Apache Corp. spent the past year quietly buying 350,000 acres of drilling rights in an overlooked corner of the Permian Basin, North America’s most coveted oilfield.
The result? The Houston-based crude explorer has “pretty well locked up” what could be a major new oil play at rock-bottom prices, said Chief Executive Officer John Christmann.
Apache on Wednesday said it has made an “immense” oil and natural-gas discovery in the southern reaches of the Permian, a region in West Texas where drillers have spent $40,000 an acre or more this year trying to amass assets. Apache spent about $1,300 an acre on average by focusing on land that others considered too geologically complex to drill economically, Christmann said in an interview in New York.
“You had to get in and do the work,” the CEO said on the sidelines of a Barclays Plc energy conference, where he unveiled the finding. “There was a huge opportunity sitting out there, but everybody’s preconceived notions were just not correct.”
Company geologists have been exploring the area since 2014, Christmann said in the interview. Apache so far has drilled 19 wells as it sought to define the potential of the resource; nine of those wells are currently producing.
Apache has estimated the region it calls the Alpine High contains at least 3 billion barrels of oil and 75 trillion cubic feet of gas, according to a company statement Wednesday. The land is mostly in Reeves County in the Delaware Basin, a section of the Permian that has been a hotbed of acquisition activity among oil explorers this year.
The Alpine High had been largely bypassed in the Permian rush because its underground layers of shale rock were thought to be too fractured and jumbled to support a productive well. The area was also believed to be full of clay, which complicates drilling, and skewed toward natural gas, which is less profitable than crude oil or natural gas liquids.
All those assumptions turned out to be wrong.
“I think we surprised a lot of people,” Christmann said. “There’s no way you could have put together 350,000 acres in the Delaware Basin, in the hottest county in the hottest basin in the world at these prices, if everybody realized how prime this acreage really is.”
Apache rose as much as 14 percent in New York, the biggest intraday gain since November 2015, before closing 6.7 percent higher at $55.13.
On Tuesday, EOG Resources Inc. said it would spend $2.5 billion to buy Permian-focused Yates Petroleum Corp. Drillers including Pioneer Natural Resources Co., Parsley Energy Inc. and Concho Resources Inc. have also announced deals this year, expanding in one of the few North American oil regions where production remains profitable at current prices.
Apache said its nine active wells in the Alpine High are producing only limited amounts for now, because the find is in a corner of the Delaware Basin that’s short on infrastructure to process and transport oil and gas. That could increase costs in the company’s bid to develop what could be a “transformational” find, said Benjamin Shattuck, principal analyst at industry consultant Wood Mackenzie Ltd.
“While it’s an exciting discovery, there’s a tremendous amount of work above ground and below ground to actually make the economics work,” Shattuck said in a telephone interview. If Apache can overcome the challenges, “it’s a game-changer.”
Oil and gas production in the area won’t begin before the second half of 2017, Christmann told investors at the conference. To accelerate drilling, Apache raised its 2016 capital budget by 11 percent to $2 billion, according to the statement. The new find will account for about one-quarter of the drilling budget this year.
Apache estimates the region may support 2,000 to 3,000 wells at oil prices of $50 a barrel and natural gas prices at $3 per million cubic feet. That includes only the Barnett and Woodford shale layers. Other layers including the Pennsylvania, Bone Springs and Wolfcamp may hold significant resources as well, the company said.
“This is a giant onion that is going to take us years to peel back and it’s a story that’s going to get bigger and better as it’s told later,” Christmann said.
By Alex Nussbaum and Joe Carroll.