After eight years of intense industry activity focusing on gas-prone shales, the topic du jour is all about shales once again. But there is a new twist in the conversation as the domestic oil and gas industry reaches a mature stage in shale development after working through a list that encompasses more members than Santa Claus has reindeer. The shale roll call to date domestically includes the Barnett, Fayetteville, Woodford, Haynesville, Marcellus, Bakken, Eagle Ford, Niobrara and Utica shales.
To that, add two more: the Wolfcamp and Cline shales in West Texas. Both are early in the development cycle, though the odds suggest that these two names will dominate industry conversations over the next half-decade the way the Barnett, Haynesville, Bakken, Eagle Ford and Marcellus did over the last.
Operators are adapting the unconventional techniques perfected in dry gas shales such as horizontal drilling and high volume multi-stage fracturing to tight formation oil. Coupled with attractive commodity prices, this effort is revitalizing the Permian Basin as the region closes in on 10 decades as an oil province following the 1921 discovery that led to the commercialization of oil production along the edge of the Permian Basin’s eastern shelf.
The Wolfcamp and Cline shales are important for another reason. In most shales to date, operators targeted just one or two primary hydrocarbon producing formations. For example, the hydrocarbon producing zone in the Bakken Shale covers 10 to 120 feet in thickness. In the Eagle Ford Shale, hydrocarbon producing formations are 150 to 300 feet in thickness. In contrast, the Permian Basin features a stacked stratigraphic column with as many as nine targets susceptible to technological exploitation in the Midland and Delaware sub-basins with the combined thickness of the Wolfcamp and Cline shales spanning 1,300 to 1,800 feet.
Think of four to six Eagle Fords stacked atop each other, or up to a dozen Bakken Shales, and it is easy to understand why “shale fever” is spreading through West Texas.
Specifically, the Wolfcamp shale features four targets or benches. Although there is vigorous discussion over whether the underlying third and four benches, the “C” and “D” units are, in fact, the Cline or Penn shales, which are of late Pennsylvanian age, or technically part of the Wolfcamp, which is lower Permian in age.
Unfortunately no one left specific markers dividing the upper Pennsylvanian in West Texas from the lower Permian. Rather, geologic processes represent a continuum of events in an isolated sea divided into two deeper basins, one of which was gradually filled from the east and the other from the northwest. Both the Midland and Delaware sub-basins are characterized by thick deposits of organically rich shales. These shales originated in a deep bowl ocean environment subject to carbonate debris flows across a shallower shelf and eventually over the shelf edge into the deep basins.
Previously, operators exploited this geologic reality in the Midland Basin by targeting the vertical Wolfberry play after the Texas Railroad Commission allowed operators to commingle production from submarine fans of Spraberry/Dean geologic age with production from the Wolfcamp shale. Wolfberry wells are drilled vertically and fracture-stimulated across multiple horizons in a process that generally involves seven to nine frac stages.
After 2008, a similar commingled play evolved in the Delaware Basin south of Pecos, Texas. That play—the Wolfbone—produces from vertical wells targeting the third Bone Spring, which is age equivalent to the Spraberry/Dean formations in the Midland Basin, with production from the underlying Wolfcamp shale.
Oil and gas operators have demonstrated that tight formation horizons previously exploited vertically in the Permian Basin will respond to the same drilling and completion techniques employed in gas shale plays over the last eight years, including horizontal drilling and high-volume, multi-stage fracturing.
Currently, Wolfcamp Shale activity is concentrated in an area that lies below the modern Pecos River valley in Ward, Loving and Culberson counties in West Texas with interest extending west of the Pecos River into Reeves County. In February 2012, EOG Resources Inc. revealed it had amassed 114,000 net acres in northern Reeves County prospective for the Wolfcamp. That upgraded its reserve potential from 65 million barrels of oil equivalent (MMboe) to 550 MMboe after drilling two successful Wolfcamp horizontals. The nearly tenfold jump in resource potential represents an estimate rather than proved reserves. However the change signifies that tight formation oil in the Permian is on the verge of entering a playing field previously dominated by the Eagle Ford and Bakken shales, although EOG does not plan a broad-based Delaware Basin development program until after 2014.
Generally Delaware Basin Wolfcamp results have been better east of the Pecos River rather than to the west because of underlying geological idiosyncracies associated with the tectonic issues that created the uplifted mountains in the Texas Trans-Pecos. Similarly the play tends to get gassier to the south and oilier towards the New Mexico line.
Farther east, across the buried Central Basin Platform that divides the Permian into the Midland and Delaware sub-basins, operators are targeting Wolfcamp Shale along the southeastern bend of the Midland Basin in Reagan, Glasscock, Crockett and Irion counties in Texas.
