The upstream industry is cooking in the Permian Basin, where the mercury in Midland had soared above 100 degrees in May for crews at work on the area's highest rig count in years. More activity is ahead as numerous companies have added Permian assets. One producer calls the Permian "the new old frontier." Talk swirled through town of an emerging Barnett Shale gas play on the western flank of the basin in Culberson and Reeves counties, being pursued by EOG Resources, EnCana Corp. and others. Heavy leasing activity has been reported and the first wells are being drilled. Most gas prospects still target the Morrow, Siluro-Devonian and Permian Wolfcamp. In these good times, rising costs and people shortages are big concerns. "The challenge around here is there are not enough competent people for the activity level. Companies have to wait on rigs and other services. Pulling units are stuck in the yard without people to run them," says Bruce Woodard, district operations manager for Tulsa's Latigo Petroleum, which has added the Permian as a core area. Dayrates have escalated some 35%, and more for deep rigs that test the Morrow. Service costs are up and casing costs have nearly doubled, adds Bill Siruta, Latigo exploration manager. "People are cautious [unlike the last boom] due to these escalating costs. Even housing costs are way up. So this time, we see more precise, controlled drilling activity." Between 1999 and 2002, average oil-field operating costs increased a third to $6.15 per barrel and nearly doubled for gas fields, to 55 cents per thousand cubic feet, according to Ziff Energy Group's Permian operating-cost benchmarking study of 285 fields. The basin produces about 823,000 barrels of oil per day, or 25% of U.S. oil output. Advanced technologies such as horizontal drilling and CO2 recovery could allow companies to get another 30 billion barrels out of the basin, according to university studies cited by Ziff. High oil and gas prices make this old basin look like a fresh core area. Occidental Petroleum-the dominant Permian Basin player-just paid $972 million for additional fields from ExxonMobil and made two other acquisitions for a total of $300 million earlier this year. Expanding its new Permian holdings, Oklahoma City-based Chesapeake Energy Corp. bought privately held Pecos Production Co. for about $200 million. It has six rigs working on the Texas side of the basin and six in New Mexico. They are drilling Morrow gas wells from 12,000 to 15,000 feet in New Mexico and 16,000 to 18,000 feet in Texas. "We like the Permian Basin and want to be bigger there. We wouldn't mind being a Top 5 oil and gas producer there eventually," says Chesapeake chief executive Aubrey McClendon. "There are high lifting costs and the leasing situation can be complex, but with $50 oil, it's the only place to find more oil onshore in the U.S., except for the Williston Basin." Since 2003, Chesapeake has spent $1.4 billion on Permian acquisitions and drilling. Home-grown operator "People are a bit leery on the pessimistic side and cautiously optimistic on the optimistic side," says Don Tiffin, Parallel Petroleum Corp. chief operating officer. "We're all enjoying good revenues now-West Texas Intermediate is a sweet crude that commands a premium price. But we are starting to see some margin compression." Parallel Petroleum pulls 72% of its daily production from the Permian Basin, which represented 90% of its reserve value in December 2004. Currently, the Midland company is using one drilling rig and eight pulling units for workovers and completions. Workovers and restimulations are big business in the Permian Basin. The Fullerton (San Andres) Field in Andrews County north of Midland yielded 47% of Parallel's first-quarter production, or 1,583 barrels of oil equivalent (BOE) per day. Parallel acquired this property in 2002 and picked up additional interests last year. Since the first deal closed, it has restimulated 85 wells and drilled six new ones. This year it plans to drill 13 infill wells and do six more re-fracs. "We try to make everything we do a multi-well program so we can get a crew and keep it, and we try to adhere to a consistent frac schedule. For example, we try to frac every Wednesday at the Carm-Ann Field," says Tiffin. Parallel acquired Carm-Ann in two pieces in late 2004 and first-quarter 2005 for an aggregate $18.7 million, creating yet another core area within 50 miles of its Midland headquarters. The field straddles the Andrews-Gaines county line. Some 25 leases covering 5,360 gross acres contain 67 producing wells. Another 