By Al PickettSpecial Correspondent

The Permian Basin is booming–again.Ironically, the same region in which crude oil has been the lifeblood of local

economies for the better part of 80 years has emerged as one of the biggestwinners in the U.S. oil and gas industry’s push into a new frontier of unconventionalliquids plays. Rarely have times been better in the oil fields of West Texas andSoutheast New Mexico, with one of the hottest multizone oil resource plays in thenation, high-potential horizontal shale plays with both liquids and gas reserves,and a new era of enhanced recovery projects focused on the residual oil zone(ROZ) below what historically has been perceived as the oil/water contact.

“The variety of opportunities the Permian Basin offers today is almostunbelievable,” observes Don DeCarlo, senior vice president of Devon EnergyCorporation’s western division. “We see myriad opportunities. We are testing somany techniques. We may try three or four to find one that works. But when itdoes, the results can be very, very good.”

The Baker Hughes rig count for the first week of April showed 386 rigsoperating in the Permian Basin, with more than 90 percent of them drilling for oil.That is nearly 100 more rigs than only eight months ago, when industry observerswere touting a return to pre-2008 economic downturn numbers.

Liquids-Rich Plays,Residual Oil Zone Projects

Have Permian Booming

The “Better Business” Publication Serving the Exploration / Drilling / Production Industry

MAY 2011

Reproduced for EnCap Flatrock Midstream with permission from The American Oil & Gas Reporter

www.aogr.com

“It is incredible,” says Tim Dove, pres-ident and chief operating officer of PioneerNatural Resources Co., the largest operatorin the Spraberry trend with more than900,000 acres under lease. “Two hundredand six of those 386 rigs were in theSpraberry. That is the highest number sincethe 1980s. Activity is very fast paced. Thenumber of rigs targeting oil in the UnitedStates is a little higher than those targetinggas. That is the first time that has happenedin nearly 20 years.”

Companies filed 845 oil and gas drillingpermits in February alone–the most recentmonth for which statistics were avail-able–in the 46 counties of West Texasand four counties in Southeast New Mexicothat make up the sprawling Permian Basin,a 102,000 square-mile region that is thelargest and most prolific U.S. oil basin,with more than 30 billion barrels of pro-duction since the early 1920s.

“It promises to be like this for a longtime,” Doug Robison, president of ExLPetroleum and chairman of the PermianBasin Petroleum Association, says of theramped up activity. “I always get a littlenervous when oil prices reach triple figures,because that introduces volatility. But aslong as we do not run into regulatory sur-prises from Washington or Austin, Tx.,the foreseeable future looks very brightin the Permian Basin.”

What has fueled this remarkable increasein activity in the Permian Basin, where oilproduction had been on the decline each

year since the 1970s before making aturnabout this year to put the numbersback on an upward trend? The answer,producers say, is simple: multiple oil targetsand new technology that makes thosetargets accessible and highly economic attoday’s commodity price levels.

“This is a fun and exciting time to bein the Permian Basin,” observes JackHarper, senior vice president and chief ofstaff at Midland, Tx.-based Concho Re-sources. “The company is doing well,and we like our position in the basin andthe plays we are involved in. Technologyand commodity prices have combined tomake the Permian Basin the right placeto be and this the right time to be here.”

The Permian Basin is also home tonearly 70 percent of the nation’s carbondioxide floods. Even these enormouslysuccessful enhanced oil recovery effortscould get a giant boost as several companieshave begun using CO2 to produce newreserves from residual oil zones belowthe oil/water contact line that previouslywas thought to unattainable.

Steve Melzer, owner of Melzer Con-sulting in Midland, which specializes inhelping companies design and execute CO2EOR projects, says conservative estimatesare that at least 10 billion barrels of oil canbe recovered from residual zones. “This isoil that never before has been listed in es-timates of the Permian Basin’s potentialreserves,” Melzer points out. “It is a hugeand viable new resource.”

