The drawworks on Precision Drilling Corp.’s Rig 77 screech, groan, clang and shudder in the clarity of early morning sunlight as the top-drive electric rig approaches 11,000 feet of vertical depth, 60 miles east of Carlsbad, New Mexico, near the northeast boundary of the Delaware Basin. Twin blasts from a claxon horn echo across the New Mexico plains, and a crew of mostly Louisiana native sons scurries up ladders to the rig floor in preparation for a pipe change.

PDC 77 is drilling the Corazon State Unit 1H for Midland-based Concho Resources Inc. Within 24 hours, the crew will kick off a 7,500-foot horizontal lateral under New Mexico ranchland, where Concho drills as many as four horizontal wells per section. It is targeting the Third Bone Spring in a multi-layer set of geologic opportunity.

That opportunity covers a lot of territory, because the basin spans five counties in West Texas and three counties in southeast New Mexico. Nearly 85% of Delaware Basin drilling is concentrated in three of those West Texas counties, including Loving, Reeves, and Ward, and two of the counties in New Mexico, Eddy and Lea.

The Williams Ranch house

The Williams Ranch house, built in 1908 and abandoned in 1941, sits 3,000 feet below the western escarpment of the Guadalupe Mountains, south of the New Mexico state line, in Guadalupe Mountains National Park. The Victorian home is located at the mouth of Bone Spring Canyon, which provided the name to the type locality of a geologic formation oil and gas operators are now exploiting a hundred miles east and 8,500 feet deep in the Delaware Basin.

Rig count in the Delaware Basin, which averaged 175 units in the second half of 2012, compares to Appalachia’s Marcellus and Utica shale drilling in volume and is slightly larger than the number of rigs active in the western Anadarko Basin in Oklahoma and the Texas Panhandle. About 45% of rigs at work in the Permian Basin are in the Delaware Basin portion of the province.

Horizontal drilling continues to rise in the basin and is roughly equivalent, at 75 units, to horizontal activity in the state of Pennsylvania or in the Mississippi Lime play on the

Overleaf: Two fluid-hauling vehicles, part of a never-ending convoy of oilfield trucking, roll west toward the sunset across the open, sparsely inhabited plains near Odessa, Texas.Kansas/Oklahoma boundary.

The Delaware Basin

The Delaware Basin is the westernmost sub-basin in the greater Permian Basin, midway between Midland and El Paso, Texas.

Concho has nine rigs at work in the northern Delaware Basin. Ninety miles southeast of the Corazon 1H, Tim Leach, chief executive for the Midland, Texas-based operator, reflects on the remarkable transformation under way in the basin.

“Most of us in the industry didn’t think there was any significant commercial oil that could be recovered vertically from these reservoirs, certainly from the shales, but also the Bone Spring sand reservoirs, the Wolfcamp, and the deeper Pennsylvanian shales,” Leach recalls.

But three years ago, unconventional drilling techniques in the form of extended-reach horizontal drilling and high-volume, multistage fracturing—the revolution that is remaking the North American oil and gas landscape—found their way to a region where the frontier ended just 130 years ago. The Arab Spring-inspired boost in crude oil prices in early 2011 also helped.

Texas

The old and the new West cross paths at the Texas state line along U.S. 285. A truck hauling oilfield fluids crosses into New Mexico while Filipe Leite, and his horses, from left, Frenchie, Bruiser, and Texas, mark another milestone six months into a two-year hemispheric journey south from Calgary, Canada, to the Leite family ranch in Brazil.

Now Concho, which went public in August 2007, is adapting rapidly to the evolving Permian landscape. The Delaware Basin is one of its three core Permian holdings. It has grown rapidly through a steady diet of strategic Permian acquisitions mixed with organic drillbit growth, and has become the second-largest oil producer in the region.

“Today, our inventory of drilling opportunities is as deep as it has ever been,” Leach says.

Industry production in the core Delaware Basin averaged 259,000 barrels of oil per day and 1.2 billion cubic feet of natural gas per day through October 2012, according to the respective oil and gas regulatory agencies in Texas and New Mexico.

