Drilling rights bids getting rich in Permian Basin

Fuel Fix:
SM Energy Co.’s $980 million purchase of drilling rights in the biggest U.S. crude field indicates producers are willing to pay a premium for access to one of the few spots where oil exploration still turns a profit.

SM, which extracts oil and natural gas from the Rocky Mountains to the Gulf Coast, agreed to pay the equivalent of $39,543 an acre for drilling rights across 24,783 acres in the Permian Basin, almost doubling the Denver-based company’s holdings in the region, according to a statement on Monday. SM plans to deploy a rig as soon as October to drill the acquired acreage, which Chief Executive Officer Jay Ottoson called “top tier.”

After decades of neglect by international oil producers, the Permian Basin that lies beneath West Texas and New Mexico has seen a rejuvenation in the past eight years as intensive drilling and fracking techniques honed in other oil- and gas-producing regions were brought to bear on the Permian’s multi-layered stack of crude-soaked rocks. As low energy prices made other areas unprofitable to drill, explorers as diverse as Apache Corp., Cimarex Energy Co. and Occidental Petroleum Corp. have been touting plans to expand Permian investments.

The Permian’s got “the hottest ZIP codes in the industry,” Concho Resources Inc. CEO Tim Leach told analysts on an Aug. 3 call. The Midland, Texas-based company focuses solely on the Permian and announced more drilling plans last week.
The Permian generated Apache Corp.’s highest profit margins in North America — about $17 per barrel, more than double the return of other regions, CEO John Christmann told analysts on Aug. 4. The Houston company’s only active drilling rigs were in the Permian last quarter and its only other wells to start producing oil were in the Scoop, he said.
The story does not indicate whether the $17 profit was a $40 a barrel or $50, but the fact that drilling is profitable there at either price has to be of concern for OPEC  which is still engaged in its suicidal market share gambit, despite the fact that only two of its members break even at $50.  In most businesses the selling at a loss to build up market share would be called predatory pricing.

Earlier stories have also indicated that major energy companies like Chevron and Exxon-Mobile are also active in the the Permian Basin.


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