Wolfberry PlayMuch of the surge in Permian Basin

activity can be attributed to the Wolfberryplay, a commingling of the Spraberrytrend and Wolfcamp zones, and everythingin between–including the Dean formation.Estimates are that the Wolfberry couldeasily yield 2 billion barrels of oil, de-pending on the economics and spacing ofwells.

The Wolfberry play runs through theheart of the Permian Basin. The westernflank, which has produced most of thesweet spots, extends about 100 miles longand 15-20 miles wide from Upton Countysouth of Midland all the way to the eastof Andrews, Tx. Wolfberry wells are pro-ducing in Upton, Midland, Ector, Crane,and Andrews counties on the westernflank. There is also an eastern flank tothe play that includes portions of Reagan,Glasscock, Sterling, Martin and Howardcounties, Tx.

Henry Petroleum is credited with per-fecting the technique of drilling throughthe Spraberry trend, historically consideredthe bread-and-butter of oil explorers inthe Permian Basin, into the deeper Wolf-camp formation, which long was believedto be nonproductive because of poor per-meability, and then using massive multi-stage fracs and commingling productionfrom the multiple zones (as many as eightzones produce hydrocarbons).

In 2008, Concho Resources made a$565 million acquisition of Henry Petro-leum’s Wolfberry’s holdings, which at thetime totaled 163 billion cubic feet equiv-alent of proved reserves (70 percent oil,62 percent proved, developed) as well asproduction of 33 million cubic feet equiv-alent a day and 282 Bcfe of identified un-proved reserves.

“Since Henry Petroleum’s team cameto Concho, our people have the experienceof drilling more than 1,000 wells in theWolfberry,” says Harper. “That gives us anice advantage in terms of cost and theability to leverage into other opportuni-ties.”

Almost all of Concho’s Wolfberry ac-tivity is in Upton and Midland counties.Harper says Concho continues to drill on40-acre spacing, but is experimenting with20-acre spacing. He adds that Concho isrunning 13-14 rigs in the play.

“We are still doing eight to 10 fracstages over multiple zones in a 3,500-foot column (from the top of the Spraberryto the bottom of the Wolfcamp),” he

Devon Energy is running four to five rigs in its Wolfberry drilling program, including threerigs in the 17,000-acre Odessa South block. The company expects to drill 127 wells inthe Wolfberry play this year, and is extending the depth of its Wolfberry wells into theunderlying Strawn, Atoka and Penn formations.

SpecialReport: Permian Basin Activity Update

relates. “The completion technique hasevolved over time. We have drilled todeeper zones as well, and we are encour-aged by the results. Last year, we drilledmore than 300 wells, and we are planningto drill 220 wells this year.”

Below The WolfcampPioneer Natural Resources is running

32 rigs in the Wolfberry, according toDove, and expects to increase that to 35rigs by midsummer. Although he says allof Pioneer’s rigs are drilling into thedeepest part of the Wolfcamp, the companynow is targeting formations that lie belowthe Wolfcamp play.

“In about 50 percent of this year’s

drilling program, we are drilling into theStrawn,” he explains. “We log it and seeif we have adequate porosity. We willcomplete the well in the Strawn and pro-duce it in about half the wells drilled tothe Strawn, equating to 25 percent of thetotal program. In some areas, we havebegun drilling into the Atoka formation(which lies below the Strawn), and wemay try to go even deeper into the Mis-sissippian. Big fields are getting bigger.”

Dove says going deeper and commin-gling multiple zones with the Spraberrytrend only makes sense economically. “Inthe first several months after we drilledinto the Wolfcamp, our wells were producing30 percent more than Spraberry trend

wells,” he contends. “We have increasedreserves for our type well from 110,000boe to 140,000 boe. We are adding 30,000boe of reserves per well at a cost of only$200,000. That averages only $7 per boe,which is highly economic at current oilprices.”

Dove says three-fourths of Pioneer’s900,000 net acres in the Spraberry areheld by production. “This is the quintes-sential oil ‘manufacturing’ play,” he holds.

