For some unconventional resources where previous conventional oil and gas were developed using vertical wells and completion techniques, now horizontal drilling techniques are being used, resulting in unconventional resource success. Such is the case with the recent development activities in the Permian Basin.

Comprising more than 40 counties throughout West Texas and southeastern New Mexico, the Permian is bustling with unconventional activity as upstream developers continue to shift to the oilier portions of their lease portfolio.

From a liquid-production perspective, the Permian Basin has remained consistent over the years, according to the Permian Basin Petroleum Association. At yearend 2010, the Permian had more than 150,000 active producing wells generating 72% of the oil production in Texas and 13% of total U.S. domestic oil production. In addition, recent Texas Railroad Commission figures indicate the area sourced 67% of casinghead gas, 13% of gas-well gas, and 8% of the condensate produced in Texas annually.

With considerable historical data available from many years of area seismic, drilling and completion efforts, area operators are anxiously augmenting such by applying their new knowledge and current unconventional resource development techniques. Even though the Permian region's production has declined slowly over time, overall activity has been reasonably consistent. Thus, more recent operator efforts remain amply supported by local service companies, while many pad locations, access roads, and drilling and production support facilities remain in-place to facilitate initial unconventional development efforts.

This re-tooled infrastructure results in prompt regulatory approval, reduced costs, less new impact to the environment and increased overall efficiency. In some cases, companies have indicated that they have re-entered historical vertical wells to provide the starting point for new horizontal activities.

Because the Permian is quite large geographically, there are a number of distinct geological plays that are being pursued in the region. Some of the plays are shale plays while others are unique unconventional formation plays. Each of these areas has its own production potential and, therefore, its own unique midstream infrastructure requirements. As these facilities require significant commitments to midstream infrastructure, midstream operators generally offer fee-for-service contracts in return for reserve-dedication or term-contractual commitments. In addition, new facilities are often implemented in phases that coincide with the upstream operators' development timing and resultant actual production capability.

Delaware Basin: Avalon shale-Bone Springs (Leonard shale)-Wolfbone

The Permian has historically been one of the oldest and largest U.S. domestic supply areas, providing billions of barrels from traditional vertical wells during its history. In the western portion, the Avalon-Bone Springs plays occupy a large area in Lea and Eddy counties in New Mexico and Reeves, Loving, Ward and Culbertson counties in Texas. Early results in this developing play are characterized by completion potential in multiple horizons and operators indicating significant potential.

Table 1 is a list of existing midstream facilities and as well as announced projects specifically supporting the Avalon and Bone Springs development efforts.

Principal transporters of area processing plant residue and dry gas volumes to interstate markets are the El Paso Pipeline, Transwestern Pipeline, Natural Gas Pipeline (NGPL) and Northern Natural Gas (NNG). Oasis Pipeline receives volumes into its intrastate system from Texas locations while Public Service Co. in New Mexico (PNM) receives volumes into its intrastate system from New Mexico locations. The nearby Waha trading hub provides regional gas-price determination and trading opportunities.

Wolfcamp-Wolfberry–Permian Area: Midland Basin

Further east, the Wolfberry region centers around Midland, Texas. The play principally runs north to south through Andrews, Martin, Ector, Midland and Upton counties and picks up again eastward, once again running north to south in the counties of Howard, Glasscock and Sterling.

The area's Spraberry geological trend has long been a desirable target for Permian operators. They have been aware of the Wolfcamp formation for many years as, geologically, it was located just below the Spraberry trend.

However the Spraberry offered more attractive production at lower drilling costs due to vertical wells and less-expensive completions and depth. As operators have discovered that the Wolfcamp formation can now be produced using current technology and techniques, operator strategies and development dynamics have begun to change.

The Wolfberry play represents a 2,000- to 3,000-feet geological interval from the top of the Spraberry to the bottom of the Wolfcamp. As operators are now focusing more to the Wolfcamp, they have also determined that there might be other potential pay zones—including the Dean formation that lies between the Spraberry and the Wolfcamp in some areas.

Table 2 is a list of various area midstream facilities which are assisting in Wolfcamp-Spraberry development activities.

