A Familiar Name Is The Next Big Thing In The Permian Shale Bonanza

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In an interview conducted in August 2019, Allen Gilmer, founder and longtime Chairman and CEO of Enverus (formerly DrillingInfo) told me he believes the oil and gas-rich Permian Basin basically amounts to “an inexhaustible resource” for the United States. Gilmer based that assessment on a variety of factors, including the industry’s constant refinement of processes and technological advancements, along with the likelihood of future producing horizons yet to be developed.

That interview was conducted at a time when many experts and analysts were projecting the Permian region was stagnating and in the early stages of an inevitable decline due to falling rig counts and a then-conventional wisdom that all the best prospects had already been drilled up. Gilmer has since retired, but his reasoning proved prescient, as per-well recoveries and overall production in both oil and natural gas have continued to rise to new record levels even as the count of active drilling rigs has dropped to a fraction of those active four years ago, all due to the factors he detailed in that interview.

A promising new producing horizon is gaining attention now, albeit in the form of a formation with a long-familiar name. In early November, Enverus released a report touting the southwestern extent of the Barnett shale as likely to become the next major producing formation in the Midland Basin, the eastern part of the greater Permian region. Knowledgeable readers will be aware of the Barnett as the center of the first major shale natural gas boom centered in north central Texas at the turn of the 21st century, the germinating point of what we now call the Shale Revolution.

“Sometimes the best place to find new oil is in already-producing areas, which neatly describes what’s happening in the Midland Basin in Texas,” said Emily Head, report author and a senior associate at Enverus Intelligence Research (EIR). “The Barnett formation is buried about 1,000 feet deeper than the Wolfcamp, a prolific oil-producing zone.”

In an interview, Head told me some Permian operators began drilling initial tests into the Barnett formation as early as 2018, but that activity has intensified in recent months as drillers look for additional prospects with a sub-$50/barrel breakeven. “A theme that we’ve heard across many investors, across the operator community is that sub $50 break even inventory scarcity is a very common thing right now,” she says, adding that Enverus’s desire to identify such opportunities across the Permian led to the decision to conduct the study.

The original Barnett Shale boom centered in the Dallas/Fort Worth area more than 300 miles from Midland was almost exclusively a natural gas play that contained a modest amount of associated liquids. Head says the formation provides an entirely different production profile in the Permian, noting that on average, we’re seeing around the 65% wellhead liquid out of this zone in the Midland Basin.” Given the current disparity between prices for liquids and for dry natural gas, this is a crucial factor in determining whether the Barnett will become the next big thing in the Permian.

Head notes that Occidental Petroleum
OXY
has thus far been among the most active evaluators of the Barnett formation in the Midland Basin proper, but also says companies like Diamondback Energy
FANG
have been testing its western extent, which extends into the Central Basin Platform, a largely non-productive area lying between the Midland Basin and the prolific Delaware Basin.

As the geographic extent of the play area for this new potential resource becomes more thoroughly fleshed out, Head points out that operators will also need to review their lease agreements to ensure they have rights to drill to the required depths. Depth limitations are a common feature in oil and gas leases and are likely to become an issue for some companies given that the Barnett lies below the prolific Wolfcamp formation, which was a highly-desired target during the early leasing phase of the Permian oil boom.

Owners of mineral rights who had the foresight to retain rights below the Wolfcamp could find they have a new money-making opportunity to now lease out rights to drill into the Barnett.

The Bottom Line

In our interview, Head was careful to note operators are still in the early stages of evaluating the magnitude and viability of the opportunity the Barnett formation presents in West Texas. If the big operators like Occidental and Diamondback determine the formation will not consistently meet the $50/bbl breakeven test, the Barnett could be quickly relegated to the backburner awaiting more promising economic conditions at some point in the future.

What all this current activity does show, though, is that the Permian Basin is a gift that keeps on giving and is likely to continue doing so for many years to come. The Permian may or may not turn out to be an inexhaustible resource, but it has been the big thing in the U.S. domestic oil and gas industry for more than a decade now, and appears likely to retain that title for years to come.

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