17 infill wells and 22 workovers are scheduled this year. Early results from the first four wells were much better than anticipated, Tiffin says. In Scurry County, Parallel plans 16 workovers and 15 development wells in shallow zones in its Diamond M Unit, pending good waterflood response. In the Diamond M Canyon Reef Unit nearby, 24 workovers are on tap, several to deeper oil zones. New entrants The Permian Basin is one of the most attractive in the U.S. for A&D activity as buyers seek long-life gas resources, even though it's known more for oil production. Last year, Latigo Petroleum opened a Midland office now staffed with about 32 people, following an asset purchase from a private local independent. The deal included about 15 fields and an exploration joint venture already under way. About 50% of Latigo's 2005 drilling budget will be spent in the Permian. Chief executive Randy Foutch's two previous E&P companies were active in the region as well. "The Permian has always been good for us. If you are willing to do a lot of technical blocking and tackling, you can recover a lot of hydrocarbons. We thought some of the existing fields had deeper exploration potential-and on some of them we were right." At press time, Latigo had two rigs running, one drilling a shallow Delaware oil test in Reeves County to about 5,000 feet, the other drilling in the Grayburg-San Andres formation in Ector County. Latigo may have three or four rigs running later this year depending on interpretation of data and drilling results. "A couple of the fields we bought are 7,000-acre units that have been producing for 50 years. In some cases the sands were never effectively water-flooded and we're now getting some of the oil that was missed; in others the entire section was never drilled and we're getting virgin pressures; and in some cases, a combination," Foutch says. "There are six or seven pays, so it's not a question of finding oil; it's a question of which are economic and where the sweet spots are." The company is generating prospects in Eddy, Chavez and Lea counties on the New Mexico side of the basin also. Two landmen are looking for additional acreage. At the Foster area over several units in Ector County, Latigo is reactivating the waterflood and plans new drilling and remedial work. Whiting Petroleum also entered the Permian Basin last year. The Denver firm owned one property in Yoakum County for some time but tried to expand its Permian position with several offers through the years. Last September, Whiting succeeded, paying $345 million to acquire 17 fields from privately held CrownQuest Operating LLC. About 70% of the assets were in Texas, the rest in New Mexico. The deal added 38 million cubic feet equivalent of daily production and 251 billion cubic feet of proved reserves. Now Whiting has two rigs drilling development and infill wells, with a third to start soon. About 23% of Whiting's $130-million 2005 drilling budget will be spent in the basin, where a third of its proved reserves are now. "We're busy exploiting what we have but we are continually making offers and would like to expand our position," says Doug Lang, Whiting vice president of acquisitions and reservoir engineering. The company is installing waterfloods in Parks Field in Stevens County and in Billy (Abo) Field in Lamb County. It is also negotiating to unitize leases in Would Have (Clearfork) Field in Howard County so that it can expand to the east a waterflood already under way there, Lang says. A recent Dillard formation discovery at Would Have has added at least five additional locations. "We're drilling development wells now to determine the extent of the field and how much we can expand the Would Have waterflood, and we're negotiating with other working-interest owners to unitize more acreage." The Signal Peak (Wolfcamp) Field in Howard County is full of low-risk, continuous-phase gas exploitation opportunities and potential for 40-acre downspacing. The Parkway Field in Eddy County, New Mexico, also is active. "If we develop the PUDs alone, we could increase production on Would Have, Signal Peak and Parkway 50% in the next 18 months," Lang estimates. Waddell Ranch Burlington Resources has hired Schlumberger to make the most of Waddell Ranch, a huge, older field in Crane County, Texas. Discovered in 1927, the 80,000-acre field still has 950 producing wells, 300 injection wells and 600 temporarily abandoned wells that might be worked over. "Over the past three years we've held production flat at 5,500 to 6,000 barrels of oil and 33 million cubic feet