Processing plant outputs are connected to intrastate gas pipelines such as Atmos Texas Pipeline, DCP Guadelupe Pipeline, Enterprise Texas Pipeline, Oneok WesTex, Oasis Pipeline, El Paso Natural Gas, Northern Natural Gas and Transwestern Pipeline.

New infrastructure

An extensive array of existing midstream infrastructure exists throughout the Permian Basin. Some of these facilities continue to support existing operations while also providing immediately available resources to near-term unconventional development efforts.

In some cases, existing oil- and gas-gathering systems are being enhanced or reconfigured to accept volumes from new sources. A number of mothballed refrigeration units and gas plants in the region are being re-activated and, in some cases, expansion plans are already underway.

Area midstream infrastructure includes oil-gathering and transmission pipelines, oil-trucking and rail facilities, oil-storage and terminal facilities, condensate-stabilization and storage facilities, gas gathering and processing, natural gas liquids (NGL) pipelines and storage facilities, fractionators, NGL-trucking and rail facilities and NGL products pipelines.

Crude oil

The Permian Basin region historically has been primarily a conventional, sweet-crude play with reasonable levels of associated gas. Where previous infrastructure exists, increasing production potential has created the need for new facilities or modification of such for liquids transportation, as well as the ability to process any associated gas streams. With oil being produced in the area for many years, many unique oil-gathering systems and regional export pipelines are in place, with local storage and trucking facilities also in use where gathering by pipeline is not readily available or is not the optimum solution.

Table 3 is a list of the major oil pipelines that currently route crude to local markets, exit northward to deliver volumes into the Cushing, Oklahoma, trading hub, or provide for eastward flow to refinery markets in other areas of Texas.

Crude oil deliveries heading east via pipeline are currently constrained, partially due to the reviving regional supply base, but also because some crude from the region that was previously exported northward to Cushing might, instead, be routed eastward via existing Permian pipelines. With the Oklahoma hub also experiencing its own current pipeline transportation bottleneck, and that congestion continuing to be reflected in lower price postings for its crude oil receipts, pipeline export capacity constraints from the Permian have been amplified. Additional and proposed oil facilities complementing these long-haul assets are also included therein.

An offered solution for new eastbound crude oil transportation capacity from the Permian is Magellan Midstream Partners' proposed conversion of their existing petroleum products pipeline from the Houston area to El Paso, Texas. That project would provide for a segment transporting crude oil from the Crane Texas area eastward to Houston the remaining western segment adapted to continue to provide ongoing petroleum product with service deliveries to El Paso. With strong market support, the project will be implemented at a capacity of 225,000 bbl. per day, up from the original offering of 135,000 bbl. per day. This conversion is proposed for initial implementation by first-quarter 2013 with full capacity by mid-2013.

The ultimate Permian and Midcontinent pipeline capacity solutions should result in, at a minimum, one new oil pipeline from each originating area and an ongoing re-alignment of future oil flows into available capacity.

Complicating this is the expected arrival and ramping up of Eagle Ford shale crude volumes entering the greater Houston area market near the same time horizon. Numerous follow-on projects in the greater Houston area will provide for additional crude storage capability and enhanced connectivity to local refineries.

Rail option

In a new Permian regional infrastructure dynamic, a recent announcement by Pecos Valley Producer Services LLC (a joint venture of Kinder Morgan Energy Partners LP and Magellan Midstream Partners LP) would introduce specialized rail along with other midstream services into the Permian area.

The proposal is to develop a multi-commodity rail-terminal business centered in Pecos, Texas, offering a variety of upstream services to area producers such as frac-sand operations, deliveries of steel and many other drilling commodities. In addition, oil-handling and storage services will be provided, including unit trains and transloading capability.

These crude oil exports by rail provide additional and new market access and flexibility not available via existing or proposed regional export pipelines, including delivery to other Gulf Coast refinery markets east of the Houston area.

Also under consideration by the joint venture are midstream infrastructure services, including the ability to develop gathering, treating, gas processing, fractionation, storage and NGL management.

These upstream rail service capabilities and the downstream delivery of crude oil by rail have been previously offered and successfully implemented by rail service providers in the Bakken shale play in North Dakota and in the Eagle Ford play in south Texas. Pecos Valley's progress is worth watching to see how it will integrate into Permian operations. Some initial service is proposed by mid-2012, with other capabilities to follow, as the overall rail-terminal development proceeds.

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