Permian Overview 1

 

The Permian Basin is one of the oldest continuous producing oil regions in the USA.  The first hydrocarbons in commercial quantities were discovered in 1925, about two decades after the first east Texas oil boom.  Drilling and production increased in the 1930s, through 1960s.  After this point some of the easier conventional fields were in decline, and despite increased drilling in the late 1970s and early 1980s due to high prices, the Permian was in decline.  According to the Texas Railroad Commission, there are currently 133,000 producing wells in the Permian Basin, a staggering number, and about 11% of all active producing US wells.  The landscape picture above is from photographer Spencer Lowell in the New Yorker.  Almost all of these wells have been drilled vertically and at tight spacing.  Unlike horizontals, where many wells can be drilled from one pad, vertical wells must be spaced apart, leading to a huge surface footprint in areas of the Permian Basin.

 In this image from a Pioneer presentation we can see the historic decline from peak production in the early 1970s.  This coincides closely with the total US peak in conventional oil production around the same time. This decline started to reverse itself in the middle part of the last decade.

From a 2012 Concho Resources company presentation, we can see the total rig count fell dramatically in the mid 1980s when the bottom fell out of the price of oil.  It stayed around 100 before dropping further in the early 2000s, then as the price of oil increased, and new techniques were developed and applied, the rig count has increased in recent years, and production declines have been reversed.  Note that some of the bump in rig count may have also been directed towards gas targets (I'm not really sure), since that is when we started seeing the huge boom in gas-directed rig count prior to the collapse of gas prices in 2008.

  The above chart also illustrates the lack of elasticity of supply for oil production.  As the price dropped dramatically the rig count dropped, but production declined at a slow 3% per year.  One aspect of horizontal drilling in tight formations is that most of the production comes in the first few years.  This may lead to higher elasticity of supply in the future, since production can ramp up or decline much faster in response to the price of oil than it could historically.

This image, from a Devon Energy presentation from 2012, shows the main drilling targets in the Permian region.  Unlike other areas like the Bakken, Marcellus, or Eagleford, drilling in the Permian targets a wide variety of different layers.  Also unlike those regions, where horizontal wells are elusively drilled, most of the wells being drilled in the Permian are vertical wells.  It should be noted that because the horizontal wells are much more expensive to drill, although there are fewer wells, they represent a very large share of the total capital spend and new production.

Here’s another visualization as of early 2012 from Comstock resources.  This shows drilling permits.  As we can see, most of the vertical activity was in the Midland Basin, with much of that in the Wolfberry region.  There was some horizontal drilling in the lower portion of the Midland basin, which was most likely in the Wolfcamp.  Meanwhile in the Delaware basin, there was lots of wolfcamp, Avalon, and bone-springs formation horizontal drilling, and little vertical drilling.  Note that there is also a significant level of vertical drilling activity in the Central Basin Platform between the Midland and Delaware Basins.

This slide from Laredo shows the different Midland Basin Targets.  The Wolfberry vertical wells have multiple targets in different producing zones and are normally hydraulically fractured for stimulation, like the horizontal wells.  Nearly 200 of the active rigs in the Permian were considered to be targeting Wolfberry according to IHS as of 2012.

There is much less concern about take-away capacity in The Permian compared to The Bakken or Marcellus.  There are a number of reasons for this.  Even if the Permain production were to double in the next 5 to 10 years, the only new pipelines would be intrastate Texas pipelines, which can be approved and built quickly.  Also, the absolute distance to the huge Gulf Coast refining and chemical regions is  relatively short.

In part two I'll look at the major companies in the Permian and what they are up to.