Pioneer drilled 340 wells last year,and is targeting drilling 700 this year and1,000 in 2012, according to Dove. “Wewent from one rig to 30 as we came outof the economic downtown,” he adds.“Now we are increasing to 35-45 rigs.The Spraberry is 50 percent of our com-pany’s proved reserves and 30-40 percentof our production. That will go up as welower our reserves-to-production ratio byaccelerating drilling.”

Pioneer is drilling on 40-acre spacing,but Dove says the next big step will be toreduce that to 20 acres. “We have 15,000locations ready to drill on 20-acre spacing,”he states. “It may be 10-acre spacingsome day; we could be drilling here fordecades.”

Although vertical wells have been usedprimarily to commingle the Spraberry,Wolfcamp and other formations, Pioneeris experimenting with horizontal drillingin the Wolfcamp zone on the southernoutskirts of the Spraberry trend.

“We have drilled two horizontal wellsin the Wolfcamp and they are being tested,”Dove states. “We plan to drill up to eighthorizontal wells, and that will determinewhether we will drill future horizontalwells on our acreage.”

Dove notes that Pioneer’s efforts tobecome a vertically integrated operatorin the Permian Basin provide benefitsacross its entire operations. “We are now30-60 percent vertically integrated. We

Pioneer Natural Resources ex-pects to have 35 rigs runningin the Wolfberry trend by mid-summer, drilling into the deep-est part of the Wolfcamp aswell as the Strawn and Atokaformations below the Wolf-camp. Drilling deeper andcommingling the Wolfcampand underlying zones with theSpraberry allows Pioneer’sWolfberry wells to produce 30percent higher rates and re-cover an additional 30,000 boeof reserves at an average costof only $7/boe. One of the 14rigs the company owns in thePermian Basin is shown hereon location.

As part of its effort to become a vertically integrated operator inthe Permian Basin, Pioneer Natural Resources owns five fracfleets, 14 drilling rigs and 25 pulling units. The company says itsvertical integration strategy allows it to better control costs and

meet its operating goals. Shown here are a company-owned fracpump truck as well as a hydraulic fracturing operation using Pio-neer’s equipment and employees.

own five frac fleets, 14 drilling rigs and25 pulling units,” he explains. “Not onlyis that a way to control costs, but it alsoallows us to meet our operating goals.”

Pioneer also is conducting a waterfloodin the 7,000-acre Sherrod Unit, south ofMidland. “We have seen positive results,”Dove comments. “Our objective is to stemproduction declines. The issue with a wa-terflood is that is takes a large contiguousacreage position. You do not want to spendthe money doing a waterflood to improvethe production in your neighbor’s wells.”

Looking To ScoreExL Petroleum’s Robison uses a base-

ball analogy to describe his company’sstrategy to “prove up” acreage beforeselling it. “We move runners around thebaseball diamond, and we score whenwe sell the property,” he says. “We havedone it multiple times. We put togetherprospects and then partner when we getthe right ratio of proven developed pro-ducing and proven undeveloped producingreserves.”

The company has two rigs operatingin the Wolfberry, trying to bring prospectsto fruition for selling the property, accordingto Robison. He says ExL also is workingin Reeves County in far West Texas, at-tempting targeted multistage completionsin the Bone Spring, similar to the Wolf-berry.

“We always are looking for newprospects,” he adds. “These new playsare associated with a fairly rich gas stream.There is a challenge to get the gas saleslines hooked up fast enough.”

Devon Energy also is maintaining an

active drilling program in the Wolfberry,running four to five rigs, including threerigs in the 17,000-acre Odessa Southblock, according to DeCarlo. “We areworking north of there, too, doing a lot ofderisking work,” he remarks, adding thatDevon plans to drill 127 wells in theWolfberry in 2011. It also is drilling itsWolfberry wells deeper into the Strawn,Atoka and Penn formations.

Production from the Wolfberry wellsvaries, depending on location and porosityof the formation, according to DeCarlo.“If we have a well that makes 500 barrelsa day, we have a good one,” he adds.“However, the wells generally produce at

peak rates of 200 boe/d or less.”

