Permian Basin: The Center of Black Gold Activity

American Association of Petroleum Geologists (AAPG)

The Permian Basin has been known for black gold and clear methane for almost 100 years. Today, it’s just as closely associated with little green pieces of paper.

Those dollars are flowing into the area as fast as oil and gas are flowing out. Companies and investors dropped almost $30 billion into Permian deals last year.

Mike Party
Mike Party
“Basically, we have 80 to 90 private equity teams working the Permian Basin along with all the publicly traded companies,” said AAPG Honorary Member Mike Party, CEO and president of Beryl Oil and Gas LP in Midland, Texas.

The greater Permian area spreads across northwest Texas and southeast New Mexico. It includes the Midland Basin to the north, the Delaware Basin to the southwest, a northwestern shelf and an eastern shelf, a central platform and, to the southeast, the Ozona Arch area.

The Midland and Delaware sub-basins make up most of the heart of current activity and have attracted most of the recent investment.

“In the Midland Basin, the Delaware Basin, we’ve got 4,000 to 5,000 feet of reservoir rock, so there’s a lot of opportunity, a lot of ways to get it out. The technology is developing very fast,” Party noted.

“The basin is profitable at or below $40 a barrel. We don’t need $50 oil to make it profitable” he said.

Billions, Not Millions

At a time when some $10 million deals have made the industry excited and $100 million deals have made it swoon, investments in the Permian are often measured in billions of dollars.

In January, ExxonMobil announced it would pay up to $6.6 billion in stock and cash to acquire companies owned by the Bass family of Fort Worth, with an estimated resource of 3.4 billion barrels of oil equivalent (boe) in the Delaware Basin in New Mexico.

That more than doubled its Permian Basin resource to 6 billion boe. The company agreed to pay $5.6 billion in ExxonMobil shares upfront, with a series of additional contingent cash payments totaling up to $1 billion no later than 2032, commensurate with development.

Noble Energy Inc. earlier announced it would buy Clayton Williams Energy Inc. for $2.7 billion in stock and cash, adding 2,400 gross drilling locations on 71,000 contiguous net acres in the core of the southern Delaware Basin in Texas, plus an additional 100,000 net acres in other areas of the Permian.

The deal included unrisked resource potential of over 1 billion boe in Wolfcamp zones plus midstream assets with more than 300 miles of oil, natural gas and produced water-gathering pipelines.

SM Energy recently acquired assets in Howard and Martin counties in Texas for $1.6 billion.
Photo courtesy of SM Energy.
SM Energy recently acquired assets in Howard and Martin counties in Texas for $1.6 billion. Photo courtesy of SM Energy.
In December, SM Energy closed a previously announced acquisition of Permian oil and gas assets in Howard and Martin counties, Texas, from QStar LLC for $1.6 billion. That included about 2,400 boe per day net production and expanded the company’s footprint in the area to around 82,450 net acres.

In October, RSP Permian Inc. of Dallas said it was acquiring Silver Hill Energy Partners LLC and Silver Hill E&P for $1.25 billion in cash and 31 million shares of RSP common stock in a deal valued at a total of $2.4 billion.

It gained current production of about 15,000 boe per day in the Permian and over 100,000 surface acres including 41,000 net acres in Loving and Winkler counties, Texas. Also in October, Occidental Petroleum Corp. acquired several Permian Basin interests from private sellers, including enhanced oil recovery and CO2 properties and related infrastructure in the southern Delaware Basin in Texas. Oxy agreed to pay $2 billion funded from cash on hand.

The acquisition included about 35,000 net acres in Reeves and Pecos counties, approximately 7,000 boe per day of net production from 68 horizontal wells and a minimum of 700 gross horizontal drilling locations targeting the Wolfcamp A, Wolfcamp B and Bone Spring.

Party said the hot Wolfcamp play is spreading rapidly to the west in the basin, but the Permian is known for multiple opportunities and numerous producing formations.

“We’ve got some operators starting to test multiple zones in the Spraberry. We also have some other new things like the Clear Fork. Up in New Mexico, you’re starting to see more activity in the Bone Spring,” Party said.

“The other thing going on kind of under the radar is the residual oil zone play, the ROZ play, in the San Andres. That’s in Yokum County,” he added.

Investment interest in the Permian is high now, but it tends to be focused in a small number of counties, Party said.

“If you look at the Midland Basin here, you’ve got eight or nine counties that are the heart of the basin action. That seems to be where all the activity is concentrated,” he observed.

Leasing prices have gotten so high that Bloomberg News issued a story in February wondering if the expense of getting into the Permian Basin would start to cool off investments.

“There’s been a sale in the Midland Basin that was up at $60,000 (per acre),” Party said. “We’re just now getting up into the 40s in the Delaware.”

But he hasn’t seen a slowdown in activity in the Permian hot spots, just a dwindling of available lease acreage. They aren’t making much new land nowadays, he commented.

“A lot of these core areas are leased up, tied up. You’re really talking now about going to somebody and making a deal with them,” Party said.

Downturn Defiance

Remarkably, investment money began pouring into Permian opportunities well before the industry began to recover from a prolonged slump.

Last July, Silver Run Acquisition Corp. said it would acquire an 89-percent controlling interest in Centennial Resource Production LLC, creating a combined company valued at an estimated $1.7 billion and gaining 42,500 acres in the Delaware Basin with large, contiguous acreage blocks in Reeves, Ward and Pecos counties in West Texas.

And in August, the investment firm The Blackstone Group agreed to invest $1 billion in Jetta Permian LP to acquire properties in the West Texas and New Mexico Permian area and pledged another $500 million to Guidon Energy, which had already scooped up 16,000 net acres in the Midland Basin.

Then came the stunner — not an investment deal, but an announcement by Apache Corp. in September. The company said its Alpine High prospect in the southern Delaware Basin likely holds 75 trillion cubic feet of rich gas and 3 billion barrels of oil in the Barnett and Woodford formations alone.

Apache also projected significant oil potential in the shallower Pennsylvanian, Bone Spring and Wolfcamp formations. It estimated 2,000 to more than 3,000 future drill sites in the Woodford and Barnett on 307,000 contiguous acres, primarily in Reeves County, Texas.

The promising outlook for the Permian Basin area has left the local industry giddy with anticipation.

“In Midland the feeling is it’s picking up again,” Party said. “Always a gauge is how busy the streets are, and the Loop has a lot of traffic on it.”

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Image Description

Apache Corp’s operation in the Ketchum Mountain area of the Permian Basin. Photo courtesy of Apache Corp.

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Apache Corp’s operation in the Ketchum Mountain area of the Permian Basin. Photo courtesy of Apache Corp.

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