Chevron Rekindles Old Texas Flame

MIDLAND (Dow Jones Newswires), Apr. 8, 2011

Climbing oil prices are making the aging oil fields of Texas's Permian Basin look attractive again to some big petroleum companies.

Chevron has pumped oil from this well-plowed area of west Texas and New Mexico since 1925. But in recent decades, as production in the area declined, Chevron and other companies used it primarily as a lab for oil-extraction techniques that could be employed in larger projects elsewhere.

This year, Chevron, the second-largest U.S. oil company by market value after ExxonMobil, plans to boost investment to $600 million in the Permian Basin, 32% more than a year earlier, and drill twice as many wells as it did in 2010 in the area. Its goal is to squeeze more oil out of these aging fields at a time when oil prices have risen to over $100 a barrel -- levels not seen since summer of 2008 -- and access to oil in the Gulf of Mexico and lucrative foreign fields has become more of a challenge. The company is also seeking to employ new technologies to unlock significant amounts of Permian crude that were hard to reach before.

Some "people in the industry said the Permian Basin was used up, tapped out, yesterday's news," Chevron Vice Chairman George Kirkland told company employees and retirees in a recent gathering here. But "we listened to veterans here who reminded us that the best place to find oil is where it has already been found."

Chevron and other major oil companies, such as Exxon and ConocoPhillips, began refocusing on this flat, arid region dotted by hundreds of rusty pump jacks last year, after the federal government temporarily banned new exploratory drilling in the deep water Gulf of Mexico following BP's oil spill.

The revival of the Permian Basin is also driven by the widespread use of relatively new technologies such as hydraulic fracturing, which involves injecting a mixture of water, sand and chemicals underground at high pressures to release oil from hydrocarbon deposits. In recent years, this and other technologies have unlocked shale oil and gas that wasn't previously accessible, leading to a boom of new wells across the country. Now they are being adapted and used to boost production from mature oil fields like the ones in the Permian Basin. Chevron and others are also planning to apply the techniques in unexplored shale areas of the basin.

The Permian Basin is especially attractive because its oil reserves, the second largest in the U.S. after Alaska, are already proven and its geology is very well known, said Matthew Jurecky, an analyst at energy consultant Wood Mackenzie. This means companies can update old wells with new technologies and add new reserves at a significantly lower cost than in other areas, such as the Gulf or Canada's oil sands.

The downtown of Midland is full of high-rises from a storied oil past. Nearby Odessa was depicted in H.G. Bissinger's book "Friday Night Lights" as a model of small-town Texas life, with its reliance on oil-field work and devotion to high-school football.

Oil production at the Permian Basin is less than half what it was in the early 1970s. But after a long decline, in the past five years production in the basin has reversed that trend, growing slowly but steadily. In 2010, the area's oil output rose 1.5% to about 891,600 barrels a day from the previous year, Wood Mackenzie said. The new flow of Permian oil helped U.S. production reach 5.51 million barrels a day last year, its highest since 2004.

The growing interest in the Permian Basin made it relatively easy for BP to sell assets there to Apache Corp. for $3.1 billion last August, as part of the large sell-off it is undertaking to help pay for the Gulf of Mexico spill.

With an output of about 53,000 barrels of oil a day, Chevron, of San Ramon, Calif., is the fourth-largest oil producer in the Permian Basin, behind Occidental Petroleum Corp., Apache and Concho Resources Inc., according to energy consultant IHS Inc.

For Chevron, the Permian Basin is especially significant because it has a bigger presence there than rival majors ExxonMobil and ConocoPhillips, said Fadel Gheit, an analyst at Oppenheimer & Co. A large part of the four million acres Chevron owns in the area were acquired over many years, through the purchase of companies such as Gulf Oil in 1984 and Texaco in 2001.

Chevron said it currently operates 11,000 wells in the Permian Basin and that it plans to drill 350 wells this year.

Most of the company's wells are targeting deeper, tight rock formations that weren't previously thought of as reservoir-quality rock.

Some wells also use horizontal drilling, a recent innovation that helped unlock new oil reservoirs in North Dakota and southern Texas.

"This is a very, very mature basin, but our objective is to sustain production with new investment," Gary Luquette, Chevron's head of exploration and production for the U.S. and Canada, said an interview. "The Permian is a very significant asset in our North America portfolio."

Copyright (c) 2011 Dow Jones & Company, Inc.


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