Modern interest in Permian Basin tight formation shales dates back to 2006 but grew as the industry moved up the horizontal drilling learning curve. The effort received a boost in 2010 when operators including EP Energy (formerly El Paso Corp.), Approach Resources Inc., and EOG competed for acreage near the junction of Crockett, Irion and Schleicher counties Texas, for the Wolfcamp Shale along the southern reaches of the Midland Basin. It is here that operators first demonstrated the commercial potential of horizontal Wolfcamp wells. Collectively, the industry spudded 40 horizontal wells targeting the Wolfcamp Shale in 2009. That number grew to 240 in 2011 and is on the verge of a break out as rig count expands in 2013.
Attracting foreign investment
One indication of the Permian phase shift is that rapidly developing shale plays in the Permian Basin have attracted outside interest — literally — with separate joint ventures over the last five months of 2012 involving Asian oil and gas companies partnering as capital providers with U.S. oil and gas operators. Specifically, Devon Energy Corp. inked a $1.4 billion joint venture with Japan’s Sumitomo Corp. in August 2012 to underwrite horizontal development across 650,000 net acres in the Cline and Wolfcamp shales in the southern Midland Basin. Devon’s deal involved a $1.025 billion drilling carry in which Sumitomo pays 79 percent of Devon’s capital requirements through 2014, including 40 gross wells in 2012.
Similarly Pioneer Natural Resources signed a $1.7 billion joint venture in January 2013 with Sinochem Petroleum USA LLC, a subsidiary of China’s Sinochem Group. The JV covers 40 percent of Pioneer’s 207,000 net acres in the southern Midland Basin, including $1.2 billion as a drilling carry through 2018 for Wolfcamp and deeper horizons in Upton, Reagan, Irion, Crockett and Tom Green counties in Texas.
For Pioneer, the joint venture means drilling 86 horizontal Wolfcamp wells in 2013, 120 in 2014, and 165 in 2015 as its drilling program expands from 7 rigs in 2013 to 13 rigs in 2015. In comparison, Pioneer drilled 39 horizontal Wolfcamp wells in 2012. Separately, Pioneer will issue 8 million shares of common stock to accelerate a $1 billion horizontal Wolfcamp program over two years in the company’s northern Wolfcamp/Spraberry holdings spanning 600,000 gross acres in Midland and Martin counties Texas.
Those two joint ventures imply capital investment of roughly one half billion dollars annually targeting Wolfcamp and Cline shales in the southern Midland Basin, irrespective of other operators in the region. It also does not include spending on any Wolfcamp activity west across the Central Basin Platform in the Delaware Basin. An informal estimate suggests the oil and gas industry will spend well over $2 billion annually targeting tight formation shales in both the Midland and Delaware basins in 2013 in a region that may see as much as $19 billion in capital spending in 2013.
About the Cline
The Cline Shale is currently the cream of the conversational crop in West Texas. In late 2012, a company that markets manufactured housing issued a press release suggesting the Cline Shale would produce 30 billion barrels of recoverable oil in a 9,800 square miles area straddling the eastern shelf and eastern edge of the Midland Basin in a geographic arc running 140 miles north to south and 70 miles wide.
That press release led to comparisons between the Cline and the Eagle Ford and Bakken shales with potential in the Cline exceeding both combined. Word of the Cline subsequently spread faster than wintertime influenza, creating a buzz in rural West Texas communities from Sweetwater to Snyder and from Colorado City to Rotan, Texas.
The current refrain about the West Texas Cline shale resembles that old Ray Steven song about Santa Claus: “He’s everywhere, he’s everywhere!” This is no modest exaggeration. In late 2012, Concho Resources conducted two horizontal tests targeting the Cline shale on 45,000 acres southwest of Lubbock, Texas. This area is along the northern border of the Midland Basin and more than 100 miles north of core Cline activity in Glasscock County, Texas. The significance lies in the fact that both Cline and Wolfcamp potential could be widespread across the entire Midland Basin, making the shales one of the more significant future resource plays in domestic oil and gas.
It is important to understand that both the Wolfcamp and the Cline are early in the development cycle and have not yet been de-risked beyond a handful of core areas. Shale productivity varies widely across acreage and especially across vast swaths of acreage. One characteristic to all shale plays is that each typically exhibits wildly optimistic projections early in the developmental cycle. But out of 40 shale hydrocarbon reservoirs in the U.S., only 10 are considered large-scale commercial plays with 10 more currently under industry evaluation.