Enviable PositionMidland-based Fasken Oil & Ranch

Ltd. has a history that dates to 1913, ac-cording to Mark Merritt, oil and gas man-ager and senior vice president for the com-pany, when David Fasken Sr. bought theC Ranch in Andrews County and portionsof Midland and Ector counties.

It just so happens that much of theranch that the Fasken family has ownedfor nearly 100 years is in the westernflank of the Wolfberry play, which puts itin the enviable position of being the landowner, mineral owner and operator. Merrittsays Fasken drilled 53 wells last year andplans to drill nearly 100 more this year,with five rigs operating on the ranch.

“We are drilling primarily on 40-acrespacing, although we have a couple ofpilot projects testing 25-acre and 19-acrespacing,” he relates. “It is too early to tellthe outcome of that work.”

Merritt admits he is amazed by thesuccess of the Wolfberry. “We have beendrilling through the Wolfcamp since the1950s, looking for conventional pay zonesin the Devonian and Ellenberger,” he says.“We drilled through the Spraberry andWolfcamp. We saw shows, but we neverthought it was commercial. Technology,namely multistage massive fracs, madethis possible. We have been pleasantlysurprised by the resource potential.”

He points out that the Wolfberry has a3,500-foot gross interval, and Fasken iscompleting multiple zones with multiplefracs on each zone, with a total of eightto 10 stages per well. Like other companies,Fasken now is drilling deeper (to 11,000-

In the Bone Spring play in the Delaware Basin in New Mexico, Devon is drilling horizontalwells with multistage completions that are yielding initial daily rates as high as 800 bar-rels of oil equivalent. On the Texas side of the basin, Devon’s most recent Bone Springhorizontal well in Reeves County came in at 900 bbl/d and still was producing at thatrate two months later. Operating 18 rigs in the basin, Devon also is drilling horizontallyin the Avalon Shale play.

ExL Petroleum is operatingrigs in the Wolfberry trend aswell as the Bone Spring.Shown here is a rig working inthe Bone Spring play inReeves County in far WestTexas, where ExL is using tar-geted multistage completionssimilar to the completion de-sign on its Wolfberry wells.

12,000 feet) to the Strawn and “completingeverything between the Spraberry and theStrawn.” Merritt says it takes about threemonths before Fasken’s Wolfberry wellsreach peak daily production around 130barrels of oil.

“These wells definitely have long pro-ductive lives, but they go on a steepdecline, perhaps a 75 percent decline inthe first year,” he adds. “Then they flattenover the years. These wells still may beproducing 30 years from now, albeit atlow rates.”

He says Fasken always has been “con-servative financially to maintain a balancesheet to withstand the ups and the downs”of the cyclical oil and gas business. Merrittadmits, however, that being the mineralowner as well as the operator with 100percent of the royalty has made the Wolf-berry play on the C Ranch “very eco-nomical” for the company.

Bone Spring/Avalon ShaleThe other play that has sparked the

resurgence is in the Delaware Basin insoutheastern New Mexico and far WestTexas on the western side of the PermianBasin. Like the Wolfberry play, theDelaware Basin offers a variety of targets,including the Bone Spring and AvalonShale. Unlike the Wolfberry, however,operators primarily are drilling horizontalwells, either in the Bone Spring or Avalon,

depending on the location.“In New Mexico, we are involved in

the Second Bone Spring in Lea and Eddycounties,” says Devon’s DeCarlo. “Thereis a nice trend in the Second Bone Spring.They make nice wells and produce atvery commercial rates.”

He notes that Devon’s Second BoneSpring horizontal wells are producinganywhere from 200 to more than 800 boea day. “They are strong wells that produceover an extended period, but they are alsoexpensive to drill and complete at an av-erage per-well cost of $3.5 million-$4.0million.”

He describes Devon’s Second BoneSpring horizontal wells as “mainly oilwith casinghead gas” with average pro-duction of 500 barrels of oil and 0.5MMcf of gas a day.

