Permian operators increasingly target shale as new technology rejuvenates legacy oil field

The old saying "the best place to find oil is in an oil field" is holding true in the Permian basin. Horizontal drilling last year overtook vertical drilling in the basin as new technology and high oil prices rejuvenated the legacy oil play and independent operators like Pioneer Natural Resources Co. and Approach Resources Inc. tapped into shale formations previously considered uneconomic.

"The Permian is one of the hottest regions in North America right now," Benjamin Shattuck, analyst with Wood Mackenzie Ltd., told UOGR.

Data compiled by Wood Mackenzie shows operators increasingly used new technology to develop reservoirs such as the Wolfcamp and Bone Springs shales.

Conventional vertical wells have produced solid returns for Permian basin operators for more than 100 years and still dominate the region, accounting for more than 80% of production. Now, Shattuck said, that is changing as horizontal drilling is becomes the main driver of production growth.

According to US Energy Information Administration data, Permian production last year increased by 280,000 boe/d to 2.3 million boe/d, comprised of 1.4 million b/d of oil and 5.3 bcfd of gas (Figs 1,2). Wood Mackenzie found output from horizontal wells increased 119% to 375,000 boe/d, while production from vertical wells increased just 2%.

Andrew Byrne, manager of the Global E&P team at IHS Herold, noted the Permian only recently showed strong improvements in horizontal-well results.

"The industry appears to have accomplished a technological leap in the second half of 2013, with many public operators reporting initial production rates from horizontal wells in the Permian exceeding 1,000 boe/d," Byrne wrote in the IHS Unconventional Energy Blog.

Horizontal development accounted for 55% of Permian basin spending last year, Wood Mackenzie found, up from 22% in the prior year as operators redirected rigs from vertical and directional activity and toward horizontal projects. By yearend 2013, 71 fewer rigs were active on vertical wells, and 67 additional rigs were active on horizontal wells.

Byrne said the main attraction of the Permian is the vast quantities of oil-in-place in stacked reservoirs. "The area has multiple prospective, oil-prone formations and, in some cases, multiple potential landing zones within a formation to place the lateral leg of a horizontal well," he said.

More than 500 rigs

The Permian basin stretches across 52 counties and 86,000 sq mi in West Texas and eastern New Mexico. The complex geology encompasses three subbasins: the Midland, Delaware, and Central Basin Platform. It is the most active area of unconventional drilling activity in the US (Fig.3).

Baker Hughes data show 536 rigs were active in the Permian basin in mid-April, more than twice the number of rigs working in the second-ranked Eagle Ford shale.

Unconventional-focused producers drove regional production growth in 2013, Wood Mackenzie said, with leaders Devon Energy Corp., Concho Resources, Pioneer Natural Resources, and Chevron collectively contributing an additional 74,300 boe/d. Unconventional drilling activity focused on development of the Wolfcamp and Bone Spring shales. Wood Mackenzie found production from these formations increased by 76% and 290%, respectively, during 2013.

Pete Stark, IHS senior research director, notes the Midland basin Wolfcamp may rival the Spraberry for technically recoverable oil and condensate resources. "Two to four Wolfcamp zones may be productive over a 4,000-sq-mile area with an in-place resource that averages more than 100 million boe per mile," he wrote in the IHS Unconventional Energy Blog.

Wood Mackenzie said the Wolfcamp shale comprises four benches: The A and B bench correspond to what is commonly referred to as the Upper and Middle Wolfcamp, while the C bench is often identified as the Lower Wolfcamp. The D bench is frequently referred to as either a part of the Lower Wolfcamp or the Cline shale. Most Wolfcamp drilling is focused on the Wolfcamp B.

Leading the way

Pioneer Natural Resources, a leader in the Permian basin, targets the Wolfcamp. The company is this year increasing its rig count and spending as it moves into full development of the Wolfcamp shale in the Midland subbasin.