“It’s still early in the Delaware Basin, but one of the differences between the Bakken, the Eagle Ford and the Permian is that there are so many zones in the Permian that industry is still

trying to delineate. It is just one or two zones in the Eagle Ford and the Bakken, and the industry has gotten to the manufacturing stage a lot quicker in those plays.

“But the size of the prize in the Permian is much bigger.”

Concho’s prospects in the Delaware took a step change upward in October 2010 when the company acquired Artesia-based Marbob Energy Corp. for $1.6 billion. Marbob held alternating leases on the Northwest Shelf where Concho had developed a core asset drilling vertical Yeso formations. But Marbob had also drilled 60 short lateral horizontals testing new concepts in the Bone Spring in New Mexico and held substantial acreage in the northern Delaware Basin.

Precision Drilling Rig 77

Crew members on Precision Drilling Rig 77 make up pipe while drilling for the Bone Spring formation at the Corazon State Unit 1H. The rig is working for Concho Resources, 60 miles east of Carlsbad, New Mexico.

By 2012, Concho had completed a string of vertical and horizontal tests to delineate the stacked formations in the Delaware, which has as many as seven discrete targets, including Delaware sands, the three Bone Spring sand intervals, and the gassier Avalon shale. As 2013 gets under way, Concho is accelerating its horizontal development across the Delaware in New Mexico and Texas.

“For us, it has moved south in the Delaware, and when you move into the southern part of the basin it is still in the early exploration phase,” Leach says. “We’ve drilled a handful of wells and they have been successful but we’re trying to get enough repeatable success to where we understand the rocks. The rocks exist throughout the Delaware, but they change characteristics depending on where you are.”

The Delaware Basin accounted for 35% of the company’s capital spending in 2012. In 2013, Concho will allocate 54% of its $1.4-billion drilling and completion budget to the Delaware as it moves into a broader-based horizontal effort. In the Permian as a whole, Concho is targeting a 20% gain in organic production growth by allocating more than 60% of its 2013 spending to horizontal drilling, which will employ half of the 30 rigs the company will work in 2013. In the Delaware Basin,

Concho will move from nine operated rigs to 11 in 2013 and is targeting 175 wells versus the 120 the company drilled in 2012.

Back-of-the-envelope calculations of industry capital spending in the Delaware Basin estimate the market at $15 billion in 2013, about par with 2012.

Devon’s Delaware

Andy Coolidge, business unit vice president for Devon Energy Corp.'s Permian Basin assets, ranks the Delaware Basin near the top for the company’s North American opportunities.

“The Delaware Basin offers some of the best economics that Devon has in our portfolio,” Coolidge says. At year-end 2012, Devon was running nine horizontal rigs in the basin and examining whether to increase the number in 2013. The company quickly transitioned from vertical gas to horizontal oil after the price of natural gas dropped in 2009.

“The multiple that you’ll spend from a vertical to a horizontal will sometimes be between two and three times the cost,” Coolidge says, “but the initial rates can be five to 10 times better.”

Josh Holder

Above, crew member Josh Holder measures mud weight in recycled water.

A series of acquisitions combined with legacy assets from Devon’s mergers and acquisitions provided the company with 400,000 net acres spread from Eddy and Lea counties in New Mexico to the southern end of the Delaware Basin near Pecos, Texas. The company is targeting the Third Bone Spring in the deeper portion of the Texas Delaware Basin where the sands are thicker, fan shaped, and less channelized, although Devon has been drilling in all three Bone Spring sands farther north, as well as in the shallower Delaware sands.

“We have done some Avalon drilling and some Wolfcamp drilling, but those plays at this time are not as competitive as the Bone Spring and the Delaware,” Coolidge says.

Drilling and completion costs in the shallower First and Second Bone Spring in southeast New Mexico range from $4.5- to $5.5 million, Coolidge says. But the wells deliver excellent production rates and estimated ultimate recoveries (EURs) between 350,000 and 450,000 barrels of oil equivalent (BOE) in normally pressured reservoirs on 4,500-foot laterals at 8,500 feet. Deeper, higher-pressured.