On the Texas side of the border, DeCarlosays Devon has drilled three or four wellsin the Third Bone Spring in Ward County.“They are expensive wells, costing $6million-$7 million apiece, but the per-formance has been outstanding,” he ob-serves. “The first well made 500 bbl/d.Our most recent well came on at 900bbl/d and still was producing at that ratetwo months later. Typically, these wellscome on at initial daily rates of 500-1,000barrels of oil and 2 MMcf of gas.”

DeCarlo says Devon continues to do alot of exploratory work in the DelawareBasin. It has 18 rigs operating, “one-thirdof which are doing derisking work andtesting new ideas and two-thirds that aredrilling solid production opportunities,”he states.

In addition to its horizontal wells in

SpecialReport: Permian Basin Activity Update

Fasken Oil & Ranch Ltd. drilled 53 Wolfberry wells last year and plans to drill nearly 100more this year with five rigs running on the C Ranch, which David Fasken Sr. purchasedin 1913. The ranch is located along the western flank of the Wolfberry play in Andrews,Midland and Ector counties. Fasken also is preparing to launch a horizontal drilling pro-gram in the Yeso oil play in New Mexico later this year.

Fasken Oil & Ranch is drillingWolfberry wells primarily on40-acre spacing and pumpingeight to 10 multistage fracs inmultiple pay zones in eachwell. The company also is con-ducting pilot projects to test25- and 19-acre spacing, andis drilling below the Wolfcampformation to the Strawn at11,000-12,000 feet.

the Second Bone Spring in Lea and Eddycounties, Devon also has drilled 10-12wells in the Avalon Shale, according toDeCarlo, including several across the stateline in Culberson County, Tx.

“We have had scattered results so far,”he reports. “We have not drilled a drywell, but some wells are definitely betterthan others. We are trying to unlock thesecret to the Avalon Shale. It will getcracked eventually.

“A lot of operators are trying a lot ofthings,” he continues. “We will drill apilot hole and then discuss where to takeit. There are a lot of ways to exploit thereservoir. It is a very dynamic and stillevolving play.”

Active On Three FrontsJust as Concho Resources entered the

Wolfberry through an acquisition, the com-pany jumped into the Bone Spring/AvalonShale with the largest acquisition in itshistory. Concho paid $1.65 billion in 2008to acquire the oil and gas assets of MarbobEnergy Corporation, which included 76million boe of estimated proved reserves(58 percent oil, 63 percent proved, devel-oped) and 166 million boe of estimatedunproven reserves.

Harper says Marbob’s operations werelocated in southeastern New Mexico, in-cluding a large acreage position contiguousto Concho’s core Yeso oil play on theNew Mexico Shelf, or the western shelfof the Delaware Basin, as well as a sig-nificant acreage position in the emergingBone Spring play.

“With the Marbob acquisition, Conchobecame active on three fronts in NewMexico and West Texas: the Yeso, the BoneSpring/Avalon Shale, and the Wolfberry,”he relates. “We feel very fortunate to be sowell positioned in all three areas.”

With the Marbob acquisition and ad-ditional acreage the company has sinceacquired, Concho now has 150,000 netacres in the Bone Spring/Avalon play,with two-thirds of it in Eddy and Leacounties in New Mexico and the rest inReeves and Pecos counties in Texas, ac-cording to Harper.

He says Concho is running five rigs inits Avalon Shale/Bone Spring play area,with two drilling horizontal wells in theAvalon Shale, two drilling horizontals inthe First and Second Bone Spring, and afifth drilling vertical oil wells in the Wolf-camp and Bone Spring formations.

The Avalon Shale wells are producing

equal parts of oil, dry gas, and natural gasliquids, while the Bone Spring wells typ-ically produce two-thirds oil and one-third gas. “All have high-Btu, liquid-richgas,” Harper states.

Harper says 20 percent of Concho’sdrilling budget is earmarked for the BoneSpring/Avalon Shale, and that the companyhas identified almost 1,000 drilling locationson its acreage. “We plan to drill about 60Bone Spring/Avalon wells this year. Wewould like to increase that, but first wewant to fully understand the play,” he re-marks. “I hope it can become anothermanufacturing process to maximize pro-duction.”

