There has been a lot of talk about the new shale formations like Texas' Eagle Ford and North Dakota's Bakken. New technologies like horizontal drilling and hydraulic fracturing have unlocked vast quantities of hydrocarbons. We're in the midst of an American energy revolution, and it's creating a great opportunity for investors.
But like venture capitalists searching for the next Apple, the hunt is on for the next great American shale play. And an old field in West Texas just might be the biggest find yet -- the Permian Basin. Emerging plays in the Permian like the Cline, Wolfcamp, and Spraberry could soon become a regular part of investor vocabulary soon.
Here're five jaw-dropping reasons why you should keep this basin on your watch list.
1) New discoveries in the Permian could make it the world's largest discovery
The numbers coming in from the industry are remarkable. According to early estimates provided by Devon Energy (NYSE: DVN ) , the Cline could contain 30 billion barrels of recoverable oil. Meanwhile Pioneer Natural Resources (NYSE: PXD ) projects that the nearby Wolfcamp and Spraberry plays could contain some 50 billion recoverable barrels. For comparison, the United States Geologic Survey estimates that the Eagle Ford and the Bakken hold 10 billion and 4.3 billion recoverable barrels respectively.
"The Spraberry Wolfcamp could possibly become the largest oil and gas discovery in the world," Pioneer Chief Executive Scott Sheffield told analysts at a industry conference in August. The company plans to test 13 zones over the next year. Those reserve figures could increase as exploration is completed.
Due to its supposed size, the play may be too large for any single operator to tackle alone. To fund its program, Devon sold a 30% interest in its Cline and Wolfcamp shale assets to Sumitomo for $1.4 billion last year. The company is on track to drill 30 pilot wells this year.
2) The Permian is like six Eagle Ford shales stacked on top of the other
One attractive feature of the Permian is what's called in the industry as "stacked pay potential". In the Eagle Ford, the hydrocarbon producing zone is about 250 feet thick. In the Bakken, the pay zone can be as thin as 10 feet.
But in the Permian, several shale formations are stacked on top of one another allowing drillers to target several plays with a single vertical well. In some parts of the Permian, the pay zone is a much as 1,300-to-1,800 feet thick. That's like having four to six Eagle Ford shales stacked on top of each other.
3) One million barrels per day of transit capacity is expected to come on-line by 2014
Unlike isolated plays such as the Bakken, the Permian Basin is conveniently located right in the energy industry's backyard. Pipelines and processing facilities already dot the landscape which should keep development costs down. However, over one million bpd of new pipeline capacity will be added by the end of 2014 just to keep up with production.
Plains All American (NYSE: PAA ) is just one example of a company stepping up to become the leading shipper in the region. In April, the company announced plans to build a 310-mile, 20-inch pipeline to move crude oil across West Texas. The project will cost $375 million and add 200,000 bpd of capacity. Since 2009, the company has spent $300 million in new infrastructure and upgrades.
4) The Permian Basin is an investment bonanza
According to a research report from Wood Mackenzie, capital spending in the Wolfcamp and Bone Spring plays alone could top $22 billion by 2018. To put that number into perspective, operators are expected to invest $28 billion in the Eagle Ford this year which accounts for a quarter of oil CapEx in the lower 48 states.
Leading the charge are a lot of smart money operators. ConocoPhillips (NYSE: COP ) plans to invest $3 billion over the next five years in the Permian. The development is expected to add 40,000 barrels of oil equivalent per day, ir boepd, of production by 2017.
Other operators moving into the Permian include Apache and Chevron. Altogether, Wolfcamp and Bone Spring could cost a combined $220 billion to fully develop.
5) Midland, TX ranks as the 2nd wealthiest town in the country
High oil prices and surging production has sparked an economic boom in West Texas. The unemployment rate in Midland, located right in the heart of the Permian Basin, is 3.4%. In 2011, the city's average income was $65,100, ranking No. 2 nationwide. For comparison, San Francisco and New York City ranked third and eighth respectively.
Foolish bottom line
New shale developments in the Permian Basin are still speculative. Many of the plays, like the Wolfcamp and the Cline, haven't been de-risked beyond a handful of core acreage. Early reserve estimates could prove wildly optimistic, but if the play can live up to even a fraction of the hype, the Permian Basin could be America's next great shale play.
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