Andy Coolidge, business unit vice president for Devon Energy Corp

Andy Coolidge, business unit vice president for Devon Energy Corp.’s Permian Basin unit, says, “The Delaware Basin offers some of the best economics that Devon has in our portfolio.”

Third Bone Spring wells to the south can cost $8 million to $8.5 million where Devon is targeting EURs of 500,000 to 700,000 BOE at 10,500 feet using 4,000- to 5,000-foot laterals.

Devon was on track to have drilled 110 Delaware Basin wells in 2012 on a capital expenditure of $350 million and was guiding for production of 28,000 BOE by the end of 2012.

“A lot of the locations we plan to drill in 2013 have already been de-risked,” Coolidge says. “At the same time we’re testing other concepts such as the Avalon and Wolfcamp, and some others. We believe we’re going to uncover even more potential going forward.”

West of the Pecos

Denver-based Cimarex Energy Co. likes what the Delaware Basin brings to the company’s portfolio, which includes areas of focus in the Midcontinent, Gulf Coast and Permian Basin.

“The Permian is absolutely in the upper tier of our investment portfolio,” says Tom Jorden, chief executive for Cimarex. The independent emphasizes growth through the drillbit while living within cash flow, though the company got its start in the Delaware via the $2.1-billion, all-stock 2005 acquisition of the old Magnum Hunter Resources, Inc., which held 370,000 net acres in the Permian. Since then, Cimarex has quietly constructed a 460,000-net-acre position in the Delaware by high-grading properties through smaller, targeted acquisitions.

Tom Jorden, chief executive for Denver-based Cimarex Energy Co.

Tom Jorden, chief executive for Denver-based Cimarex Energy Co., notes the company will spend an estimated $800 million in 2013 drilling Delaware Basin wells targeting the three Bone Spring sands as well as the Wolfcamp shale on both sides of the border between New Mexico and Texas. “Those oil wells that we in the industry like to talk about also make a lot of gas,” he says.

The company reported Delaware Basin production of 274.5 million cubic feet equivalent per day, 71% liquids, in third-quarter 2012. It has focused on 35,000 net acres of Third Bone Spring sands in Texas and 65,000 net acres incorporating the Second Bone Spring in Eddy and Lea counties, New Mexico. Cimarex is also extending the Second Bone Spring play south into Culberson County, Texas.

According to Jorden, the Third Bone Spring generates some of the best internal returns for Cimarex company wide, with the Third Bone Spring in Texas averaging 30-day initial potentials of 1,000 BOE per day, 80% oil, on well costs of $7.5 million.

“We don’t view the Bone Spring as a resource play,” Jorden explains. “We use very good maps. We have to pay very close attention to how we define net pay. You can drill a poor well in the Bone Spring trend. You can drill a dry hole in the Bone Spring trend. The great wells and the dry holes aren’t that far apart, so you really

have to work on sets of net-pay maps that you believe are well-calibrated and are targeting individual locations.”

Cimarex is investing $800 million annually on its Delaware program, mostly drilling $6.5-to $7.5-million wells featuring 5,000-foot laterals and a dozen frac stages. Recent developmental efforts have gravitated toward the 100,000-net-acre block Cimarex owns in Culberson County, Texas, south of the New Mexico state line and west of the Pecos River.

That block features multiple-stacked plays from Pennsylvanian-aged shale up through the lower Permian Wolfcamp and the ubiquitous middle Permian-era Bone Spring sands. Further potential resides in the overlying Delaware sands. The stacked nature of the play allows Cimarex to focus on reducing well costs by optimizing its infrastructure through centralized operations such as tank batteries, central compression and saltwater disposal.

El Capitan

Sunlight bathes El Capitan in alpenglow at day’s end in Guadalupe Mountains National Park. The limestone prominence, framed in a drainage culvert, is the most distinctive landmark in the Guadalupe Mountains and, at 8,085 feet, is an uplifted remnant of the Capitan barrier reef that marked the boundary between shallower shelf waters and the deepwater Delaware Basin in Permian geologic times.