Meanwhile, Concho has 12 rigs drillingvertical oil wells to 5,000-7,000 feet in theYeso play, where the company has morethan 50,000 net acres. “These are very eco-nomic wells, and we have a lot of runningroom for future drilling,” Harper concludes.

While Merritt says the Wolfberry iskeeping Fasken busy, his company alsohas prospective Yeso acreage in EddyCounty, where it is planning to drill hori-zontally into the oil-bearing zone.

“We have not drilled a Yeso prospectyet, but we are preparing to drill two hori-zontal wells in the Yeso later this year,”Merritt reports, adding that the companyalso has some deep Morrow production inthe area. “The Yeso play is moving our di-rection. Wells have been drilled next to our

leasehold, and we are working with otheroperators to get the production infrastructurein place. You need to know where yoursaltwater disposal will be, and you have tohave drilling rigs under contract and fracservices line up. Logistics have becomemore difficult as activity has picked up.”

Rewriting The TextbookFort Worth-based Approach Resources

has coined the term “Wolffork” in its op-erations on the southeastern side of thePermian Basin in Crockett County, Tx.“It is similar lithology as the Wolfberry,”explains Ross Craft, president and chiefexecutive officer of Approach Resources.

The difference is the Clearfork, whichCraft says is the time equivalent to theSpraberry in this part of the basin. Approachis doing multistage fracs and comminglingthe Clearfork, Dean and Wolfcamp for-mations.

“We have rewritten the textbook forthe southern Midland Basin,” he contends.“It was thought that the Midland Basindid not extend into northern CrockettCounty, in part because of the OzonaArch and the Big Lake Fault. If this wastrue, one would expect the Wolfcamp tobe thin or absent.”

Approach has proven the conventionalthinking on the southern Midland Basin tobe wrong. Craft explains, “The Ozona Archis present, but not at the Wolfcamp time,

SpecialReport: Permian Basin Activity Update

In the southeastern Permian Basin, Approach Resources has established a play it dubsthe “Wolffork” in Crockett County, drilling horizontally and pumping multistage fracs tocommingle production from the Wolfcamp formation and the Clearfork fractured gas andoil interval above the Wolfcamp. Approach plans to drill 11 horizontal Wolffork wells thisyear.

and the Big Lake Fault does not significantlyaffect the Wolfcamp’s thickness.”

The Wolfcamp Shale has four members:the D, C, B and A from bottom to top. TheDean and Clearfork are located above theWolfcamp. The Dean and Clearfork arefractured oil and gas sections, and theWolfcamp, also a fractured oil and gassection, is the generating rock. The combinedthickness of the Wolffork Shale is 2,500feet of gross oil and gas potential, Craftstates. “The A and B members of the Wolf-camp comprise a 200-foot thick section oforganic-rich source rock that is thermallymature and located in the peak oil and wetgas generating window,” he says

The company has drilled more than500 wells in Crockett County since 2004,targeting the deeper zones, Ellenberger,Strawn and Canyon formations, Craftcontinues. “Many times when we drilledthrough the Wolfcamp, we saw strongshows of oil and gas. We thought it wasonly shale and the shows were comingfrom isolated open factures,” he states.

But Approach then hired QingmingYang as vice president of exploration,who pulled data from the past three orfour years of drilling and created a planto determine whether the Wolfcamp couldindeed produce at commercial rates.

“We went through a tedious processto disprove it,” Craft says. “But everydata point came back positive. We evaluatedwhole core, log data and drilling showdata. All the data came back that it hadsufficient thermal maturity, porosity andsize to be commercially productive.”

Approach first conducted a three-wellrecompletion pilot program targeting theWolfcamp only, and then a five-well pilottargeting a combination of Wolfcamp,Wolffork, and Wolffork and Canyon, withthe emphasis centered on increased fracstages. All the while, Approach was ac-quiring more lease acreage.

