U.S. Oil Operations in the Permian Basin: A Story of Five Billion Barrels

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A few weeks ago, I was driving east out of Artesia, New Mexico, on Highway 529. I saw a road sign that said Hobbs was 46 more miles.

"Hey," I said to my traveling companion and Agora Financial colleague, Matt Insley. "At this rate, we'll be in Hobbs in about half an hour."

And do you know what? I was only off by a couple of minutes.

That's the kind of high-speed you'll find on my investment research field trips. I want to get out to where things are happening. Yes, sure, I could sit in the office and read "reports." But who writes the reports? What do they know?

I want to go out and see the projects. I want to meet the people who make it happen and take it all in, first hand. I want to kick the rocks and taste the mine dust. I want to feel the vibe of drilling rigs turning, and smell the aroma of the oil patch.

I won't go into detail about projects and investment ideas that are still in the research folder. But I'll tell you that Matt and I started out in El Paso. Then we drove (fast) over to Hobbs, New Mexico, to attend an engineering review of a major mining project.

After New Mexico, it was down into the four-wheeler wilds of deep West Texas to see another mining project. On this one, our guide had us bouncing and tossing in our seats, as he gunned his Ford F-250 truck up and down roads carved into the side of a mountain of volcanic rhyolite.

Down in one mine shaft, we found a nest of rattlesnakes. Our guide called them "winter visitors"...

Night Watchmen
With this high-grade mine you need some night watchmen, right?

One of the critters put on quite a sound-show in an effort to scare us off. But don't worry. I gathered a few ore samples — keeping an eye on Mr. Sidewinder — and we were on our way. No animals were harmed during the preparation of this Daily Resource Hunter update. It's all good, right?

Then Matt and I went to Midland, to attend a function sponsored by oil giant Chevron (CVX: NYSE). The event was in celebration — and remembrance — of Chevron's five billionth (yes, "Billionth") barrel of oil production in the Permian Basin of West Texas.

The number comes from oil production by Chevron and its legacy companies. These latter firms include great old names — Gulf Oil, Texaco, Unocal, Skelly Oil, Pure Oil and a few other smaller outfits that rolled-up into big-Chevron over the years.

That 5 billion-number is how much oil Chevron, and legacy firms, have pulled out of the Permian basin since the first major drilling efforts began out there in the 1920s. The number is also sort of a composite. In the world of oil-lease accounting, Chevron can claim an interest in about 15-plus billion barrels, historically. But when you net it all out, the accurate "bragging rights" tally about 5 billion barrels.

There's a lot of history behind those 5 billion barrels. There were hundreds of thousands of people involved, over many years. This includes people who did some of everything. There were land-men, geologists, engineers, drillers, roughnecks, roustabouts and armies of service contractors.

Then there were the industrial vendors such as designers, equipment builders, parts-suppliers... going all the way back to steel mills and iron mines.

These people had families as well, so the oil and gas business touched a lot of lives. Oil and gas has created an entire, energy-oriented culture in West Texas and southeast New Mexico. Over the decades, people who worked and grew up in the Permian Basin went out to find other energy deposits across the world. Thus does the Permian Basin have a human ripple effect that as changed many parts of humanity.

Funding the drilling efforts, along the way, were business people who loved taking risks. At root, that's what the oil biz is all about. Promoters and developers assemble funds, drill a well, and hope and pray it isn't a dry hole. Fortunately, much of the Permian Basin is productive. But it's a tricky effort.

It was Permian Basin oil that powered the U.S. ships and airplanes that won World War II. And it was energy development in the Permian Basin in the 1950s and 1960s that kept hundreds of thousands of people directly employed, and many more indirectly employed. Not to mention, what the U.S. economy did with all that oil.

Looking back, there never really was much of that so-called "easy" oil. But as with much in life, success looks easy to outsiders. Oh, if only more people really understood...

The Chevron remembrance is personal to me because I began my geological career in the Permian Basin, in 1978, working for Gulf Oil Co., which merged with Chevron in 1983.

The old Gulf Oil Co. production numbers are part of the overall 5-billion Chevron number. From my own experience, I assure you that just Gulf produced one heck of a lot of oil out of the Permian Basin.

Some of those barrels were even "mine," in that I submitted a few drilling proposals that found oil. Of course, Gulf paid to drill the wells, and the company had a small army of other people who "helped" me find that oil. But the idea to drill at "point X" was mine. So I can brag just a little bit.

Today, if you fly over Midland-Odessa, or drive along almost any highway in the region, or go through the many dozens of small towns that dot the landscape, you'll see thousands and thousands of wells. This is a big chunk of America's oil patch, delivering a bit over 20% of daily domestic oil output.

West Texas Oil Pumps
Not much rest for these West Texas oil pumps...

To be sure, it's not just wells out there, although there sure are lots and lots of them. In West Texas there's a distinctive network of rig-roads, built to accommodate the original drilling effort and now devoted to service vehicles. Then there are the drilling pads, where the original rig was located, along with all the gear that goes into making a well.

Of course, if you travel around you'll also see the ubiquitous pump-jacks, often moving up and down, pulling the sucker-rods and lifting oil and brine water to the surface.

Criss-crossing the oil patch is a network of electric wires, plus a multitude of oil and gas gathering pipelines. Then there are the separation tanks, the storage tanks, equipment yards and much else that goes into a gigantic spread of oil fields and associated production.

This is just a short version of what it takes to pull oil out of the ground in the USA. It takes wells. Lots and lots of wells. And lots and lots of people. And lots and lots of capital. And lots and lots of will and desire to come up with new ideas. Every "mature" oil province was once a frontier region.

