New Frontiers: Looking at the oil prospects in the Delaware Basin

In another look at a highly prospective formation in the US, Starr Spencer reviews the outlook for the Delaware formation, part of the Permian basin, in this week’s Oilgram News column, New Frontiers.

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If you’re an oil prospector these days and someone says “Delaware,” chances are what comes to mind won’t be the US’ tiny First State located south of Philadelphia but rather a West Texas/New Mexico basin that is turning up a rapidly rising amount of crude.

The hood-shaped Delaware Basin is really the western chunk of the larger Permian Basin. Like elsewhere in the Permian, the Delaware consists of multiple prospective “stacked” or pancaked geological layers which oil companies have only recently begun to exploit. In the Delaware, these reach 12,000 foot depths, a little deeper than eastern Permian areas.

“We do not have a good fix on how much upside [is] yet to be captured” in the Delaware, Wunderlich Securities analyst Irene Haas said in a recent report. But “we cannot stop thinking about how big this trend could end up being after a few more years of drilling,”

“Producers are just beginning to count productive layers within the Wolfcamp, in addition to Bone Spring [and] Avalon/Leonard intervals,” which are found at depths of roughly 10,000 feet, 9,000 feet and 8,000 feet respectively, Haas said.

The Delaware Basin currently produces roughly 539,000 b/d of oil, and this is projected to rise to 769,000 b/d by year-end 2019, up 43%, according to Bentek Energy, a unit of Platts. By contrast, the basin was producing 355,000 b/d in July 2012 and 241,000 b/d in July 2010.

The basin’s current production split is 292,000 b/d from New Mexico and 247,000 b/d from West Texas, and these could respectively rise to 410,000 b/d and 359,000 b/d by end-2019, Bentek figures show.

“Given the current upward trajectory of both rigs in the region and initial production rates, our estimates are likely conservative,” Bentek analyst James Klingsporn, said.

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As with the Midland Basin—the easternmost half of the Permian—operators started testing in one area of the Delaware and then migrated elsewhere, probing for the “sweet spot.” In Midland, operators began in the south but found the north more productive. In the Delaware, the reverse has occurred as much of the activity until recently focused on Lea and Eddy Counties in New Mexico and parts slightly south of the Texas border in Loving, Ward and Winkler counties.

These days, besides drilling the Bone Spring and Avalon/Leonard plays which were industry’s earlier focus, operators appear to be testing the Wolfcamp interval at 10,000-12,000 foot depths, analysts say. The Wolfcamp has shown a little more consistency than the Bone Spring, which was sand and “a lot more variable,” Michael Scialla, an analyst with Stifel Nicolaus, said.

Delaware Basin oil quality is roughly comparable to the rest of the Permian Basin—namely, from about 38-45 API gravity, although it has become lighter on average in the last few years as the proportion of unconventionally produced oil increases, said Bentek’s Klingsporn.

Crude oil from the play currently goes to the US Gulf Coast, to the Cushing oil hub in Oklahoma on the Basin or Centurion pipelines; to East Houston on the Longhorn pipeline; or to Nederland, Texas, on the West Texas Gulf or Permian Express I pipelines. The new 300,000 b/d BridgeTex line will raise capacity to Houston when it begins service in mid-Q3.

Rail to the West Coast is now too expensive given current price differentials between the Delaware Basin and California versus the US Gulf Coast, analysts said. But pipeline doesn’t seem to be an option, either: Kinder Morgan’s proposed Freedom Pipeline was abandoned last year due to lack of shippers, “indicating the Gulf Coast is a more attractive market for Permian crude,” including Delaware Basin oil, Sandy Fielden, director of energy analytics for consultants RBN Energy, said.

Accordingly, developers are eyeing more infrastructure projects for the basin. One recent announcement was by producer Concho Resources, one of the most active Delaware operators, and Tulsa-based Frontier Midstream Solutions. The pair in May formed a joint venture to build and operate over 400 miles of crude oil gathering lines in the northern Delaware that can take over 100,000 b/d to multiple delivery points.

“We’ve tried to sell at the lease line and it’s worked for us to this point,” Concho Executive Vice President Will Giraud said at a recent analyst conference. “We feel like now’s the time to be more aggressive in midstream and the market side. We want to improve the price we receive for our barrels and make sure infrastructure gets built in locations we want them built.”

Also in May, midstream provider Rangeland Energy announced it began building a 10,000 b/d truck-to-rail transloading rail facility in the Delaware. The company looked at areas of “greatest potential for increased oil production that lacks infrastructure,” Rangeland CEO Chris Keane said. “We quickly zeroed in on the Delaware Basin.” –Starr Spencer in Houston

US jet fuel demand hits blockbuster status

The US summer movie season has yet to see a true blockbuster, unless you count “Transformers.” But new data shows the summer jet fuel demand season has finally reached blockbuster status.