Craft says the company’s acreage innorthern Crockett County now is flankedby a number of large independents andeven a major, all of whom paid as much as$3,500 an acre in the latest university leasesales. “We have one rig drilling horizontallyin the Wolfcamp B zone, right under theorganic bench,” he imparts. “We expectour lateral lengths to range from 4,000 to8,000 feet and our frac stages to rangefrom 14 to potentially 24. We believe therecould be as much as 180 million boe oforiginal oil and gas in place per 640 acres.Our internal recovery assumption is 3

percent oil and 10 percent gas.”Craft says Approach plans to drill 11

horizontal wells this year. He adds thatthe company will drill 26 vertical wells inthe Canyon formation and then will re-complete the Wolffork zones approximatelyone year later. It also plans to drill 19vertical wells in which it will comminglethe Canyon with the Wolffork.

Approach’s horizontal wells are ex-pected to produce anywhere from 47 to77 percent oil and NGLs, according toCraft. “The Btu value of the gas is high,”he notes. “The Canyon/Wolffork wellsare expected to produce 40-70 percent oiland NGLs. One of the beauties of ouracreage position is that we have morethan 200 miles of company-owned gath-ering infrastructure in place across a largeportion of our 140,000 net acres. In addi-tion, there are several processing plantsin the area with capacity.”

Infrastructure ExpansionsThe ramped up activity with the de-

velopment of the Wolfberry, Wolfcampand Avalon Shale/Bone Spring, all ofwhich are producing oil, gas and NGLs,has in some cases, stretched the region’sservice industry and midstream providersto the limit, especially the capacity totake the NGLs to market.

“We have more crude oil than takeawaycapacity,” says Fasken’s Merritt. “Thepipeline to Cushing, Ok., is maxed out.Even crude oil trucks are in short supply.We are seeing limitations on stimulationservices and drilling crews. There arelimitations everywhere you look. I neverthought that would happen in the PermianBasin, but it is a good problem to have.”

Craft reports that DCP Midstream isholding an open season on a proposed180,000 bbl/d NGL pipeline that it plansto build from the Delaware Basin in NewMexico through the Permian Basin towest of San Antonio, the Eagle FordShale, and eventually, to Mont Belvieu,Tx., NGL storage facilities and chemicalplants along the Texas and Louisiana GulfCoast.

Nuevo Midstream LLC, a startup mid-stream company based in Houston, an-nounced in April that it had secured a$65 million equity commitment to help itdevelop and operate midstream infrastruc-ture for gas producers in the PermianBasin, with specific emphasis on the BoneSpring, Wolfcamp and Avalon Shale.

Equity backing for the new company

comes from the EnCap Flatrock Mid-stream’s Energy Infrastructure Fund, TorchEnergy Advisors Incorporated and Petro-leum Fuels Company Inc. Jay Lendrum,president of Torch Energy, is serving aschief executive officer for Nuevo Mid-stream.

Lendrum says Nuevo Midstream willcenter its early operations on upgradingthe Ramsey gas gathering lines and pro-cessing plant in Reeves County near Orla,Tx. The company expects to have initialprocessing capacity of 10 MMcf/d online by midsummer.

“As demand increases, we will expandand bring on additional gathering, processingand treating capacity,” he reveals. “Ourplans call for a second cryogenic processingplant at the Ramsey location with capacityof 50 MMcf/d. The Avalon Shale and BoneSpring really have kicked off.”

Lendrum notes that Clayton WilliamsEnergy’s announcement of a joint venturewith Chesapeake Energy Corporation, aswell as involvement in the area by inde-pendents Concho, Cimarex, Anadarko Pe-troleum and Devon, is proof of the enor-mous potential of the Wolfcamp/AvalonShale/Bone Spring play.

“It is producing both oil and gas,”Lendrum says. “It is 50-55 percent oil,but the economic value is 75-25. But youhave to gather, process and treat the gas.It is a perfect situation for a midstreamcompany.”

