The lonely character of the Permian Basin seems more suitable to horses and stargazing than sophisticated drilling, but it’s the subterranean mystery of the place that has attracted so much money and manpower to Texas and New Mexico.
The Permian, it turns out, is not stingy with its secrets, giving them up to anyone willing to look hard enough.
The basin has displayed remarkable resilience in the low commodity price environment. And just as the Midland Basin was beginning to feel crowded, the industry is brimming with excitement anew at the Delaware Basin.
It isn’t just that the Delaware has proved itself economical despite low oil prices or that it has started to command high-value transactions. The basin has also continued to surprise with extraordinary discoveries.
“We’ve had a remarkable summer in the Delaware Basin,” Toby Darden, founding partner of Vermilion Cliffs Partners, told attendees of Oil and Gas Investor's recent A&D Strategies & Opportunities conference in Dallas.
From July through September, the Delaware saw $6.2 billion in deals from companies such as EOG Resources Inc. (NYSE: EOG), Diamondback Energy Inc. (NASDAQ: FANG), PDC Energy Inc. (NASDAQ: PDCE) and Mark Papa’s Silver Run Acquisition Corp. Though it still trails valuations in the neighborhood—the Midland Basin commands higher per acre prices—the Delaware is rapidly catching up.
Apache Corp. (NYSE: APA) gave the Delaware another boost early September with a billion-barrel oil discovery primarily in Reeves County, Texas, which “raised the awareness for all of us on what lies ahead in proving the Delaware,” Darden said.
However, some analysts argue whether Apache’s discovery is replicable. Nevertheless, A&D activity will continue to power Delaware deals as companies buy their way into what some are calling the industry’s “new hot play,” said Irene O. Haas, senior research analyst with Wunderlich Securities Inc.
Alpine High Fever
On Sept. 7, Apache introduced the world to its new resource play in the Southern Delaware, dubbed Alpine High.
Apache took a chance in Western Reeves, which Haas said has not been a popular zip code area as it is viewed as being too gassy and too structured.
“The Woodford/Barnett shale play failed a decade ago, mainly due to high clay content,” she said in a Sept. 26 report.
Advantage, Apache: the company estimates Alpine High holds 75 trillion cubic feet of rich gas and 3 billion barrels of oil in place on its acreage position in the Mississippian Barnett and Devonian Woodford formations alone. The Houston-based company added that significant oil potential still exists in the shallower Bone Spring, Wolfcamp and Pennsylvanian.
Apache’s Alpine High Play consists of 307,000 contiguous net acres in the Southern Delaware, primarily in Reeves. The acreage is comprised of 4,000 feet to 5,000 feet of stacked pay in up to five distinct formations including the Bone Springs, Wolfcamp, Pennsylvanian, Barnett and Woodford.
The company built the acreage position over the last 18 months at an average cost of about $1,300 per acre, John Christmann, CEO and president of Apache, said on a press call Sept. 7.
Apache has identified more than 3,000 future drilling locations in the Woodford/Barnett, which are in the wet gas window and expected to deliver a combination of rich gas and oil.
So far, Apache has drilled 19 wells in the play, with nine currently producing in limited quantities due to infrastructure constraints. This includes six wells in the Woodford, one well in the Barnett and one well each in the shallower Wolfcamp and Bone Springs oil formations.
“This really is a giant onion that is going to take us years and years to peel back and uncover,” Christmann said.
While Apache’s discovery is large, Haas said she believes it’s not easily replicable, “though the Permian will likely continue to be a great hunting ground for oil finders, both large and small.”
Imre Kugler, senior consultant of energy research at IHS Markit, pointed out that unconventional drilling and completion technology has advanced in the past 10 years. However, well performance has been critical in the current oil price environment.
“You don’t have as much of a cushion or tolerance for failure or poor performance at today’s prices as you did at $120 a barrel,” Kugler said in a Sept. 26 report.
Apache’s Alpine High acreage is surrounded by both “quality” and “poor performing” wells by a variety of operators, he added.
“It remains to be seen whether Apache’s initial success in the play will carry over into the Wolfcamp Formation. It’s too early to tell, but more drilling and appraisal will be necessary,” he said.
Vermilion Cliffs’ Luck
Vermilion Cliffs, whose acreage neighbors Apache’s Alpine High discovery, had shelved its Delaware assets due to its distance from other producing areas of the basin, Darden said.
Founded in 2014, Vermilion Cliffs holds 88,000 net acres in the Permian and the Eastern Shelf, including positions in the Midland and Delaware. The company’s founders, Darden and Jeff Cook, have worked together in the oil business for more than 30 years.
Vermilion Cliffs’ acreage position in the Delaware consists of about 35,233 gross (34,068 net) acres in Culberson and Reeves counties. The company has three producing wells and one saltwater disposal well on its acreage.
Darden said his team had discounted the Barnett/Woodford because it “was part of an earlier play we had tried.”
Instead, much of Vermilion Cliffs’ horizontal development has been focused on its acreage in the Midland Basin, where the company holds 33,256 gross (28,902 net) acres in Howard and Glasscock counties in West Texas.
NOTE: Wolfcamp Water Partners is a water supply project in the Delaware Basin owned by Vermilion Cliffs.
In light of Apache’s discovery right next door to the company’s Delaware position though, the company will most likely give those assets another look, Darden said.
“Now we're right in the middle of the producing trend and of course, we'll be drilling some wells next year and probably running 3-D seismic before that,” he said.
Not only did Apache’s find increase the number of potential producing formations in the Delaware, but it also increased the size of those targets, Darden added.
“I think the delineation of those targets is probably going to take a couple of years, but it will accelerate the activity in that basin,” he said.
Compared to the Midland Basin, the targets and total depths are going to be deeper in the Delaware.
“They are thicker in total sediment though and could be a much larger prize when fully developed,” Darden said.
The gas-oil ratio (GOR) is greater in the Delaware than other Permian sub-basins, he added.
“There’s some theory that the higher GOR in the Delaware Basin will actually help recover more of the oil in place than we'll see in the Midland Basin,” he said.
Besides unlocking the geological code, development of the Delaware has been constrained due to the lack of infrastructure.
“To make [the Woodford/Barnett] viable, gathering infrastructure will need to be built out,” Kugler said. “However, the play’s proximity to the nearby Waha Hub helps.”
Additional takeaway capacity may be required to “fully monetize” gas and NGL production from the play, he added.
Several pipelines have recently been built in the Delaware and are set to be expanded to support the region’s growing activity, Darden said.
“Vaquero has a pipeline, Eagle Claw has a pipeline in the Delaware and Brazos Midstream just put in a pipeline system in the Delaware,” he said. “And those will be expanded to accommodate this new drilling.”
Exploration wells flaring on Apache’s Alpine High acreage within the Delaware Basin in Reeves County, north of Balmorhea, Texas. Darden, who captured the footage on Vermilion Cliffs’ neighboring acreage, said the company had been watching Apache's flares over time. “The flares to me look pretty substantial ... It’s very pleasant for us to find out that a big player is right next door having great results,” he told Hart Energy. (Video courtesy of Toby Darden, founding partner of Vermilion Cliffs)
After almost a century of production, the Permian Basin seems to have found another second wind.
“Shales in the Permian Basin are in many ways just getting warmed up. We’re going to see huge growth in that market,” Darden said.
And luckily for Darden, Vermilion Cliffs has found itself in the middle of another hot play.
Emily Moser can be reached at firstname.lastname@example.org.