Normally, when an oil formation has been producing for more than 90 years, most of the oil has been tapped out and companies look to unload assets there. This has not been the case with the Permian Basin in West Texas. Both QEP Resources (NYSE:QEP) and Breitburn Energy Partners (NASDAQOTH:BBEPQ) are just the most recent in a long list of companies that are buying up any available land in the Permian. So what has led to QEP and Breitburn to fork over $950 million and $282 million, respectively, for this aging oil region? Let's take a look.
There's (more) oil in those wells!
The old adage in the oil industry was that once the well was tapped, artificial lift machinery was installed, and the reservoir was flooded with oil, we had produced all the oil we could from that well. That just isn't the case anymore. One of the major developments in the past couple years in the oil industry is the boom of using what are known as tertiary recovery, and the most popular method for this is injecting CO2 gas into formations. Denbury Resources (NYSE:DNR) has been one of the pioneers of this process, and the company estimates that reservoirs that have long since been abandoned could still yield billions of barrels of oil through CO2 extraction.
Because of its size and its well-documented history of oil production, the Permian is prime territory for CO2 oil recovery. Kinder Morgan (NYSE:KMI), a company we normally associate with pipelines and processing, is the second-largest oil producer in the Permian and almost all of its production comes from CO2 injection methods. So not only is CO2 proven to be an effective technique, but it also has shown to be very effective in the Permian.
This is very likely to be the path that Breitburn will follow with both these assets and the rest of the land it holds there. More than a third of the recent asset purchase is for already producing assets and will eventually require stimulation of the well to get the last drop out of the well. Breitburn already has employed CO2 operations in the panhandle region of Oklahoma, and if it can secure a CO2 source in the Permian, don't be surprised if it starts a CO2 recovery program in the Permian as well.
The nine lives of the Permian
The Permian Basin has been a cornerstone of American oil production through conventional production, and each time a new oil recovery method has given this region a new life. What is so astounding about this formation, though, is that below the billions of barrels of conventional resources we have extracted lies potentially an even bigger prize that could give the region another breath of life. The region that so many producers are clamoring for is the Spraberry/Wolfcamp shale formations within the Permian. According to Pioneer Natural Resources (NYSE:PXD), these shale formations could be the second-largest discovery of recoverable oil of all time.
Pioneer has pretty much made its bed with the Permian Basin. The company estimates that its stake alone in the region holds up to 9 billion barrels of oil, and it will take as much as $400 billion to fully develop the field.
QEP's recent purchase came in both Martin and Andrews counties, which will put that acreage right in the sweet spot of the Spraberry and Wolfcamp shale formations. The company estimates that there are more than 300 million barrels of recoverable oil on just 26,000 acres. With the purchase only yielding 6,700 barrels equivalent per day right now, there is lots of room for QEP to grow this newfound asset.
What a Fool believes
Between revisiting older oil wells for enhanced oil recovery techniques such as CO2 injection and the enormous potential of West Texas' shale plays, it's difficult to find the words to describe how much oil could come out of the Permian over the next couple of years. Estimates from Pioneer puts production in the Permian's shale production alone at more than 2 million barrels per day within the next 10 years, which would equate to both the Eagle Ford and Bakken combined today. With numbers like that, can you really fault QEP resources and Breitburn Energy Partners from spending big bucks to join the Permian party?
The Motley Fool recommends BreitBurn Energy Partners and owns shares of Denbury Resources. It recommends and owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.