Horizontal drilling to increase in Permian Basin

So far this year there has been a 50% increase in rigs drilling horizontally in the Permian Basin, and the shift is likely to continue.

Citing Smith Bits, Global Hunter Securities analysts (GHS) reported Friday that 31% of the 395 rigs active in the Permian Basin as of September 7 were drilling laterals, "A pronounced shift in the number of rigs drilling horizontally is underway in the Permian," the analysts said.

While the first Permian Basin well was drilled back in 1925, the liquids-rich area, comprised of the Midland Basin, the Delaware Basin and the Marfa Basin, has experienced a revival of activity as the oil and gas industry’s interest in unconventional resources grows along with new technologies and oil prices.

During a recent interview with OGFJ, Allen Howard, president and CEO of NuTech Energy Alliance, pointed to the Permian as the most exciting play on the horizon.

“From my personal perspective from the tremendous amount of work we have analyzed, there are about three or four plays in the Permian basin that are not quite there technically. When the strategies are properly understood and implemented, you will see some of the best reserves per well in the world,” he said.

Last week, oil majors Chevron and Shell purchased Permian acreage from Chesapeake, and as GHS analyst note, various companies — Concho Resources and Pioneer Natural Resources included — mentioned plans to convert drilling plans from vertical to horizontal during recent 2Q calls.

Relative to its vertical program, said Concho COO and senior vice president E. Joseph Wright in its 2Q call, Concho is “seeing greater efficiencies in our horizontal program in terms of capital dollars per flow and barrel,” noting that of overall 2012 rig count of 30 to 35 rigs, about 40% will be horizontal.

During the same call, when asked about the company’s 2013 rig count outlook, Timothy A. Leach, Concho CEO and president reiterated the view noting that the “horizontal stuff does compete very well with anything we’ve ever done vertically. It’s more capital efficient. We can get more capital invested with fewer rigs and that’s influencing our thinking. When we started this capital budget process for 2013 as we have done in the past, the first thing we will do is try to make a reasonable estimate of our cash flow and build our drilling budget around that. And I don’t think it’s going to take as many rigs to get that invested as it has taken in the past, because of the horizontal nature. It wouldn’t surprise me if half our rigs weren’t drilling horizontally in 2013.

The calls led the analysts to “take a deeper dive into the implications for what we believe will be a continued shift toward horizontal drilling in the play, similar to what has transpired in most of the US this cycle,” they said.  

Oilfield service companies
“We currently peg the Permian rig count at 395 rigs and we estimate that every 40 rigs shifted from vertical to horizontal demand nearly 360K incremental fracturing horsepower. We derive current horsepower demand in the Permian coliseum at roughly 2.8MM vs. supply of 3.3MM, hence the weak pricing environment currently. Even in a flat rig count environment a continued shift in the number of rigs drilling horizontally could drive the demand for HHP in the basin higher, thus potentially creating a floor for pricing in the region,” said the analysts.

Pricing, horizontal drilling, and multi-stage fracture stimulations have helped open up plays like the Permian, Apache chairman and CEO Steve Farris told OGFJ in August. With a holding of 3.5 million gross acres in the region, and a large vertical program, Apache is one of the most active operators across the Permian.

“Today, there is more equipment available at more reasonable prices than we've seen in the last five years. Just 18 months ago, we couldn't find a frac crew in the Permian Basin; now they are all over the place.”  

With the shift to horizontal drilling in the Permian will come a boost to oilfield services companies. Some such companies — C&J Energy Services (currently under contract with Apache in region through early 2014), Baker Hughes, and RPC Inc. (operating business units include Cudd Energy Services, Patterson Services, ThruTubing Solutions), and Halliburton — are already knee-deep in the play.

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