The Permian Basin’s resource potential and oil versus gas split

By

Updated

One of the largest oilfields

According to current estimates, the Permian Basin is one of the largest oilfields in the world. A recent presentation from Pioneer Natural Resources (PXD) showed the total recoverable resource potential of the Spraberry and Wolfcamp formations in the Permian Basin to be approximately 75 billion barrels of oil equivalent, up 50% from 2013 level, and second only to the Ghawar Field in Saudi Arabia.Total recoverable resources Part 6

A further chart shows the Spraberry and Wolfcamp formations to hold the largest amount of estimated recoverable resources in the United States.Recoverabel Resources

Note that the Spraberry and Wolfcamp formations in these charts don’t include the Delaware Basin, another component of the Permian Basin.

High magnitude of hydrocarbons

Article continues below advertisement

The magnitude of hydrocarbons available in the Permian Basin is one of the factors that make it an attractive place to drill for oil and gas. Another major factor is the oil and gas split given current commodity prices. By industry standards, one barrel of oil is roughly equivalent to 6,000 cubic feet of natural gas (1 bbl = 6 mcf). However, currently, oil trades at roughly $90 per barrel and natural gas is trading at roughly $4 per thousand cubic feet. Although the energy ratio of oil to natural gas is 6:1, the ratio of the price at which the commodities trade is over 20:1 (note that these are approximations, as differences in the quality of hydrocarbons and origin of production can cause prices to vary).

The region is prolific

According to the Railroad Commission of Texas (RRC), historical production from the Permian Basin has totaled roughly 29 billion barrels of oil and 75 billion cubic feet of gas, or roughly 70% oil by energy content. The oil content of the Permian Basin, in conjunction with the improvement of recent technology, has made the Permian Basin a hot play, and activity there has escalated rapidly over the past few years. Further confirming how prolific the region could be, the RRC also states that the Permian Basin “is estimated by industry experts to contain recoverable oil and natural gas resources exceeding what has been produced over the last 90 years.”

Other statistics you should consider on the oil-versus-gas split in the play:

  • Pioneer Natural Resources has stated that 80% of its production in its Spraberry and Wolfcamp drilling is oil.
  • Approach Resources has stated that ~70% of its proved reserves was booked to horizontal Wolfcamp play in 2013.
  • Laredo Petroleum has stated that approximately 50% of its proved developed reserves of its Permian reserves is oil.

Outlook

Increased activity in the Permian Basin has had positive effects on the entire value chain of the energy companies operating in the region. The oil and gas companies that would benefit from higher drilling and production in the Permian include oil producers like Concho Resources (CXO), Pioneer Natural Resources (PXD), Laredo Petroleum (LPI), and EOG Resources (EOG). Some of these companies are components of the Energy Select SPDR ETF (XLE) and Vanguard Energy ETF (VDE).

Advertisement

More From Market Realist