Petroleum reserves in Texas' Permian Basin are still attractive

Apr 09, 2004 02:00 AM

The aging Permian Basin petroleum reserves will continue to offer opportunities and challenges to oil and gas producers and marketers for years to come, executives of the most active oil companies in this region say.
Richard Kinder, chairman and CEO of Kinder Morgan Energy Partners (KMP) said some of the greatest opportunities for enhanced oil and gas recovery reside in the Permian Basin.
"The Permian Basin continues to have long-lived assets," Kinder told more than 400 people during the opening session of the 10th annual Executive Oil Conference at the Midland Centre.

KMP is attracted to the 80-year-old Permian Basin, the largest inland reservoir in the Lower 48, because of its stability, Kinder said. Production is declining at a faster rate each year but less than that of newer, smaller producing fields, Kinder said.
Based in Houston, KMP is the largest independent owner and operator of products pipelines in the country and is the fourth largest crude-oil producer in Texas. In his speech, Kinder attributed KMP's success at its SACROC unit to keeping operating costs low. That unit is one of the largest oilfields and oldest carbon-dioxide injection projects in the United States, and it is located in the north-eastern Permian.
"Our focus is on costs, costs, costs," Kinder told the more than 400 executives at the centre, an attendance record for the annual conference. "You've got to do that in a mature basin like the Permian Basin.

At KMP, profitability is found in the details, he said, in weekly assessments of operations and investments, in monthly evaluations of earnings and in quarterly strategic reviews. Building economies of scale through incremental acquisitions of low-cost assets is another element of KMP's business strategy, he said. The company maintains a conservative, no-frills approach to business travel, salaries and perks, he said.
"There are no corporate jets at KMP. Our corporate jet is Southwest Airlines or Continental, as the case may be," he said.

All executives receive $ 200,000 a year. Kinder, the majority stockholder, earns $ 1 per year and receives no bonuses or stock options. Since its formation in 1997, the company's value has increased from $ 325 mm to $ 13 bn, he said.
In the past four years, the company has tripled production at SACROC, from 85,000 bpd of oil to 100,000 bpd. KMP plans to flood the 78-year-old Yates Field, located in the southern Permian, beginning this year and pursue an "aggressive" horizontal-drilling program.

KMP plans to drill 100 wells to maintain production of about 18,500 bpd of oil "for the foreseeable future." Kinder said KMP will continue to aggressively market carbon dioxide for enhanced recovery projects.
"We believe the technology is very valuable and whose time has come. For the two world-class reservoirs, the Yates and SACROC, we're very excited about the CO2 business, particularly in the Permian Basin," he said. "As far as we're concerned the best is yet to come."

During a panel discussion of businessstrategies, Greg Ashdown, Permian Basin operations manager for ConocoPhillips, said the company emphasizes worker safety and "environmental excellence."
ConocoPhillips has improved its safety record by involving its entire workforce from its own employees to those of its contractors. With ConocoPhillips running more rigs in the Permian than it has in the last two decades, Ashdown expressed concern that on-the-job safety would suffer, referring to the current lack of experienced oilfield workers.

While the Permian's production-to-reserve ratios are better than those of newer and smaller producing fields in the world, this reservoir's age, its lower production volumes and corrosive downhole fluids still present challenges to producers, said Ashdown, speaking on behalf of Bill Patterson, manager of ConocoPhillips Mid-Continent business unit, who was scheduled to participate in the conference but was unable to attend. And despite high secondary and tertiary recovery costs, ConocoPhillips "still feels the Permian Basin is a great place to make money."
ConocoPhillips this year will focus on reworking existing wells, on drilling and completing new ones, on vehicle safety and the mechanical integrity of its facilities, especially its old vessels and flow lines, Ashdown said. As part of its 10-year business plan, ConocoPhillips goals are zero workplace accidents, improved operating costs and "continued delivery on capital investments," Ashdown said.

Don DeCarlo, vice president and general manager of Oklahoma City-based Devon Energy, said Devon shored up its Permian assets through five transactions over the past several years, leading to a "meaningful increase" in is presence here. And Devon is interested in finding more mineral assets, he said.
"If we see a company with a wide swath of Permian assets, we consider that a major plus." DeCarlo said Devon plans to invest $ 120 mm to $ 140 mm in the Permian in 2004, more than it did last year. "We like the oil mix," DeCarlo told the crowd. "We like the decline rate here. It's stable, which helps you grow your business."

During another session, Aubrey McClendon, chairman, CEO and director of Chesapeake Energy, spoke about his company's entry into the Permian Basin though the acquisition of Pioneer Drilling and Midland-based Concho Oil and Gas last year. McClendon said his business strategy is based on balance "For every dollar we drill with, we acquire $ 2" and in being comfortable with price volatility.
While it may seem counterintuitive for most people, McClendon said constant change "can bring great opportunity as well." As the "new boys on the block," McClendon said Chesapeake is actively looking to purchase non-operating leasehold interests in the Permian Basin, the long-lived reserves of which McClendon described as "very, very helpful" to producers' profitability.

Source: Odessa American
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