Which brings me back to Chevron, and prompts me to offer a comparison. The other day, one Chevron executive discussed a period when he worked in Nigeria. He described how he would oversee 20 wells, producing a total of about 250,000 barrels of oil per day. If you do the math, you realize that these Nigerian wells are super-productive, delivering about 12,500 barrels of oil per day.

Now in the Permian Basin, this same executive has authority over about 6,000 wells, with a total daily output of about 40,000 barrels. Do that math. Each of his wells yields an average of about 6.5 barrels of oil per day — about one-two-hundredth of the average Nigerian well. All oil wells are NOT created equal, right?

This sort of anecdote sums up the precarious nature of the energy situation in the U.S. today. Onshore, and in shallow waters offshore, there are lots of wells but they have low — distressingly low — average productivity.

Yes, cumulatively, the U.S. lifts a lot of oil every day — near 9 million barrels. But the effort is based on large numbers of wells yielding low average output. (Deep-water wells tend to be highly productive, but they are also super-expensive and difficult to drill and place in operation — another story entirely. Plus, the deep offshore is basically shut down — don't get me started on that issue.)

My point is that the U.S. oil business relies on large amounts of capital input — big capital, spread out over a continental scale. The effort needs lots of skilled labor. The effort has many, many moving parts. And many of those parts are old and getting older.

Indeed, according to the Chevron executive, "My greatest challenge is to manage a large array of aging assets."

In other words, in the Permian Basin, Chevron is producing oil from fields discovered many decades ago, often using pipe and equipment that was installed decades ago. Oh, it would be nice to rebuild everything with new steel and equipment, and all the latest automation. But you can only justify so much new investment wells that produce 6.5 barrels per day before it's cheaper to plug them.

At the same time, the modern U.S. oil business is not just all about managing legacy assets. For all the oil that's ever been pulled out of the Permian Basin, MOST of the original oil is still down there, in the source rocks and in reservoir rocks that won't give it up very easily.

So Chevron is using the Permian Basin as a modern laboratory for new oil recovery techniques. There's still a lot of oil down there, but now it takes more imagination, capital and technology to extract it. One of the points of my visit was to go out into the field and see what Chevron is doing.

The short answer is that Chevron is doing plenty! With some old reservoirs, Chevron is pumping CO2 to "flood" the reservoir, mix with the oil in place, and then move that oil out of pores in ways that traditional water-floods won't reach. In fact, Chevron is working on ways of making the oil less viscous via CO2, and then "sweeping" the reservoir with water floods. The idea is to increase recovery from the reservoir, to get every drop that will possibly flow.

Chevron is also drilling new wells into formations that were not, traditionally, oil producers. Up until now, the rocks had something "wrong" with them — such that they didn't give up the oil.

Indeed, some new types of oil bearing rocks have the permeability ("impermeability" is a better word) of granite. But the kinds of hydro-fracturing that we see in shale formations is also beginning to yield a lot of "new" oil from tight formations.

While out in the field with Chevron personnel, Matt and I saw a heavy-duty fracturing job in process.

Brazil Today
The fracking operation: water, sand and lots of pressure

Chevron had eight, powerful pumper trucks all lined up — supplied by Schlumberger (SLB: NYSE) by the way. These pumpers were just roaring away, pushing barrels of fracturing fluid (mostly water, with chemical additives and propping-sand) down the hole.

The idea is for the fluids to work their way into the rock formation, and literally crack open a series of fractures as far away from the well as the energy will carry. Then when the water comes back out, the sand that's been mixed will stay in the fractures and hold them open. This makes it easier for oil to move out of the rock formation and into the well.

According to the University Of Texas Bureau Of Economic Geology, there may still be 60 billion and more barrels of oil left in the Permian Basin — half the oil reserves of Iraq, by way of illustration. The trick is to develop technology to get it out.

It's the new tech — with companies like Chevron out in front — that will keep the Permian Basin supplying oil for another 100 years — and offering new investment opportunities.

That's all for now. Thanks for reading.

Byron King

P.S. In today's alert I listed two companies that stand to benefit from oil operations in the U.S. — If you'd like to see my "best of the best" list of (33) oil and gas related companies all you need to do is follow this link.

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Byron King

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Byron King's Military-Tech Alert, Outstanding Investments and Real Wealth Trader.  Byron has made frequent appearances in mainstream media such as The Washington Post, MSN Money, Marketwatch.com, Fox Business News, CNBC's Squawk Box, Larry Kudlow, Glenn Beck and PBS Newshour. He also had a feature article written in the Financial Times, and has appeared on both CNN and Marketplace radio broadcasts. Byron has also been quoted in various international publications such as The Guardian and De Volkskrant, and has been a guest on Canada's CBC television broadcast.

At The Daily Resource Hunter , we take a fundamentally different approach to research. With our boots on the ground, we travel the world looking for the most lucrative resource, energy, an precious metals opportunities. Each business day we call on our stable of world-class writers and thinkers to show you how to get ahead.

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One Comment
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  1. Dear Byron,

    I am a long-time subscriber to Outstanding Investments, and have profited from your insights. I also came in to this world in the midst of the East Texas oil boom where my ancestors owned significant acreage in what became the East Texas Oil Field. Although my great-grandfather had to sell a large portion of his mineral interests to feed his family, what remained was a real blessing.
    Over the years, I have continued to collect information about the ET Field, and have recently completed writing a book about the Slant-Hole Scandal that erupted in 1962.
    I appreciate your acknowledgment of the wonders of the great Permian Basin production and its future potential; and I would like to remind you that the ET Field has produced about 6 billion barrels of oil since its discovery eighty years ago. And, in addition to Permian Basin oil, East Texas oil made a large contribution to the winning of World War II. Our field no longer produces the vast volumes that it once did; but about 1 billion barrels remain in place. Maybe we can tease most of that out with new technology.
    Yours for a great 2012,
    Robert Cargill

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