The Ramsey system consists of ap-proximately 130 miles of gas gatheringlines, compressor and measurement stations,and processing, fractionation, storage andloading facilities. The gathering systemcrosses through Eddy County in southeastNew Mexico and Culberson, Loving andReeves counties in West Texas.

“The biggest issue facing the marketis liquids takeaway capacity, because theseplays are yielding so many liquids,”Lendrum adds. “The question is how toget it to Mont Belvieu. Until the DCPline is built, some are looking at a railsystem to get the NGLs out of the PermianBasin to Mont Belvieu or the Gulf Coast.”

CO2 EOR, ROZ ProjectsEnhanced oil recovery projects using

carbon dioxide continue to play a majorrole in the Permian Basin production pic-ture. Melzer says 64 EOR projects areactive in the Permian Basin, injectingnearly 2 Bcf/d of CO2. He claims that 5percent of domestic production and almost

SpecialReport: Permian Basin Activity Update

20 percent of oil production in Texas isthe result of CO2 EOR efforts.

“The big issue in the Permian Basin isnot having enough CO2 supply for thenumber of pent-up projects,” he says,adding that proposed coal-fired powerplants in the Permian Basin will employnew carbon capture technology that shouldeventually provide additional carbon diox-ide for EOR projects.

Fasken’s Hanford Field in Gaines Coun-ty north of Seminole is a shining exampleof what a CO2 flood can mean for amature, declining field, and how the resid-ual oil zone is the next step to usingcarbon dioxide injection to further boostoil recovery.

“We started CO2 injection in the fieldin 1986,” recalls Merritt. “Cumulatively,we have had more than 50 percent recovery.It has been a really successful project.”

The Hanford Field has 26 producingwells and 26 injectors. Merritt says Faskenhas begun injecting below the pay zoneinto the ROZ. “The oil is coating the rockand the oil saturation is such that it is notmobile with water,” he states. “It is tooearly to evaluate results and we are limitedon our CO2 source. We need more carbondioxide. However, it opens new possibil-

ities. The residual oil zones are morewidespread than the main pay. It is costlybecause you have to displace the waterwith CO2 to make the oil mobile andflow it from the injector to the producingwell. It is a slower response than a water-flood.”

Merritt says Fasken has patterned itsCO2 residual oil zone project after thesuccess that Hess Corporation has had inthe nearby Seminole Field, which wasone of the pioneering projects in usingcarbon dioxide to sweep the oil frombelow the oil/water contact line.

Legado Resources, based in The Wood-lands, Tx., also is conducting a CO2 floodin the residual oil zone in the 6,000-acreGoldsmith-Landreth-San Andres Unit, afield west of Odessa, Tx., that began pro-ducing in the 1940s. “We have deepenedthe wells and injected the CO2 into boththe ROZ and the main pay,” says DaneCantwell, Legado’s senior vice presidentof development. “We are treating it asone zone.”

He says the company initially conducteda four-well pilot and ramped productionfrom 170 to 650 bbl/d. Legado now is in-jecting 50 MMcf/d of carbon dioxide inthe first phase of the project, according to

Cantwell. The second phase will be com-pleted by the end of the year.

“This field will have six phases, so itwill take a while to put together,” Cantwelladds. “It looks like the oil in place in theresidual oil zones is similar to the originaloil in place in the San Andres.”

As exciting as the new technology-driven developments are in plays such asthe Wolfberry, Wolffork and AvalonShale/Bone Spring formations, Melzersays it is astonishing to consider thatresidual oil zones will have more oil inplace than the total cumulative volumethat has been produced since the PermianBasin discovery well was drilled eightdecades ago.

“The Permian Basin has produced somuch oil over the years, but the goodnews is that 20-35 percent of what wasleft behind is recoverable,” Melzer em-phasizes. “I know it must seem incon-ceivable, but I believe ROZs could holdas much as 30 billion barrels of recoverableoil, which would be equal to the amountthe basin has produced to date. We haveto find a way to get more carbon dioxidesupply, but the Permian Basin has a won-derful future. It will be producing oil forgenerations to come.”

SpecialReport: Permian Basin Activity Update