US jet fuel demand for the week ended July 4 spiked 8% to 1.799 million barrels a day for its highest level since November 2007, while stocks plummeted 4% to 35.6 million barrels for the lowest mark since May 2004, according to data released July 9 from the Energy Information Administration.

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IEA paints a steady picture for 2015 oil markets

The International Energy Agency on Friday gave its first taste of how oil markets might look in 2015, and on first reading it looks as though they should be pretty well supplied throughout the course of the year.

The agency’s confidence that non-OPEC supply can meet almost all of the projected growth in demand next year means that OPEC itself won’t need to produce, on average, any more than its current 30 million b/d ceiling. Read the rest of this entry »

On US oil exports, offshore safety, crude-by-rail, how long will the government delay?

It has become a routine in Washington to explain the government’s inability to react to changes in the marketplace by blaming the swift pace of technological change. The latest such admission came last week when Commerce Secretary Penny Pritzker spoke about US crude exports.

“Technology is advancing faster than existing regulations,” Pritzker said during an appearance at the Aspen Ideas Festival. She said there was a “serious conversation” going on within the administration on crude export policy. “The question is what [are] the right exports and what is the right amount of exports.”

Similar admissions have come from other officials on the topic of transporting crude by rail and ensuring the safety of offshore drilling. In all three cases, industry has wisely not waited for Washington to act. Innovation marches on and companies put huge amounts of capital at risk to advance new ways to produce and move energy resources.

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Major US trade decision in the pipeline for OCTG producers

The story is a familiar one: Cheap foreign steel products are threatening domestic manufacturers, and the US steel industry is seeking relief with a trade case.

Here’s how it goes down: Following a petition by one or more US producers, the Department of Commerce and the International Trade Commission independently and simultaneously investigate any antidumping and countervailing claims. Commerce investigates whether imported products are sold at less-than-fair value or have been subsidized by foreign governments and determines duty rates accordingly. The ITC rules whether those imports materially injure or threaten material injury to the domestic industry. If either body votes in the negative, no duties are levied.

On Friday, Commerce is due to make its final determination in the antidumping and countervailing investigations of oil country tubular goods (OCTG) imports from South Korea, India, the Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, Ukraine and Vietnam.

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The changing face of global gas, or, chasing the arbitrage

The fate of US LNG import terminal projects was sealed as the amount of relatively low-cost gas produced onshore soared in the middle of the last decade. Most of them were scrapped before getting off the drawing board, but the more advanced of them, notably Cheniere’s Sabine Pass, went on to become export terminals, in a radical and apparently successful bid to salvage their backers’ fortunes.

That well-documented transformation was only made possible by the yawning price difference opening up between the depressed Henry Hub and the rest of the world.

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EIA analysis: US crude stocks fall on higher refinery run rates

US crude oil stocks fell 2.4 million barrels the week ended July 4 on an uptick in refinery run rates, according to data from the Energy Information Administration. Total US refinery throughput rose above the five-year average, which added to refinery utilization rates. Read the Platts analysis  from Alison Ciaccio here.

The Oil Big Five: Your comments include Iraq, Africa, refining, and OPEC

You’ve read about the big topics our Platts experts think are most interesting for July, and now we want to turn our attention to our readers.

In our monthly The Oil Big Five feature, we poll our global oil experts for what they consider the most pressing or interesting aspects of the oil industry at the moment. We follow each post by rounding up some of the comments, and below you can see (in no particular order) some of the reactions we had from our readers, both on the blog as well as on social media.

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Regulation & Environment: Cap & Trade comes to California oil product markets

California’s cap and trade law has been reality for a wide variety of CO2 emitters for several years. But they are all stationary sources. In January, it moves to a moving kind of source: motor vehicles. In this week’s Oilgram News column, Regulation & Environment, John Kingston, fresh off a trip to the state’s capital city of Sacramento, discusses the implementation of the law in the fuels business.

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“Mini-trends” increasingly common in the oil industry

In the talk about oil cycle phases, one pattern that has emerged in recent years is the appearance of “mini-trends” within the industry that are often at odds with what is happening in the larger market.

As a result, data is growing increasingly complex, and even single data sets contain a “story-behind-the-story” which often makes more complete interpretations necessary and keeps journalists and researchers busy “Deciphering It All.”

Case in point — one of many — is the offshore industry which is undergoing a slump in dayrates, particularly for deep- and ultra-deep waters, while the onshore sector — which at least in the US and increasingly overseas now consists of unconventional drilling — churns ever-higher amid what is generally agreed to be a larger, unprecedented boom.

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