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As the year comes to a close, reflecting about the year 2013 in shale oil brings me to Pioneer Natural Resources (NYSE:PXD). The year 2013 could be considered the year of the Permian Basin in the context of prospective shale oil plays. Bakken and Eagle Ford Shale observers could argue with this position, and may be right to do so on some variables. But this is the year that the prolific Spraberry/Wolfcamp play was estimated to hold 50 billion barrels of oil equivalent (NYSE:BOE) - actually this number could end up doubling in time. The initial rollout of the estimated recoverable reserves of this Permian-Midland Basin play came this spring, with the dominant firm Pioneer leading the charge.

With the Pioneer "announcement" of even more significant oil reserves being recoverable came a host of other energy players proving the value of their Permian acreage. Notable firms that rode the tailwinds of the announcement include Apache (NYSE:APA), Occidental Petroleum (NYSE:OXY), Laredo Petroleum (NYSE:LPI) and smaller cap firms like Energen (NYSE:EGN) and Concho Resources (NYSE:CXO). In fact, Concho had been drilling horizontally in the Delaware Basin, the western part of the Permian, in 2009. They too have started focusing efforts on their Midland Basin acreage - 2014 plans include horizontal rig growth from 12 (1Q'14) to 14 rigs in the 4th quarter. In comparison, from an average of 13 horizontal rigs in the Delaware, future plans include having 25 rigs in the fourth quarter of 2014. Concho intends to focus activity in Upton, Midland and Andrews counties in the Midland Basin.

Apache and Occidental Petroleum are part of a trend of large independents selling off international assets to re-direct capital to U.S. shale oil activity. But Pioneer was an early mover in doing so, actually starting its divestitures in 2006 onward. Recently, they sold off Alaskan assets to continue with their capital campaign for the Permian development plans. In December, Pioneer estimated greater than 8 billion barrels of recoverable reserves on its acreage in the Permian Basin; that's a lot of inventory.

In addition to continuing the learning process that goes into drilling in the shale plays, firms are becoming manufacturers in the field. This means reducing costs to drill and complete wells and operate. The following slide from Pioneer illustrates this dynamic, which includes further downspacing testing - moving wells closer together for more efficient production. This will be done in the JV southern Wolfcamp acreage. Again, this is industry innovation, recovering more resource by staggering the spacing between an interval from 77-acre spacing to 50-acre spacing in mid-2014. In Pioneer's case this relates to the lower and upper Wolfcamp B intervals.

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Most of the Permian players will be ramping up production in 2014, and horizontal drilling activity will make a difference in production. Pioneer will move its oil profile from roughly 64% to ~70% in 2015. In Pioneer's Northern Spraberry/Wolfcamp acreage (non-JV area), they will grow from 5 horizontal rigs to 10+ horizontal rigs in early 2014.

Importantly, the trend of shale oil production in general marches onward and upward. In December's Energy Information Administration drilling report (DPR), the following production was reported:

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Basin

Rig count (NOV)Oil production/rigTotal Dec prod (m/b/d)
Permian462821.334
Bakken1744801.000
Eagle Ford2834081.226
Niobrara1003120.275
Total 3.84 million b/d

Looking more closely, the notable metrics are that in the Bakken and Eagle Ford, with higher oil productivity per rig, the effect of horizontal rigs and oil production. In the past, the Permian has been drilled mostly with vertical wells. As this changes, the productivity per well will increase. The last data point is the total oil production figures. By December 2013, a projected 3.84 million barrels of oil per day were being produced by the four main oil-producing shale basins (minus Haynesville and the Marcellus with low oil production). In October 2012 from a base of 2 million b/d from the shale plays, the consultancy IHS predicted production would reach 3.5 million by 2015. The milestone was already passed this year.

The following chart shows the history, which helps predict the Permian's productive capacity in the future. By mid-year 2013, the Permian's horizontal to vertical rig count was 25% to 75%, respectively. Note below the impact of time and experience: the Permian has almost three years of horizontal rig activity, beginning Nov 2010; the Eagle Ford about six years; and the Bakken nearly 10 years of activity, though starting from a low experience base (that is the advent of horizontal drilling in earnest was in its infancy in shale drilling). This picture indicates what may lie ahead in productive potential.

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Finally, in spite of depletion concerns in regards to shale oil wells - that they burn out fast and furious - they do burn faster upfront but they continue at a "normal" production rate for up one, two and possibly three decades. (Most industry experts I have spoken with indicate this to be true.) This final chart, from the December 16th early release from the EIA, indicates the U.S. government view of the impact of shale oil, also known as tight oil. They expect shale oil production to peak at 4.8 million b/d around 2020. IHS expects 4.5 million b/d to continue through 2035, in contrast to the EIA forecast.

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The EIA expects shale oil to decline to 3.7 million b/d in 2035 and then 3.2 million by 2040. Pioneer expects, if all of the stars align, for the Spraberry/Wolfcamp to produce about 2.5 million b/d (70-75% oil equivalent) around 2033. After 2018, Pioneer expects to have approximately 50 horizontal rigs running. That the Spraberry/Wolfcamp is also expected to ramp up more slowly initially than the Bakken and Eagle Ford is not a bad development; allowing more time for infrastructure, labor and capital to adjust may help smooth out the potential for extremes of boom and bust.

Data sources:

1) EIA drilling report, Dec 9.

2) Pioneer Aug IP report (three basins growth chart).

3) Pioneer December investors' presentation.

4) These events and firm movements are chronicled in JW's other articles.

Source: Shale Oil Developments: Pioneer And The Permian