Pioneer holds 825,000 gross acres in the Spraberry/Wolfcamp and is the area's largest producer, operating 35 rigs (24 horizontal, 11 vertical) and more than 7,000 producing wells. Gross production averaged 93,000 boe/d in November 2013, far ahead of second-place producer Apache Corp.'s 51,000 boe/d, and third-largest producer Concho Resources, which produced 37,000 boe/d.

Pioneer expects to deliver compound annual production growth of 16-21% from the Spraberry/Wolfcamp during the next 3 years, with output more than doubling by 2018. Chief Operating Officer Tim Dove told a call to discuss quarterly earnings that Pioneer is refocusing its drilling program away from appraisal and resource capture and toward development and production growth.

The Permian basin is a core operating area for Pioneer. The area is receiving $2.4 billion of the company's $3.3 billion capital spending budget in 2014.

The bulk of Permian spending is directed toward the company's northern Spraberry/Wolfcamp operating area in Andrews, Martin, Midland, and Glasscock counties, Tex. About three-fourths of the $1.7 billion drilling budget allocated to this area will be spent on horizontal wells, with the remaining $440 million slated for vertical wells.

The number of rigs drilling horizontal wells across the northern area was set to increase during the first quarter to 16 from 5 for Pioneer.

Pioneer's 16-rig program is expected to spud 140 wells this year with an average lateral length of 8,200 ft. About 90% of drilling will target the Wolfcamp A, B, and D intervals, with the remaining 10% targeting the emerging Lower Spraberry and Jo Mill shales. Three-well pads will be utilized, with drilling and completion costs expected to average $8.5-9.0 million/well.

Most Wolfcamp production now comes from the Wolfcamp B interval, but development is also picking up across the Wolfcamp A and D intervals after Pioneer last year drilled several successful appraisal wells into these zones in its northern acreage position. "[Last year] we accomplished quite a lot in terms of our understanding of the various zones in the Wolfcamp basin," Dove said.

Pioneer said nine of its Wolfcamp B wells came online with an average, 30-day initial production rate of 1,149 boe/d. A well targeting the Wolfcamp A came online at 1,122 boe/d, and four Wolfcamp D wells yielded an average 30-day IP rate of 938 boe/d.

Pioneer is also active in the southern portion of its Permian basin acreage in Upton, Reagan, and Irion counties, Tex., where it works with a unit of China Petroleum & Chemical Corp. (Sinopec). The pair plans to drill 115 horizontal wells in 2014. About two thirds of these wells will target the Wolfcamp B, the remainder targeting the A, C, and D intervals. Dove said, "We will be drilling our first wells in the Wolfcamp C, so that will be very interesting to see how those results come out."

Lateral lengths in the southern Wolfcamp joint venture area are set to average 9,400 ft. Drilling and completion costs are expected to average $8 million/well. Three-well pads will be utilized.

The terms of the partnership agreement signed last year call for Sinopec to pay for the bulk of development costs. Pioneer will spend $205 million in the southern Wolfcamp joint venture area this year. About 68% of the funds will be dedicated to horizontal drilling.

Upside potential

Another Wolfcamp leader is Approach Resources, Houston. Approach holds 146,000 net acres in Crockett and Schleicher counties, Tex., along the southern portion of the Midland basin.

Approach last year completed 45 horizontal wells and produced 11,300 boe/d from the Wolfcamp. This year, the company plans to drill 70 horizontal wells using three rigs and increase production by 40%. Wells will target the Wolfcamp A, B, and C with lateral lengths of 7,000 ft.

Approach last year reduced drilling and completion costs by $1 million/well and is targeting costs of $5.5 million/well in 2014.

Permian basin drilling is expected to remain active in coming years as high oil prices and new technology enable producers to extract more resources from previously untapped formations.

Wood Mackenzie figures the Wolfcamp shale has a 50-year drilling inventory at the current pace of development. The research and advisory firm also believes horizontal drilling potential exists in several other intervals, including the Clearfork, Middle Spraberry, Atoka, and Woodford shales.

"The Permian basin is one of the most mature areas in the US, it is also a region where optimism around exploration continues to grow," Wood Mackenize said.

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