Permian Basin: Running Faster Than Ever at 90

Permian Basin: Running Faster Than Ever at 90

If you're an aficionado of oil and gas, their respective histories, and investing in the companies that produce them, you know all about the newly hot Eagle Ford play in South Texas and the Bakken/Three Forks in North Dakota and Montana. For my money, however, the most colorful and geologically fascinating of the plays in the onshore U.S. is the Permian Basin.

Whereas the Eagle Ford is a mere kindergartner at five years old, and the Bakken is more senior, with production dating back more than half a century, the Permian is a nonagenarian play that's recently become friskier than ever. As you likely realize, the Permian region which covers much of West Texas and southeastern New Mexico through a 250-mile by 300-mile expanse, has, like the Bakken, found new life through the development of hydraulic fracturing and other technological wrinkles.

Nearly a century ago
The Permian's first commercial well was spudded in 1921 in Mitchell County, Texas, on the eastern extremity of the play. Two years later it began producing and never missed a beat until it was capped in 1990, following nearly 70 years of output.

Subsequent work across acreage that once was covered by the Permian Sea disclosed a number of subsurface features, including the Midland Basin in the northeast, the Delaware Basin to the southwestern edge, and the Central Basin in the middle. The Wolfcamp shale overlies most of the basins at depths of between 7,000 and 10,000 feet and with thicknesses that run from about 1,500 feet to 2,600 feet.

Since it first began hosting drilling rigs, the Permian has, according to the Texas Railroad Commission, ginned out nearly 30 billion barrels of oil and 75 trillion cubic feet of gas. Today, the play accounts for about two-thirds of crude oil production in Texas and 15% of the output for the entire U.S. The 500 rigs working there today represent about a quarter of the U.S. total.

More ahead the behind
Fracking has dramatically changed the outlook for the Permian Basin. Geologists and geophysicists today predict that future production will exceed that of the past 90 years.

Output during the Permian's producing history has been anything but constant. After rising to a peak of a couple of million barrels a day during its first half century, activity decreased as oil prices fell in the 1960s and 1970s. It then rebounded in the 1980s and softened in the 1990s, before heading higher during the past decade. What was about 850,000 barrels a day in 2007 has increased to 1.3 million daily barrels today.

As the San Antonio Express-News observed Sunday in a piece on the explosion of activity in the Permian, "Instead of hitting only one of 10 holes, some drillers who are tapping once inaccessible formations and using new extraction techniques expect to find oil most of the time." One ultimate result is that the value of Permian production has hit about $2.5 billion to $3 billion a month, including the contribution from the gas output.

The players
The first companies to work in the Permian Basin were the majors, who generally pulled out when prices began to slide, only to be replaced by independents. Today, the majors, including ExxonMobil and Chevron , are back. They're now working side-by-side with the independent producer likes of EOG Resources , which has come on strong by planting its operational flags largely in the Eagle Ford, the Bakken, and the Permian.

Occidental , Pioneer Natural Resources , and Apache are currently ranked uno, dos, and tres, respectively, in Permian oil production. But the 42.8 million barrels collected by Oxy in 2012 were more than double Pioneer's 21.2 million. Apache wasn't far behind with 19.1 million barrels produced.

About two-thirds of Occidental's Permian Basin oil production is tied to fields where carbon dioxide (CO2) flooding is actively employed. The company is the largest acreage holder in Texas, with 2.5 million net acres in such Permian plays as the Avalon shale, Bone Spring, Wolfbone/Wolfcamp, Cline shale, Wolfberry, and Delaware.

A relative across the pond
The Permian may be the only U.S. energy play to have a namesake cousin in Europe. Indeed, a thick layer of sedimentary rocks was deposited during the Permian period in parts of Poland, Germany, Denmark, the Netherlands, and under the North Sea to Scotland. The formation, which is also called the Permian Basin, first yielded a gas discovery at Schlochteren, Netherlands in 1959.

The bottom line
What does all this mean for Foolish investors with a yen for energy? Quite simply, it just might provide a sufficient reason for undertaking careful research into the companies with significant operations in the Permian, including Occidental and ultra-successful EOG Resources.

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