No. of Recommendations: 8
Despite the steep shale oil decline rates (that Warren and Charlie bemoaned at the AM), the economics of OXY's Permian shale wells can be quite compelling.
OXY's average Delaware Basin early well performance is referenced on slide 24 in the link below
https://www.oxy.com/siteassets/documents/investors...From the two graphs on Slide 24 the average well produces ~ 165,000 barrels of oil in the first six months of production and ~235,000 barrels of oil in the first year (12 months).
If we assume that the cost to drill and complete a horizontal well with a 10,000 ft lateral section is $7,500,000 (my best estimate), the well is roughly paid off after producing ~ 110,000 barrels (less than six months).
In just the first 12 months of production the well generates roughly (235,000 - 110,000 barrels) x $70/ barrel = $8,750,000 of revenue
after paying out well cost. I am ignoring the associated gas that would be produced with the oil in the first year, and would generate additional revenue.
A simple Excel cash flow model for the average OXY Delaware oil well production profile ((slide 24), including associated produced gas revenue, using the following assumptions -
-Initial well cost of $7,500,00,
-Monthly operating cost of $100,000/month
-Flat oil price of $70/bbl
-Flat gas price of $2.50/mcf
Net revenue interest of 80%
generates a pre-tax PV(@10% of $18,000,000 and an IRR of 94% net to OXY's interest before tax. Over ten years this average Delaware well produces 655,000 barrels of oil on "primary" production (721,000 BOE including gas).
OXY have 6,885 well locations identified in the Permian Basin and DJ Basins combined (slide 25). The DJ Basin wells likely won't produce as much oil as the Permian wells, but well costs will be lower in the DJ (reservoir targets exist at shallower depths) so economics may be comparable.
After the initial ten years of primary production Vicki Hollub estimates an additional oil volume equal to 80% of the primary well production (i.e. another ~525,000 barrels of oil) will be recovered from each shale well with implementation of CO2 EOR. That brings total recovery from their average Delaware horizontal well to over 1 million barrels of oil recovered(655,000 from primary and 524,000 from CO2 EOR).
Incremental capital required to implement the CO2 EOR phase would be the compression and piping necessary to hook the well up to a CO2 source, much less than the cost of drilling a new well. Don't know enough details of CO2 shale EOR economics (cost of captured CO2) but Vicki Hollub has stated publicly:
"Vicki Hollub:
"The Permian is a shorter life cycle, but we intend to make it a longer life cycle. And the way to do that of course is with CO2. If you look at a shale player today...because this is how we look at our assets in the Permian. We've got an inventory of more than ten years (of new well locations) to drill. But what happens beyond that? What do you do if you are a shale player? If you have a five to ten year inventory what comes after the ten years?
And for us what comes after the ten years is CO2 applied to the shale and the conventional (reservoirs). And once you are putting CO2 into the reservoir, then the well decline rates are much different. There is hardly any decline. Our conventional (reservoir) assets decline at about 3-4%. So, we are going to turn our Permian (shale) high decline high return into a low decline but solid return asset over time. When people start thinking the industry goes away in ten years, there are going to be some companies, some assets and some countries that are going to remain to continue beyond that. And that's where we'll be. Because you're going to be able to almost double (oil recovery), not quite."https://vimeo.com/810645111As previously posted, the oil reserves associated with applying CO2 EOR to thousands of shale wells do not yet appear on OXY's reserve books. That is "hidden" value.
OXY are also drilling and testing new deeper unconventional reservoir horizons in the Permian that do not produce yet on a wide scale. OXY have drilled five new horizontal wells in the Barnett shale on the Central Basin Platform (legacy Permian producing area) that look pretty good:
https://webapps2.rrc.texas.gov/EWA/oilProQueryActi...Pioneer Resources CEO Scott Sheffield said recently that his company had identified
thousands of Barnett shale well locations in same area of the Permian:
https://seekingalpha.com/article/4568105-pioneer-n...If the Barnett shale became economic under a large portion of OXY's acreage, that could add significant new reserves for OXY as well.
CHARLIE MUNGER:
And there's a lot more oil down there, if anybody can figure out another magic trick. That's all we need is another magic trick. 