Progress and development in the Permian basin

The West Texas Permian region has one of the world’s deepest sedimentary basins and contains a multitude of thick, porous and permeable formations. Speculators began to arrive in the area around 1917. However, early oil and gas developers considered the Permian basin a graveyard. Shallow drilling with cable tool rigs resulted in many dry holes and marginal producers.  

However, this changed when the Santa Rita #1 blew out at a depth of 3,050 ft on May 28, 1923, and set off a series of major oil and gas discoveries that ultimately led to the development of the greater Permian basin. The well was christened Santa Rita, the Patroness Saint of the Impossible by a group of apprehensive Catholic investors to help ensure the success of the operation. The news of the discovery spread quickly and, by 1924, most all of the major legacy oil players had established a presence in the West Texas region. 

FUTURE POTENTIAL   

The Permian basin, and by extension the Delaware basin, have been the most prolific oil and gas producing regions in the U.S., Fig. 1.  The Permian is divided into three main sub-basins: 1) Midland basin; 2) Central basin platform; and 3) the Delaware basin. This combined region has been the premier growth engine of the U.S. hydrocarbon system since the start of the oil shale revolution. The areal extent of the region is estimated at 250 mi wide and 300 mi long, amounting to 75,000 mi2 that include West Texas and a portion of southeastern New Mexico. While activity in Texas remains brisk, drilling operations on the New Mexico side of the basin have gained momentum over the last several years. 

Fig. 1. The Delaware basin is the top-producing play in the greater Permian basin.

More than 5.5 MMbopd have been recorded as recently as January 2023, from reserves estimated to be at a depth of less than 10,000 ft. Estimates from recognized organizations, including the U.S. Energy Information Administration, believe there’s still substantial reserves yet to be recovered. Predictions suggest that the Permian basin may still have another 5.5 Bbbl of oil in reserve, in addition to 19 Tcfg. 

One aspect that has kept this region a robust global energy supplier is technology advancement and the ingenuity of drilling and completion techniques. The implementation of extended-reach horizontal drilling, staged-hydraulic fracturing and multi-well pad development have kept the Permian basin in play and will continue to do so, long into the future. So exactly how much oil flows from the Permian basin? According to a June 2022 estimate, the area was responsible for nearly half (43%) of all U.S. crude oil production and 17% of U.S. natural gas output.  

INVESTMENT STRATEGY 

The impressive hydrocarbon output is the primary reason that U.S. Energy Development Corp places a substantial amount of our investment, manpower, resources and assets in the Permian region. For the past two years, the company has been increasing its Permian basin assets. And the region remains a bright spot for U.S. Energy Development Corp. Two-thirds of our operating budget will be allocated to the Permian basin over the next two to three years, which we expect to be $200 million to $300 million on an annual basis.  

Over the next 18 to 24 months, we anticipate the deployment of an additional $400 million to $500 million for allocated projects in the Permian, Powder River and Haynesville basins. In the last two years, we’ve pursued strategic joint ventures to develop dozens of multi-well projects in the Permian. We are actively vetting and evaluating additional acquisitions and partnerships to expand on these efforts. 

Joint development operations. In September 2022, our company announced a $60 million acquisition of three separate asset packages in the core of the Delaware basin, partnering with operators on 17 new well sites across a three-county area, Fig. 2. And in 2021, we acquired a $50 million asset in Loving County, with plans to add wells targeting the Third Bone Spring, Wolfcamp A and Wolfcamp XY benches, Fig. 3. 

Fig. 2. Frac data-van onsite at one of USEDC’s Rio Hondo wells during a Wolfcamp completion.

Fig. 3. Three horizontal drilling rigs working simultaneously at and nearby the Rio Hondo project in Ward County, Texas.

This deal brought the company’s total investment in the Permian to $135 million year-over-year (2020-2021). That acquisition came on the heels of a $14.1 million purchase of an asset in Reeves County, also targeting the Wolfcamp. Moving further westward in the Permian region, we entered into a joint venture with Midland-based Atlantic Energy Partners in August 2021 to develop and operate three horizontal wells targeting the Wolfcamp B shale in Ward County, where earlier in the year, we completed and put online an additional three-well pad.  

In addition to these efforts, we’re also participating in numerous projects as a non-operating partner. Our budget will be split between operated and non-operated projects. We continue to pursue additional operated and non-operated developmental drilling projects in the basin, with aims of expanding our regional footprint. 

What we expect from our Permian assets. From an activity standpoint, we feel these strategic capital deployments were prudent investments, especially considering the decline in domestic hydrocarbon discoveries. Still, our assessment is that drilling activity will remain steady, and perhaps even experience a slight uptick in the near future. Taking into account the industry assumptions around commodity pricing, we’re not exactly anticipating a big boom in production and there are still limits in finding available operators who need partners for drilling projects in the Permian.  

We also must take into account how commodity pricing will affect supply forecasts and available-for-sale assets. Commodity price volatility, including higher commodity prices, always has the effect of making new acquisitions a challenge. This is mostly due to the gap between what sellers expect to receive and what buyers are willing to pay, but we also believe that this gap is tightening.  

All told, for the next 12 months, we maintain there will be an increase in the number of opportunities for transactions in the Permian basin and domestic U.S. We expect to continue our efforts in assessing accretive opportunities for strategic growth. But ultimately, our business strategy allows us to conduct a thoughtful and patient approach as to the allocation of capital, which we anticipate should allow us to grow at a measured pace.  

