.60/bbl since Ziff's last such study in 2002, although leading operators achieved operating costs below $5/bbl.

Similarly, the 2004 average opex for gas fields increased 31% to nearly 90¢/Mcf, whereas leading gas field operators' average opex was less than 60¢/Mcf.

For the study, the fields were grouped into seven oil asset groups and three gas asset groups for benchmarking comparisons so that fields were compared realistically against 'like kind' peer groups. Waterflood fields are directly compared based on geologic formation, and tertiary (CO2 flood) fields are analyzed in a separate group, Ziff said.

Cost factors
In the study, Ziff assessed data for 13 standard cost classifications. The impact of rising commodity prices on severance and ad valorem taxes, lease fuel, and purchased energy was responsible for part of the average cost increases, the analysts said. Core costs made up the balance of the increases.

The study revealed that total unit operating costs in 2004 were $4.50-8/boe, averaging $7.25/boe, and that purchased electricity costs were up 56% for oil fields and 67% for gas fields.

"Taxes in 2004 were the largest single cost component for oil and gas fields alike, representing nearly half of the total operating expenses for gas fields and almost a third of the opex for oil fields," Ziff reported. A number of operators, however, reduced their taxes—some by seven-figure amounts annually—by identifying above-peer-group average taxes in previous Ziff studies.

Eight of the nine study participants were independent producers seeking to lower costs. Cost reduction potential, based on eliminating above-peer-group average costs, is $5-40 million/year, Ziff said. Cost pressures and reduction potential are heavily concentrated in contract services, taxes, well servicing, labor and field supervision, and electricity.

Operators of one fifth of the oil fields assessed were able to lower unit costs despite 2 years of service cost increases. For these operators, total cost reductions more than compensated for the cost impact of production decline.

Since the last study in 2003, ownership in the basin has changed. Chevron Corp. acquired Pure Resources Inc. (with its Unocal purchase), and Kerr-McGee Oil & Gas Corp. acquired Westport Resources Corp. Marathon Oil Corp. sold Yates field to Kinder-Morgan CO2 Co., propelling the latter from 16th rank to the third largest operator in the basin by production volume. And ExxonMobil Corp., Anadarko Petroleum Corp., Devon Energy Corp., and others sold assets in the basin.

Basin characteristics
The Permian basin in West Texas and New Mexico remains the largest onshore US oil-producing region, despite steady annual decline since its peak in 1973. It also is the most active center of carbon dioxide enhanced oil recovery operations in the world, with more than 50 such projects in operation.

During the past 5 years, gas production has increased from both shallow horizons, such as the Sonora area, and deeper reservoirs, such as Ellenberger.

Some Permian operators manage large-volume, low-margin oil fields and have the challenges of numerous wells, extremely high water cuts, reservoir pressure maintenance, and capital-intensive processing operations.

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