Fueling this boom is the fact oil saturates the rocks within the basin, and that oil is inexpensive to get it out of the ground. That combination is fueling robust drilling economics even in the current environment.
The Permian's better half
While the overall level of activity in the Permian Basin is healthy, its eastern half, the Midland Basin, is particularly hot right now. That is because the two shales within the Midland Basin, the Spraberry and the Wolfcamp, are just loaded with oil and gas. According to data from leading Midland Basin driller Pioneer Natural Resources (NYSE:PXD), these rock formations hold an estimated 75 billion barrels of oil equivalent resource potential. For perspective, that makes it the second biggest oil field in the world behind the vaunted Ghawar field in Saudi Arabia. Furthermore, like that legendary Saudi oil field, the production costs in the Midland are near the bottom of the barrel with Pioneer noting that some production costs are as low as $2.25 per barrel. That led its CEO, Scott Sheffield, to say that "definitely we can compete with anything that Saudi Arabia has."
Because of the play's economics and resource potential, Sheffield's "firm belief is the Permian is going to be the only driver of long-term oil growth in this country. And it's going to grow on up to about 5 million barrels a day from 2 million barrels." Clearly, his company and its rivals believe that to be true, which is why they are pumping so much money into the play despite the industry's current doldrums. Pioneer, for example, recently spent $435 million to acquire 28,000 net acres to bolster its industry-leading position in the play. On top of that, it is spending $1.87 billion of its $1.95 billion drilling budget on the Permian.
Others are following its lead. Canadian producer Encana (NYSE:ECA) paid $7.1 billion to acquire a position in the Permian in late 2014. As a result of that transaction and other investments in the play, Encana is now the second largest producer in the Midland Basin behind Pioneer Natural Resources. Encana is not just growing for the sake of growth; its Midland Basin position has some of the best economics in its portfolio, which is why it earmarked more than half its capex budget to the basin.
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