The Permian Basin: Strong Cash Flow & Potential for Gas Play

Abstract: Panelists at the Permian Basin International Oil Show's (PBIOS) technical conference spoke reverentially about the region's oil reserves while outlining a potential 13 tcf natural gas play. Everyone is here to stay.

Analysis: If you want to know why the Baker Hughes rig count was down last week, there is a simple explanation. Everyone was looking for a parking place in Odessa, Texas.

It was the Permian Basin International Oil Show, the biennial event that alternates between the dry plains of West Texas and the more humid climes of southern Louisiana. This year's show was restricted to the oil and gas industry only and attendance might have been down incrementally. It doesn't matter. This year's program was enhanced by an expanding technical conference sponsored by various West Texas chapters of the Society for Petroleum Engineers. Panels addressed the particulars of horizontal drilling and explored case studies on using infill drilling to increase recovery, a popular topic in a basin that has produced oil for 80 years.

A panel on oilfield theft detailed the rapid increase in stealing over the past two to three years, particularly from well service/workover units. The industry has witnessed a string of burglaries at drilling bit warehouses in Oklahoma and Texas, and oilfield theft is alive and well with some third-generation crooks at work. The industry has a tendency to keep quiet about oilfield theft, which exacerbates the problem.

But the big excitement in the technical panels focused on the future of the Permian Basin from the perspective of the majors and the independents. Essentially there is a lot of oil left to produce and the region offers outstanding potential for natural gas development. In a nutshell, the majors love the Permian Basin because it is characterized by long reserve life, shallow decline rates, stable cash flow, and healthy margins. And if that wasn't enough, the region has a long history of reserve additions.

It all adds up to low unit costs through economies of scale for those who tend to their business. As a result, the Permian Basin serves as a cash cow for many large operators who redirect the cash to expensive exploration projects elsewhere across the globe.

ChevronTexaco produces 200,000 bopd out of the region and employs 575, including 225 in Midland. Essentially it is possible to double those employment numbers by including the contractors ChevronTexaco employs on its properties. This year the company is spending $175 million in capital projects in the Permian Basin and another $350 million on operating expenses with capex expected to rise slightly in 2003.

The company's approach is to reduce downtime and wring as much out of the existing assets as possible through operating excellence, typically by improving well reliability. The region remains a core business for ChevronTexaco, where it ranks as one of the top 10 business units globally for the company.

Similarly, the Permian Basin ranks third out of Marathon Oil Company's nine business units, which is why Marathon intends to maintain a major presence in the region for some time. The company uses reservoir management expertise to lower operating costs.

Marathon viewed the basin as both an oil and a gas province. The industry is unable to reverse the oil decline curve for oil no matter how much cash is invested regionally. But there are expectations that the basin contains 13 tcf of natural gas, which will play a larger role in the basin's future. Gas production has increased over the last 30 years and is up five bcf/d during that time, which amounts to an extra tcf per year.

ConocoPhillips outlined a Permian Basin business strategy emphasizing safety, low cost, and long-term commitment. The company seeks to become best-in-class in HSE performance and to achieve an incident-free workplace. Right now the company is focusing on behaviors associated with drilling and completions, and vehicle safety.

The company employs a 50 percent plow-back rate for Permian Basin revenues. It sees a transition to horizontal drilling with a bias toward natural gas targets. Meanwhile the company uses sidetracks to maximize yield and targets opportunities through economies of scale, generally employing some form of enhanced recovery.

Oxy Permian represents the largest business unit for Occidental Petroleum. While the region accounts for 21 percent of Occidental's capital program, the Permian Basin yields 35 percent of the company's oil production and contains 48 percent of its reserves. The business unit's role is to generate cash for reinvestment elsewhere. The unit's 2003 capital program will be similar to the $280 million spent in 2002. The company plans to drill 225 wells in 2003, which is also similar to 2002, and is looking at acquisitions.

As for the particulars of the oil show, the "world's largest inland petroleum exposition" featured more than 700 companies and 1,100 exhibits, which made it the "Mall of America" for petroleum last week. And yes, it is an international crowd of vendors and attendees. If you haven't heard the story, the PBIOS began in 1940 as the Little International Oil Show. There were just 35 exhibitors and a great social atmosphere. World War II intervened, but the show has run continuously since 1950 and is overseen by a board of 200 oil and gas industry representatives.

Fortunately the social atmosphere is still present thanks to the cordiality of the volunteers. Here's to PBIOS 2004.