Why You Should Pay Attention to This Texas Oil Play

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While North Dakota's Bakken shale and Texas' Eagle Ford shale remain the best-known hotbeds of oil and gas activity in the U.S., another less famous play continues to gain importance. That play is the Permian Basin of western Texas and eastern New Mexico, which, in combination with the Eagle Ford, has propelled Texas oil production to the highest levels since at least 1989.

Let's take a closer look at the play itself, its major advantages over other plays, and the innovative methods that exploration and production companies are using to maximize the quantity of oil they can get out of the ground.

A primer on the Permian
Measuring approximately 250 miles wide and 300 miles long, the Permian Basin is truly massive. Within it, one can find numerous smaller oil-producing formations, such as the Avalon, Bone Spring, Clearfork, Devonian, Spraberry, and Wolfcamp plays. To readers familiar with companies such as Devon Energy (NYSE: DVN  ) and Linn Energy (NASDAQOTH: LINEQ  ) , these names should be quite familiar.

Unlike the Bakken and other plays that are -- in some ways -- overnight success stories, the Permian Basin has a long and storied production history; the play has been producing oil for more than 90 years.  

The first well started producing in 1921, and production held strong through subsequent decades, before reaching a peak in the early 1970s at around 2 million barrels per day. Since then, it fell into a steady decline, dipping to a low of 850,000 barrels per day in 2007.

But over the past five years, all that has changed dramatically. Since its 2007 low, crude oil production from the Permian has surged by about 50% to around 1.3 million barrels a day currently. That's nearly twice as much as the Bakken's daily production.

A major reason behind this phenomenal resurgence is the improved ability of oil and gas producers to tap tight, unconventional reservoirs through drilling methods such as hydraulic fracturing and horizontal drilling. Initial success applying these new drilling techniques sparked a flurry of interest in the play, with numerous oil and gas producers rushing in to get a piece of the action.

The Permian's advantages
The Permian is characterized by mature fields, multiple pay zones, relatively low drilling costs, and relatively good access to transportation infrastructure, thanks to its proximity to the U.S. Gulf Coast refining hub. These features equate to several advantages over comparable plays.

One of the most appealing features of producing formations within the Permian Basin is what the oil and gas industry refers to as "stacked pay potential." The term refers to two or more producing formations that are stacked vertically on top of each other, which allows E&P companies to produce oil from varying depths using just a single vertical well.

Multiple vertically stacked pay zones allow for improved well economics, which allows E&Ps to produce reserves that would otherwise be considered uneconomical. For instance, Devon Energy (NYSE: DVN  ) expressed its optimism last year about the superior economics of a Permian play called the Cline Shale, otherwise known as the Lower Wolfcamp formation. In an investor presentation last year, the company identified as many as 15 producing zones within the stratigraphic section of the Cline Shale.

Techniques being used in the Permian
One of the most undeniable trends across the North American E&P space is companies' desire to do more with less, and the Permian serves as a classic example. In addition to shallow vertical drilling, numerous E&Ps are drilling at deeper depths, using a great number of frac stages, downspacing (reducing the spacing between wells), and using enhanced oil recovery methods to boost production and cut costs.

Numerous operators are seeing improved well performance through drilling longer laterals and employing a greater number of frac stages. For instance, EOG Resources (NYSE: EOG  ) has used laterals in excess of 7,000 feet in combination with more than 35 frac stages in the Wolfberry, which yielded 24-hour peak initial production rates greater than 1,500 barrels of oil equivalent per day for several of the company's wells.

Not surprisingly, IP rates in the Wolfberry are on the rise. Since inception, they've averaged approximately 600 barrels of oil equivalent per day (Boepd) but have risen substantially over the past couple of years, coming in at an average of nearly 700 Boepd in the third quarter of last year.

Other major methods that have been extensively employed across the Permian include tertiary recovery methods, such as enhanced oil recovery, or EOR, and secondary recovery techniques such as waterflooding.

EOR has been a favored recovery method for one of the Permian's largest leaseholder and producer, Occidental Petroleum (NYSE: OXY  ) . The company uses a carbon-dioxide injection technology in the majority of its Permian operations, which has led to sharp increases in the production potential of older wells. In fact, EOR based on carbon dioxide injection accounts for roughly two-thirds of Occidental's production in the play.

Waterflooding has also been a popular method among Permian operators, with Pioneer Natural Resources (NYSE: PXD  ) having made extensive use of waterflood injection technology in the Spraberry formation, which has led to substantial increases in total recovery. And Linn Energy (NASDAQOTH: LINEQ  ) , which has recently developed the Permian into one of its core producing areas as it seeks to increase its oil exposure, has also made use of waterflooding on its Permian acreage outside the Wolfberry.

Final thoughts
As you can see, the Permian is worthy of any energy investor's attention. In addition to the prevalence of multiple pay zones, the play's relatively low well costs, strong production rates, and favorable access to transportation infrastructure make it an attractive play. And the use of new technologies and drilling techniques to coax greater quantities of oil from the play has also been met with great success.

Going forward, major pipeline projects expected to go into service this year should provide a substantial boost to the region's takeaway capacity to the US Gulf Coast. This coming improvement in infrastructure, coupled with production that is expected to grow by 250,000 barrels per day by 2016, should continue to attract a bevy of exploration and production companies into the region.

One of the major projects providing takeaway capacity from the Permian that is set to come on line this year is the West Texas Gulf Pipeline expansion. The pipeline is operated by Sunoco Logistics Partners, which is now part of Energy Transfer Partners, a midstream company that helps alleviate gluts in supply with 23,500 miles of transformational pipelines. To see if ETP and its industry-leading yield will be a fit for you, click on this detailed premium report, which will supply you with a thorough analysis of this midstream operator. 

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