of gas a day," says Jeff Ryan, Schlumberger project manager for Waddell Ranch. Schlumberger (or a predecessor acquired in 1998) has operated Waddell Ranch since 1991 for Burlington. Other interest owners are ExxonMobil, Petrohawk Energy and two private companies owned by descendants of the discoverer. The oil wells average an unexciting seven barrels a day, but the decline curve is far slower than that found on the Gulf Coast. Cumulative production is 423 million barrels of oil and 694 billion cubic feet of gas, yet experts think Waddell Ranch could produce for another 10 years. There is plenty to do-some 14 pay zones from 2,000 to 10,000 feet produce oil and gas. The wells are very closely spaced. In several cases, three wells within 100 feet of one another might produce from three different horizons. With this complexity and production spread over so many wells, every detail is key to prolonging its life and keeping costs in check. That's why Schlumberger's integrated project management (IPM) holds sway here. IPM focuses on reducing costs and well mechanical failures, and drills and does workovers to fight a 10% annual decline in oil and 15% decline in gas output. Tactics include a big emphasis on lifting costs, improved equipment for pump-off control, and alliances with several service providers. Employees with deep experience make a difference as well. One, age 69, has worked in the field his entire career. In 14 years, some $200 million has been spent and 50 million BOE have been found for an all-in cost of about $5 per BOE. "We have a rule of thumb here: finding and development for $5 and lifting costs of $5. The Ziff study indicated we do more with less people and remain in the top 25% for low costs," says Ryan. CO2 boosts recovery About 22% of the Permian Basin's oil production comes from CO2 flooding for enhanced recovery, and Houston-based Kinder Morgan leads the way. It ranks second after Oxy Permian in oil production in Texas, largely thanks to its CO2 operations in the basin. It produces nearly 60,000 barrels per day. Kinder Morgan CO2 Co. LP is the fastest-growing segment of all the Kinder Morgan companies, which include CO2 and pipelines. Since it bought the 1948-vintage, 1-billion-barrel Sacroc Field five years ago, Kinder Morgan has more than tripled production to about 33,500 barrels a day from the Canyon Reef formation. From 2002 through 2005, Sacroc's annual budget of about $200 million has been for drilling, workovers, CO2 injection and facilities. Last year the company added 225 million cubic feet of daily gas handling capacity and reactivated 84 wells. But water injectivity problems caused oil production to dip a bit, a problem not seen before, so Kinder Morgan has had to adjust both that and the way it pressured the reservoir. Production is now rising again. Its new 100-megawatt power plant in the middle of the gas-processing plant was to begin operating this summer, which will alleviate the cost to run gas compressors. In the future, at the so-called platform area to the north where the pay is even thicker and more complex, the company is trying to determine its best strategy. "If everything behaves as we hope, we could get production up to nearly 50,000 barrels a day. There is a future at Sacroc-we just don't know if it is a breadbox or a garage. The fact we've been able to change this field so profoundly every year is remarkable," says Tim Bradley, president of Kinder Morgan CO2 Co. in Houston. Kinder Morgan also has a recently acquired interest in the Claytonville Field. "It's only 5% the size of Sacroc. It's been on waterflood for awhile and is producing less than 200 barrels a day, but we think it may be a good CO2 flood candidate." Sacroc contributes 63% of the CO2 division's cash flow and the old Yates Field, acquired from Marathon in 2003, is 11%. At Yates, where the pay is only about 1,000 feet deep, the company cannot force fluids around with much pressure, so must take a more measured approach. A tremendous amount of oil is trickling down from the gas cap to the oil rim, Bradley explains, and it is very amenable to CO2 injection, which started in 2004. The reservoir has more than 3 billion barrels of oil remaining, even though the field has produced 1.6 billion barrels since 1926. This year at Yates, Kinder Morgan will drill 100 horizontal wells, with 600-foot laterals. The wells pay out in three months at these oil prices, Bradley says. "Our forecast for this year was to reach 19,100 barrels a day but we are already at 24,000. The CO2 response has been better than we expected."