Permian Basin 2018

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PERMIAN BASIN: OVERVIEW 10 | October 2018 | sand might result in a satisfactory frack job, he explained, over time the overburden pressure could disintegrate the sand. But the basin's own proclivity for odd geology might be helping to solve this problem. A recent article in Oil and Gas Investor discussed the Kermit Sand Dune northwest of Odessa. The area has long been used for recreation, kind of the beach without the ocean, but it's now being eyed as a potential source of frack sand. "Multiple entrepreneurs were jockeying to be first to get a piece of the dune, which proved to hold finer grades of sand more suitable for downhole stimulation," the article noted, adding that since 2016 20 new mines are in place or planned. They will be needed. Richard Spears, vice presi- dent of Spears & Associates Inc., told the magazine that the volume of drilling activity combined with lateral lengths and the amount of sand needed per linear foot of lateral has caused the demand for sand to skyrocket. "It's the fastest growing market in the entire oil field," he said. Water is another issue plaguing the region. The continual ramp-up of activity means that operators are facing growing difficulties dis- posing of their frack water. A Wood Mackenzie report noted that the water-to-oil ratio in the Delaware Basin is as high as 10 to one. In the Wolfcamp play alone, producers use nearly 17 million gallons of water per well, a 50% increase over 2015. And water costs will continue to rise, amounting to 20% of drilling costs and affecting overall play economics. Finally, there's the question of decline rates. While vertical wells in the region have been producing for years, noted another Wood Mackenzie study, the horizontal tight-oil wells are relatively young, and there's no guarantee of their longevity. "Pure field data for horizontal tight-oil wells only goes back about eight years," the report noted. "Conse- quently, operators and investors have routinely used proxy values based on decades-old data from vertical wells and other shale plays to model tight-oil terminal decline rates." The study noted that after five years of production the most active Wolf- camp plays have annual decline rates almost dou- ble the value that is typically used. This is likely to result in 800,000 bbl/d of production at risk by 2040. Too much of a good thing? That remains to be seen. The Permian Basin has certainly proven its longevity over the decades. But perhaps a slower, steadier pace might be in the industry's best inter- est at some point. Q Editor's Note: For a complete analysis of the Permian Basin see the Production Forecast by Stratas Advisors on page 70. $25 $30 $35 $40 $45 $50 -25% -20% -15% -10% -5% Base case 5% 10% 15% 20% 25% W T I b r e a k e v e n a t 15 % I R R ( U S $ / b b l ) D&C costs OPEX EUR This chart shows breakevens for a Delaware Wolfcamp well with sensitivities around drilling and completion costs, opex and EUR. (Source: Wood Mackenzie) Delaware Wolfcamp Type Well

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