Cimarex is also delineating the horizontal Wolfcamp shale in Culberson County. Basin-wide, the company has drilled 29 horizontal Wolfcamp wells through the third quarter of 2012, averaging 6.4 million cubic feet of gas equivalent per day, 47% liquids, on $7.5-million wells.

“Cimarex was an early mover in that Delaware Basin Wolfcamp,” Jorden says. “We’ve been at it for four or five years. There were days when we wondered whether that play was going to work. I really credit our technical team with figuring this out, not only how to drill and how to complete, but what zones to target and what to focus on.”

From Wolfbone to Wolfcamp

The Wolfbone play in Reeves County, Texas, boasts one of the more intriguing names in oil and gas. The name originates in commingled production from the lower Wolfcamp shale and the overlying Third Bone Spring sands. The Wolfbone is a vertical stacked play, similar to the Wolfberry in the Midland Basin, but offers higher returns and better production.

The Wolfbone is in the deepest portion of the Delaware Basin and has been the focus of an intense development effort over the past three years, with more than 35 rigs at work west of the Pecos River and another 15 active east of the river in Ward County. Operators will be working during 2013 to delineate the next iteration in the Delaware Basin, the transition from the highly successful vertical Wolfbone to prospecting for horizontal Wolfcamp shale, where the industry estimates as much as 108 million barrels of oil in place per section in a sealed, over-pressured geologic system with abundant natural fractures.

Corazon State Unit 1H for Concho Resources Inc.

Early morning light brightens the blades of an abandoned windmill while Precision Drilling Corp. Rig 77 drills ahead on the Corazon State Unit 1H for Concho Resources Inc. near the northeast boundary of the Delaware Basin, 60 miles east of Carlsbad, New Mexico. Water has been an issue for pioneers and the oil and gas industry in the semi-arid Delaware Basin.

That transition will create a second liquids-rich core area for Dallas-based Comstock Resources Inc. When natural gas prices collapsed in 2009, Comstock, an early mover in the Haynesville shale, faced a challenge. The glut of shale gas nationwide rendered the company’s exceptional Haynesville shale acreage uneconomic. Comstock decided to keep the Haynesville on ice until gas prices recovered, and in the interim sought ways to transition to a liquids-rich portfolio. It acquired acreage in the Eagle Ford shale oil window in McMullen County, Texas, where Comstock could transfer rigs and frac services from the Haynesville. But with expansion in the Eagle Ford on everyone’s horizon, high acreage costs prompted Comstock to look for a second basin where it could diversify.

That effort culminated in the December 2011, $332.7-million purchase of Eagle Oil & Gas Co. acreage prospective for Bone Spring and Wolfcamp shale on 44,000 net acres in Reeves County, Texas. Comstock, with its geologic familiarity in deep basin work in the Haynes ville, found an analog in the West Texas Wolfbone, which is in the deepest section of the Delaware Basin.

“The Wolfbone play in our area is about 1,500-feet thick with several distinctive pay zones in shales and silts,” says Gerry Black - shear, vice president of exploration for Comstock Resources. “It is not as easy as a one-zone play like the Haynesville or the Eagle Ford that has one or two main zones where once you have proven up the area you move into harvest mode.

The Williams Ranch house

The Guadalupe Mountains, visible on the horizon from all points in the 130-mile-long Delaware Basin, form a spectacular early-morning backdrop to an El Paso natural gas pipeline station north of the Texas state line.

“In the Delaware we’re still going through all the phases of development from early science

to optimization. And there is still a lot of upside in the discovery phase for shallower zones.”

Comstock is running a three-rig program in the Delaware as it works through an inventory of 935 vertical wells in the Wolfbone. Vertical wells cost $4 million to $4.5 million to drill and complete, using eight to 12 frac stages that produce EURs ranging from 180,000 to 350,000 BOE on 30-day initial potential rates of 150 to 300 BOE. The company drilled 40 wells in 2012 with capital expenditures of $170 million and plans to have at least one rig drilling horizontal Wolfcamp wells in 2013.

