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IHS Markit: Rising costs tighten Permian economics
Exploration and production firms that acquired Permian basin
acreage in the land grab of 2016 are now faced with maintaining
premium valuations while meeting high-growth expectations in
a rising cost environment, according to research by IHS Markit.
Despite the Permian’s continued economic attractiveness,
rising service sector costs will raise per-well capital expenditure by more than 15% during 2017, said Imre Kugler, senior
consultant at IHS Markit.
“The economics for the Permian are still impressive at a $41/
bbl weighted average for a $55/bbl [West Texas Intermediate]
price-projection, but costs are rising, mostly for service sector-
related costs of drilling and completion, proppant, sand, and a
tightening rig market as utilization rates increase,” Kugler said.
“While Permian and Anadarko basin plays remain in the mon-
ey, so to speak, lofty acquisition values become more difficult to
pay off when the plays require nearly $50/bbl WTI to produce
a 10% internal rate of return.”
Many firms are able to offset rising service-sector costs
with increased productivity, particularly in the early life Perm-
ian plays, while more mature plays outside of the basin have
reached a plateau with economics primarily altered by cost, Ku-
gler explained. Outside the Permian, the lack of infrastructure
bottlenecks will place less cost pressure on the Bakken, Wat-
tenberg, and Eagle Ford regions.
“Oil-price stabilization is creating greater confidence, and
pumper calendars are filling up quickly,” said Thomas Jacob,
research consultant at IHS Markit. “In the Permian in partic-
ular we see significant expansion in drilling and completion
activity. As a result, we at IHS Markit estimate the play will
increase its proppant consumption from 20% of the US market
in 2014 to 37% of the market in 2017.”
Jacob said an increase in the number of wells hydraulically
fractured in 2017 and higher frac-sand-mass-per-well assump-
tions for fourth-quarter 2016 and beyond have led to a 62%
increase in North American frac-sand demand in 2017. “This
year, mine-gate sand prices are expected to increase by roughly
50%, and, in particular, fine-grade sand prices are increasing
most significantly,” he said. “The market share of fine-grade
sand increased from 60% in 2014 to 80% in 2017.”
Chisholm Energy startup enters Delaware basin
Chisholm Energy Holdings LLC, a Fort Worth startup backed
by a $500-million line-of-equity from private equity firm War-burg Pincus LLC, has acquired acreage in Eddy and Lea counties of New Mexico from an undisclosed private seller.
Chisholm says “the asset includes a substantial amount of
highly attractive undeveloped acreage with multiple targets in
the Bone Spring and Wolfcamp formations.” Terms of the deal
were not disclosed.
Formed in May 2016 to target the northern Delaware basin,
Chisholm plans “to pursue unconventional resource opportu-
nities where it can leverage its horizontal drilling and comple-
Chisholm’s CEO is Mark Whitley, who served as an advisor
to WP starting in 2014 and previously was senior vice-president
of Range Resources Corp.’s Southwest division.
Hope dims again for Cypriot reunification
Prospects for the reunification of Cyprus, which improved last
month with the resumption of negotiations between Greek and
Turkish Cypriot leaders after a 54-day break, have dimmed
again (OGJ Online, Apr. 12, 2017).
The standoff precludes settlement of a territorial dispute
that thwarts consideration of a pipeline between deepwater gas
discoveries in the Eastern Mediterranean and Turkey.
Offshore oil and gas work figures in the latest setback to efforts to end 43 years of partition of the island nation.
Since last month’s agreement to schedule new talks by Greek
Cypriot leader Nicos Anastasiades and Turkish Cypriot leader
Mustafa Akinci, new conflict has flared over Cyprus’s Exclusive
Economic Zone (EEZ).
Turkey issued maritime notices about its plans for military
drills and seismic surveys in the EEZ. And Turkish frigates
have menaced seismic vessels working in disputed Block 6.
Anastasiades complained about the Turkish activity in a
May 8 letter to United Nations Sec. Gen. Antonio Guterres in
which he said Espen Barth Eide, the UN special envoy to Cyprus, shows bias in favor of Turkey. He said Eide should not
make statements or issue warnings.
On May 11, Eide appealed to leaders of both sides to relax
tension, saying, “We may be looking forward to rather dramatic