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.
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.
Blog post continues below…
|Request a free trial of: Oilgram News|
|Oilgram News brings fast-breaking global petroleum and gas news to your desktop every day. Our extensive global network of correspondents report on supply and demand trends, corporate news, government actions, exploration, technology, and much more.|
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