Yesterday’s announcement that Apache Corp. has discovered a three billion barrel oil field in the South Delaware Basin has many West Texans celebrating, but energy economist Ed Hirs suggests the champagne be put on hold for the time being.
Apache’s find is, indeed, huge. In addition to oil reserves, and hints from management that they may turn out to be bigger yet, there is an estimate 75 trillion cubic feet of natural gas. As a bonus, the gas is “wet,” meaning it is liquids-rich (propane, butane, ethane, pentanes) at a time when gas prices are low and gas liquids are priced against oil benchmarks.
“The Apache announcement confirms what many in the Permian Basin had believed, that there was a big player accumulating acreage and consolidating an acreage position,” says Hirs.
“The 4,000 to 5,000 feet of stacked pay is very attractive. But Apache’s estimated net present value of $4 million to $20 million per well at $50/b and $3/Mcf means that the play is likely non-economic at $35/b and $2/Mcf.”
Apache says that expected well costs “in development mode for a 4,100 foot lateral are estimated to be approximately $4 million per well in normally pressured settings and $6 million per well in over-pressured settings.”
The good news is that oil prices are expected to continue recovering in the latter part of this year and are forecast to exceed $50 in 2017. And gas is also forecast to rise, perhaps to as high as $4.50/MMBtu, according to Ponderosa Energy Integrated Analytics.
Now for the not so good news. The Alpine High is located in southeast New Mexico and West Texas counties where development has been slower than other areas, such as the Midland Basin, and there is not much in the way of roads, pipelines, and other infrastructure.
“The net back to Apache at the wellhead may take a significant hit because, as Apache points out, there is little infrastructure for takeaway in their area,” said Hirs.
“This goes back to the discussion about pipelines, chickens and eggs – and which will come first. With the midstream guys hurting just now with many producers pushing back on the take-or-pay agreements they signed in order to build out the infrastructure, Apache may have to pay for the infrastructure on its own.”
There are a couple of scenarios that could play out says Hirs, who is also the managing director of Hillhouse Resources, which operates in the Niobrara Basin in Colorado.
One, big players like Pioneer and EOG are adding huge acreage positions in the Permian Basi and Hirs says the acreage acquisitions mean are the companies are building inventories for future drilling operations.
As John J. Christmann IV, Apache’s chief executive officer and president, puts it: “We are incredibly excited about the Alpine High play and its large inventory of repeatable, high-value drilling opportunities.
“We have thousands of low-risk locations in the Woodford and Barnett formations alone, and we are looking forward to further delineating what we believe will be a significant number of oil-prone locations in the Pennsylvanian, Wolfcamp and Bone Springs.”
“Their strategic planning folks believe – as we all do – that the current erosion in supply will dovetail with the steady and slow increase in worldwide demand for oil and gas, and the prices will rise above current levels to make these wells very economic to drill,” Hirs said.
Two, Hirs isn’t entirely convinced Apache is in the Alpine High for the long-term.
“Given the resumes of Apache employees I have seen lately, the costs of building infrastructure, and the continuing low price of oil and low price of gas, Apache may have made the announcement for window dressing,” he said.
“They have long been rumored to be an acquisition target for one of the majors.”