Occidental doubles down on Permian investment

03 November 2016, Week 43, Issue 432

Occidental Petroleum has bought more acreage in the Permian Basin, whilst also buying into more enhanced oil recovery (EOR) properties in the area. Oxy announced the deal on October 31, a day ahead of the publication of its third-quarter results. It paid US$2 billion for the acquisitions, from cash on hand, of which it had US$3.2 billion as of the end of the third quarter.

The leasehold acquisition covers 35,000 net acres (142 square km) in Reeves and Pecos counties, Texas, in the Permian’s Southern Delaware Basin. It provides an estimated 700 gross drilling locations in the Wolfcamp A, Wolfcamp B and Bone Spring plays. It brings the company’s total leasehold to 59,000 acres (239 square km). 

This will provide the company with an additional 7,000 boepd of net production, from 68 horizontal wells, while the EOR deals provide around 4,000 boepd, from net proven developed producing reserves of around 25 million boe, and total proven reserves of 41 million boe. Both transactions are oil-focused – the first is 72% oil and the second 80%. 

Oxy’s president and CEO, Vicki Hollub, said the deals would “further complement and solidify” the company’s position in the Permian Basin. The company holds a number of interests in the area, including the Barilla Draw, with Oxy saying it would benefit from cost and infrastructure efficiencies. Furthermore, the amount of contiguous properties would allow it to drill longer laterals. 

The EOR and CO2 flood deal increases the company’s ownership in properties where it is the operator, or working with a partner. 

While Oxy has proved its interest in acquiring more Permian acreage, production fell to 121,000 boepd in the third quarter, with oil comprising 72,000 bpd of this. The company brought on nine wells in the area in the third quarter, down from 14 in the second quarter. 

In the second quarter, Oxy’s output in the Permian was 126,000 boepd, up 17,000 boepd year on year. 

Production from the Permian and the company’s Permian EOR properties should remain flat over the fourth quarter, although an increase in activity should lead to production rising towards the end of the year, it predicted. Well productivity and base management should moderate production decline. 

Oxy is moving into “manufacturing mode” in the Permian, which will cut costs, it said. Drilling and completion costs have fallen by 38% from 2015, the company said, while using produced water will further cut the price tag. Furthermore, it is moving to longer laterals, targeting 9,000 feet (2,743 metres) in 2017, from 5,200 feet (1,585 metres) this year. Operating expenditure is also falling, to US$8.2 per barrel in the third quarter, from US$10.87 per barrel in the same quarter of 2015. 

 

Takeaways

Interest in the Permian is on the up, driving prices higher, which is demonstrated through continued additions to the play’s rig count. 

SM Energy, for instance, is another big spender in the area, having announced two deals paying US$980 million for around 25,000 net acres (101 square km) and US$1.6 billion for 35,700 net acres (144 square km) in October. SM also set out plans for expanding its drilling rig count in the region, in line with the broad trend. Recent additions to the US’ rig count have been largely focused on the region, at the expense of others. 

The area is not solely of interest to the intermediates, though. Chevron holds around 2 million acres (8,090 square km), which some estimates have valued as carrying a potential price tag of US$50 billion. ExxonMobil announced a deal in August 2015, paying an undisclosed amount for 48,000 acres (194 square km), taking its position to 135,000 net acres (546 square km), while Royal Dutch Shell is also a substantial holder in the region. 

Apache made waves in September with its announcement of its Alpine High discovery, which it said might hold 3 billion barrels of oil. The find was made in the Delaware Basin’s Reeves County – also the destination of Oxy’s recent investment. 

Given the well-signposted nature of the Permian, and its long history, operators will come under pressure to tackle the challenge of recouping the substantial price tags paid through technological innovation, such as longer laterals and new fracking techniques. 

Oxy, announcing its third-quarter results, noted its marketing margins had shrunk over 2015, citing “unfavourable Permian to Gulf Coast differentials”. With the upward trend of interest in the basin, combined with pressure on differentials, operators must take care that future acquisitions are driven by commercial rationale – and not be swayed by industry groupthink. 

 

Edited by

Anna Kachkova

Editor

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