Devon Energy to boost drilling this year
Improving conditions in the oil and natural gas markets will allow Devon Energy Corp. to boost drilling efforts in Oklahoma over at least the next several years, executives said Wednesday.
In a conference call with analysts, Devon CEO Dave Hager said the company has focused its efforts primarily on central Oklahoma and southeast New Mexico.
“For Devon, 2016 was a transformational year,” he said. “We successfully reshaped our portfolio around our top two franchise assets, the STACK and the Delaware Basin, providing us a sustainable multidecade growth platform.”
The Delaware Basin is the western portion of the vast Permian Basin, which is the country’s most active oil field.
Devon executives said the company will spend $2 billion to $2.3 billion on drilling activities this year, with much of that concentrated on its top two areas. The company is expected to operate up to 20 rigs this year, up from 13 at the end of 2016.
As its name implies, the STACK is a region of the state where multiple oil and natural gas producing rock layers are stacked on top of each other. Devon employees are studying how many wells can be drilled on a single area, including wells in different directions and different depths.
“Ultimately we believe we could have spacings as high as 20 to 30 wells in a single spacing unit when considering the Woodford and Merimac together,” Hager said.
The company is averaging six wells per section now.
While Devon executives are ramping up drilling plans for this year, they are looking forward to 2018 and beyond, Hager said.
“We’re even more excited about the outlook for 2018,” he said. “Given the nature of pad drilling, the majority of the drilling activity in 2017 will provide a great impact to production in 2018.
Due to these timing considerations, there is significant operational momentum heading into 2018.”
While the bulk of the capital expenditures will be in Oklahoma and New Mexico, Devon executives also are considering options in north Texas and in Canada.
Devon teams plan to restimulate existing wells in the Barnett Shale in North Texas. The company has lowered the cost of the process to about $700,000, down from between $1 million and $1.2 million previously, Hager said.
“If that is successful, it could have returns that are very competitive,” he said.
The Great White North
Devon executives also are considering expanding the company’s Canadian operations with a potential project with BP PLC for a new heavy oil development in Alberta. Executives from Devon and BP expect to make a decision on their Pike project in the second half of 2017, Hager said.
U.S. shale development is a relatively quick process. Wells can be drilled and completed in a few weeks. Those wells tend to see production drop sharply after initial production, although companies have worked to slow the decline.
Canada’s heavy oil, however, is a much longer process. It takes years to prepare and develop a field, but once the area is operational, it produces relatively steady volumes of oil for decades.
“We like the project a lot,” Hager said. “It’s a little lower return than our program in the U.S., but it’s like the bond in our portfolio. It’s lower risk. We know how to do it and can generate good returns on it.”
Because of the longterm nature of Canadian oil projects, immediate oil price trends are less important.
“The question is not what prices are going to be in 2017, but what we anticipate prices will be when first production happens in 2021,” Hager said. “We are hoping to get greater clarity on that question.”
Besides prices, Devon and other Canadian oil producers now also must consider geopolitical issues that have not been an issue previously. One potential factor is the Trump Administration’s proposed border adjustment tax, which could add a tax of up to 20 percent on imports into the United States.
“We do not necessarily see the proposed border adjustment tax as a negative to our Canadian process,” Hager said. “We see where it could be a positive overall for our portfolio in that the bulk of our oil is in the U.S. and the tax could cause WTI (domestic benchmark West Texas Intermediate crude) to go up. But it won’t necessarily lower the prices coming out of Canada.”
Refineries along the U.S. Gulf Coast and other areas are designed to handle relatively large volumes of viscous, high-sulfur oil like that produced in Canada.