Obstacles to success. Like every other oil-rich and natural gas-producing region in the U.S., such as the Barnett, Marcellus and Bakken shale plays, the Permian basin is not immune to headwinds that could challenge the profitability of those who choose to invest in the region. As long as the Ukrainian conflict continues to bog down into a near-stalemate, there will be volatility in the global energy markets. While the disruption of energy assets has largely been more of a burden in the EU, the risk to oil prices and the industry as a whole is inexorably tied to the outcome of how this conflict will play out.  

Due to this instability, the Permian basin has actually taken on a much more significant role in terms of global production. Lastly, the stubbornly high rate of inflation and rising interest rates has most certainly rippled through the banking industry, tightening lending and adversely affecting the cash flow status of many operators. In this cautious time, it’s a current outlook that hampers the environment for potential mergers, acquisitions, and other would-be joint ventures. Taking all of these factors into consideration, some major exploration companies have recently revised their long-term forecasts for oil and natural gas output in the Permian. 

Technological strategies for expanded growth. Knowing the potential that still exists in the Permian, many operators and drillers have turned to innovation to ensure that their West Texas operations remain steady and production-positive. A few examples of state-of-the-art technology have entered the region and could keep output levels on the higher end of forecasted predictions. These advancements hold promise for improving operational efficiencies and safety.  

Another area of increasing interest concerns the burgeoning value of mining the large data sets generated by drilling and production operations. Many Permian operators are expanding their technological capabilities through the use of artificial intelligence and leveraging it for automation purposes. There’s also predictive analytics that can detect, and correct, routine equipment failures and even bitcoin mining, which can be conducted by using the energy generated by gas, which would otherwise be flared.  

In the interest of using technology to advance oil and gas interests, project managers have taken a cautious and measured approach to conduct operations in a faster and safer environment. In advance, they’ve calculated the near-term and long-term economics, welcoming continuous feedback on the deployment’s benefits.  

ESG efforts becoming increasingly important. Environmental stewardship has become increasingly important to our company, as many of the legacy E&P players are being judged on the robustness of their efforts to include sustainable initiatives in their operations. It’s an area we take seriously, which has produced measurable results that we’re pleased to share with our investors and the general public. U.S. Energy Development earned the coveted ISO 14001:2015 certification a few years ago, and we continue to follow ISO 26000 guidelines, an international standard of social responsibility that aligns with the U.N.’s sustainable development goals.  

As a company, we’ve established our own internal governance structure to oversee ESG efforts, believing that it takes a collective effort to develop, nurture and enhance the strategies that reduce risk, as well as emissions. Our approach is anything but a "set it and forget it" initiative, as we’ve established routine monitoring of our ESG efforts, reporting and evaluations. Ultimately, our stated goal is to allocate investments in sustainable projects that prioritize the reduction of our overall environmental footprint. We’ve also concentrated our efforts on a reduction of reactive flaring and the cutting of freshwater usage in operations. Our most recent tally of this initiative reveals that we were able to eliminate routine flaring at our Eagle Ford well sites, equating to approximately 4,500 tons of CO2 emissions per year.  

Our freshwater reduction efforts include similarly admirable results, as we cut usage by almost 1.5 MMbbl while removing over 70,000 gal of anticipated diesel fuel usage. This fuel reduction actually lowered carbon emissions by 800 tons across two of our flagship projects at our Sola Vaca Norte A 6-well pad and University Lands 43-203-well pad. As we look to the future, we’re engaged in a feasibility study that takes into account a comprehensive carbon strategy. It consists of a total elimination of flaring, and the potential for participating in high-profile national sustainability efforts, such as the EPA’s voluntary Methane Challenge Program.  

While it’s unlikely that we’ll see numbers that match our global counterparts in terms of overall environmental impact, it hasn’t deterred us from doing our part. When it comes to balancing traditional energy exploration and production efforts with renewables, we don’t see it as choosing one extreme over the other. There’s a middle ground that has the sweet spot we’re looking for and, as a legacy oil and gas exploration company, we happen to believe the mantra that change begins with yourself. 

FINAL THOUGHTS 

Since 1980, U.S. Energy Development Corp has invested in, operated and/or drilled more than 4,000 wells in 13 states and Canada, deploying over $2 billion on behalf of ourselves and our partners. Combining all the wells we operate, plus our interests in non-operating wells, U.S. Energy oversees production of approximately 7,400 boed, spanning approximately 300,000 gross acres held by production that account for 4,000 wells.  

Being a Texas-based oil and gas company, the Permian basin will continue to factor into our strategic plans for exploration and production. Ultimately, the goal is long-term growth through aggressive acquisition and development of these highly productive oil and gas producing regions in West Texas, as well as other areas of North America. We’re currently active in all major U.S. basins and intend to continue allocating our resources, manpower and capital to produce a steady return for our investors. 

About the Authors

Jordan Jayson

U.S. Energy Development Corporation

Jordan Jayson is chairman of the board and CEO of U.S. Energy Development Corporation. As the company’s principal executive, he determines the firm’s vision and strategy and oversees the implementation of all change management. A strong proponent of business growth, Mr. Jayson, in coordination with members of the executive leadership team, drove the transition of U.S. Energy from an Appalachian-based producer to a diversified exploration and production operating firm, with assets in multiple oil and natural gas basins.