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    Permian oil production grows

    Increased production in the Permian basin, along with similar rapid growth in the Bakken and Eagle Ford shale plays, is helping the US reduce its dependency on foreign oil imports.

    Last year, US crude oil production reached its highest level in 15 years, according to the latest report from the US Energy Information Administration (EIA). The states with the largest increases in production are Texas and North Dakota.

    When we think of oily shale plays, the first two that typically come to mind are the Bakken shale play in North Dakota (also eastern Montana and parts of several Canadian provinces) and the Eagle Ford shale formation in South Texas. However, the Permian basin in West Texas and part of southeastern New Mexico has also seen significant increases in crude oil production.

    The Permian basin is a mature oil province with much infrastructure already in place. However, as oil and associated gas are produced in larger and larger volumes, increased takeaway capacity will be required. A number of midstream companies already are hard at work planning and building out this additional capacity with both public and private capital being utilized to fund the projects.

    US crude oil production (including lease condensate) averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years, according to the EIA. The last time the United States produced 6.5 million barrels per day or more of crude oil was in January 1998.

    Since September 2011, US production has increased by more than 900,000 barrels per day. Most of that increase is due to production from oil-bearing rocks with very low permeability through the use of horizontal drilling technology combined with hydraulic fracturing.

    New Mexico

    From September 2011 to September 2012, Texas production increased by more than 500,000 barrels per day, and North Dakota production increased by more than 250,000 barrels per day. Texas's increase in production is largely from the Eagle Ford shale and the Permian basin.

    North Dakota's increase in oil production comes from the Bakken shale formation in the Williston basin. Increased production from smaller-volume producing states, such as Oklahoma, New Mexico, Wyoming, Colorado, and Utah, is also contributing to the rise in domestic crude oil production.

    Horizontal drilling increases in Permian

    The past year saw approximately 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) recently said that, "A pronounced shift in the number of rigs drilling horizontally is underway in the Permian."

    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," said Howard. "When the strategies are properly understood and implemented, you will see some of the best reserves per well in the world."

    SandRidge Energy to sell Permian assets for $2.6 billion

    Oklahoma City-based SandRidge Energy Inc. [NYSE: SD] said in late December that it has signed a definitive agreement to sell its substantial Permian basin properties to Sheridan Production Partners II, a privately-held Houston-based oil and gas company, for $2.6 billion in cash. SandRidge had previously said it was exploring the sale of the assets.

    Tom Ward, SandRidge's chairman and CEO, commented, "The sale of the Permian assets at this time has allowed us to capitalize on current strong valuations for mature, conventional Permian assets and generate a very strong return on our investment there."

    Noting that the Permian Basin assets were a key part of SandRidge's planned strategic transition from a natural gas producer to an oil-rich E&P company, Ward added, "With these proceeds we will have a cash balance of almost $3 billion and liquidity of over $3.5 billion, which we intend to use to reduce debt and strengthen the balance sheet. This will also allow us to fund development of our acreage position as well as future opportunities in the highly scalable, high return Mississippian Play."

    The Permian properties being sold were producing approximately 24,500 boe per day at the end of the third quarter (67% oil, 15% NGLs and 18% natural gas) and exclude assets associated with SandRidge Permian Trust [NYSE: PER].

    Chesapeake closes Permian asset sales

    In late October, Oklahoma City-based Chesapeake Energy Corp. completed the sale of certain Permian basin assets.

    The company sold its southern Delaware basin assets to SWEPI LP, a subsidiary of Royal Dutch Shell; its northern Delaware basin portion of the Permian to Chevron USA Inc., a subsidiary of Chevron Corp.; and its producing assets in the Midland basin portion of the basin to affiliates of Houston-based EnerVest Ltd.

    The assets sold produced approximately 21,000 barrels of liquids and 90 million cubic feet of natural gas per day during the 2012 second quarter, or approximately 5.7% of Chesapeake's production during the quarter.

    Total combined net proceeds from the three transactions, inclusive of preferential rights exercised by other parties, are approximately $3.3 billion, of which Chesapeake received approximately $2.8 billion in cash at closing.

    Tall City gets $200 million commitment

    Midland, Texas-based Tall City Exploration LLC has closed on a $200 million equity commitment from Denham Capital, an energy and resources-focused global private equity firm. The capital will be used to pursue acquisition, exploration, and development of oil and gas assets with a specific focus on upstream unconventional activities in the Permian basin.

    Led by CEO Mike Oestmann and president Joe Magoto, Tall City Exploration was founded in 2012 and has already leased approximately 5,000 net acres in the Permian. The company is engaged in discussions with potential partners to increase its opportunity base and plans to begin drilling in spring 2013.

    "We believe the unconventional opportunity set in the Permian basin is only beginning to be exploited," said Oestmann.

    A native of Midland, Oestmann has nearly three decades of experience in all aspects of the oil and gas business, with a particular focus on company start-ups, exploration, asset management, and development.

    In addition to the $200 million commitment from Denham Capital, the company recently raised an additional $5 million from Henry Resources and Tall City Strategic Partners —a group of company employees and local oil and gas investors from Midland.

    Three Rivers acquires assets from Meritage

    With an investment from private equity firm Riverstone Holdings, Three Rivers Natural Resource Holdings II LLC, a new private upstream oil and gas company based in Austin, has executed a definitive agreement to acquire certain Permian basin assets from Meritage Energy Company LLC.

    The properties include 15,000 net acres with current production of approximately 1,900 barrels of oil equivalent per day located in Howard, Glasscock, Martin, Dawson, and Upton Counties, Texas.

    Three Rivers II focuses on oil and gas acquisition opportunities in the Permian. Most recently, the management team led Three Rivers Natural Resource Holdings LLC, which sold its assets to an affiliate of Concho Resources Inc. earlier this year for approximately $1 billion.

    On the MLP side, Legacy Reserves paid Concho Resources $520 million or $90,000 per daily boe (60% oil) for largely developed (85% PDP) reserves in the basin. The assets are expected to generate $80 million in cash flow in 2013.

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