“It’s still early, but that’s what we really bought our property for,” says Mark Williams, chief operating officer for Comstock. “One of the things we liked about the area is that it is stacked. We have Delaware sands production. We have the Avalon shale, which is in discovery mode. We know it’s a forefront, we know it has a lot of oil in place. It’s not being produced in this area yet. Below that is the Third Bone Spring, which we are developing, and the Wolfcamp shale.”

Farther west, outside the bottom of the basin, industry results have not been as good, leading to a perception that the Delaware works best east of the Pecos.

“It is related to the igneous uplift to the west,” Blackshear says, referencing the Laramide orogeny that created the mountains in the Texas Trans Pecos. “The play gets very gassy going west. It’s just thermal maturity. As you move back into the bottom part of the basin, where we are, the thermal maturity is ideal for crude oil generation.”

Wolfbone

Top, Gerry Blackshear, vice president of exploration, and Mark Williams, chief operating officer for Comstock Resources Inc., like the multilayered stacked opportunity in the Wolfbone near Pecos, Texas. The play features targets in the Wolfcamp shale, the Bone Spring sands, the Avalon shale and the Delaware sands.

Birmingham, Alabama-based Energen Corp. is well aware of the idiosyncracies of hydrocarbon production in the Delaware Basin. Energen Resources Corp., the company’s oil and gas exploration subsidiary, is in full-stage development of the Third Bone Spring east of the Pecos River in Loving, Ward and Winkler counties.

“When we talk about Third Bone Spring we really divide it up east of the river and west of the river,” says Energen chief executive James McManus. “We view the west as riskier—gassier, with higher water production and the wells in general have not performed as well as they have east of the river. East of the river we have had phenomenal success.”

That success includes the Black Mamba 1-57 #1H, which generated 2,257 barrels of oil equivalent per day, 69% oil, near the junction of Loving, Ward and Reeves counties, and reportedly is the single-best well in the Third Bone Spring to date. Energen’s initial rates through the first nine months of 2012 have averaged in excess of 1,000 BOE and 30-day rates of 680 BOE, 68% oil, in the Third Bone Spring.

Pecos River

A fluid-hauling truck approaches the Pecos River at daybreak in New Mexico, just upstream from an El Paso pipeline ferrying natural gas to markets outside the Delaware Basin. The river today is a ghost of the ornery stream that Texas cattlemen once called “the graveyard of the cowman’s hopes.”

“These wells are generating the best returns we have in the company,” McManus says. Energen has a two-year inventory remaining in the Third Bone Spring in its core area, east of the Pecos River.

Energen has spent more than $1 billion on Permian Basin property and leasehold acquisitions since mid-2009, establishing sizeable positions in the Delaware Basin and in the Midland Basin, where it is drilling vertical Wolfberry wells. The company’s legacy assets are waterflood properties primarily in the Central Basin Platform. The company expects oil and natural gas liquids to make up more than half of its production in 2013 and plans to invest $130 million this year to prospect the horizontal Wolfcamp shale in the Delaware and Midland basins and possibly the horizontal Cline shale in the Midland Basin. The company also may venture west of the Pecos River to prospect the vertical Wolfbone.

And if gas prices recover, Energen is intrigued by the neglected Avalon shale. “Right now the Avalon has not gotten a lot of focus because it is a gassier formation,” McManus says.

“I think the Avalon shale will come back into play at some point, and that formation is uphole on all of our 110,000 net acres in the Delaware Basin.”

Energen Resources Corp. chief executive James McManus

Energen Resources Corp. chief executive James McManus notes most acreage is already leased in the Delaware Basin as the region enters the development cycle. The company’s Black Mamba 1-57 #1H, at the junction of Loving, Ward, and Reeves counties in Texas, is reportedly the largest producing Third Bone Spring well to date at 2,257 barrels of oil equivalent per day.

McManus, who describes the Delaware as early in the development cycle, believes major acreage acquisition in the tight-formation development is mostly finished.

“Acreage in the Delaware Basin is largely under lease,” McManus says. “I don’t think there is a lot more that can be grabbed in the Delaware Basin. Companies have largely established their positions, although there may be continued consolidation.”