The Permian is the place to be
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Written by: David Hunn
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Whether a company drills or operates pipelines, the Permian Basin in West Texas is the place to be.
Oil exploration and production companies are pouring billions of dollars to acquire land in the basin, while pipeline companies – taking advantage of the recent lull in drilling – are building projects or adding capacity to existing lines to relieve past congestion and prepare for better days.
“Things are definitely getting hotter in the Permian Basin right now,” said Ben Shattuck, an analyst at research firm Wood Mackenzie. “You’ve got a substantial asset base that you can drill at today’s prices and still make money on.”
So far this year, energy companies have spent $12 billion to acquire land and assets in the Permian, accounting for nearly half the $27 billion the industry has spent on exploration mergers and acquisitions, according to Wood Mac-Kenzie. Last month, PDC Energy of Denver became the latest energy company to dive in, buying 57,000 acres from New York private equity asset manager Kimmeridge Energy for $1.5 billion, or about $21,000 per undeveloped acres.
In past three months alone, Wood Mackenzie has tracked eight deals, each worth at least $400 million. Houston-based Silver Run Acquisition, run by noted shale driller Mark Papa, bought 38,000 acres from another Denver company, Centennial Resource Development, for $1.38 billion, or $29,000 an acre.
After focusing in recent years on the Permian’s northern and eastern sections, known as the Midland Basin, companies are now turning their attention toward the western half, called the Delaware Basin.
Papa said his company had been looking for “a meaningful position in one of North America’s premier oil shale basins.”
“There has been a lot of recent excitement about the Delaware Basin, but we believe its potential is still significantly underappreciated,” Papa said.
The Delaware wasn’t just discovered, WoodMac analysts said. But the basin’s geology is more complex than that of the Midland. And drilling technology didn’t allow efficient production in the Delaware until late 2014 – just as oil prices were crumbling. Rigs moved there anyway, with production in the entire Permian reaching 2 million barrels a day in early 2016, double the output of 2011.
That was more crude than pipelines could handle, leading to slowdowns in transporting crude to refineries. The drop in production this year, by about 30,000 barrels a day, has given pipeline operators in the Permian the chance to catch up, according to a report by Morningstar, an investment research firm. Pipeline companies have added more than 700,000 barrels per day of new capacity over the past 18 months.
A joint venture of Magellan Midstream Partners of Tulsa, Okla., and Plains All American of Houston boosted capacity by 300,000 barrels per day from Colorado City to Houston. Plains added almost 100,000 barrels per day from McCamey to Gardendale in South Texas’ Eagle Ford.
Sunoco Logistics of Philadelphia added 200,000 barrels per day from Garden City to Port Arthur, and 200,000 barrels from Midland to Garden City.
Pipeline companies also have built several smaller lines, the report says, linking well heads to mainline hubs. Those lines should eventually reduce transportation costs for oil producers, according to Morningstar.