This isn’t the story of oil in the 1980s. Though forecasters are predicting oil below $40 per barrel and North American producers are slashing spending and dividends, major projects are being put on hold, and the most vulnerable are defaulting, there are still some sweet spots where production costs are low and profit is still promising.
From the Permian Basin in Texas to the North Williston Basin in Canada’s Saskatchewan, investors can still reap rewards with exploration and production companies who are operating in prolific plays where low drilling and extraction costs rule the day.
Oil producers of all sizes are slashing spending plans for this year: Apache Corp (NYSE:APA) is slicing its budget 26% for its North American plays, while ConocoPhillips (NYSE:COP) is cutting 20% out of its spending and Chevron (NYSE:CVX) is hesitating to unveil its strategy under the prevailing circumstances.
But it’s not all doom and gloom. While many new oil projects are no longer viable in this gloomy oil price atmosphere, production costs in both basins remain low, making them very attractive places to invest despite all.
We’re looking here at the Permian Basin in West Texas and eastern New Mexico—the second largest oilfield in the world in terms of reserves. Here we see some of the lowest cost development in the world, which makes it suddenly much more valuable with slumping oil prices.
A second sweet spot is North America’s last highly accessible onshore oil and gas frontier—the North Williston Basin in Canada’s Saskatchewan province where wildcatting meets with more success than anywhere. More specifically, we’re looking at the massive potential of an undiscovered play called Little Swan.
Two months ago, Bayhorse Silver Inc. (TSX Venture: BHS) entered into a farm-in agreement with Saturn Minerals Inc. to earn a 50% of Saturn's interest in Little Swan’s 253,000-acre oil and gas prospect—the largest exploration permit in all of Saskatchewan. Not only is this an extension of the prolific oil-bearing formations of North Dakota and Montana, but projections hold that the Williston Basin will soon be producing 2 million barrels per day—up from its current 1 million bpd—as new wells come online.
Sweetening the deal for investors is some of the lowest cost production in North America. Bayhorse is eyeing significant light sweet crude oil accumulations as deep as 1,200 meters, and drilling to this depth will cost only $500,000 because there is no need for expensive horizontal drilling for hydraulic fracturing.
At the end of the day, it’s an investors paradise, with costs projected to come in as low as $20 per barrel. This can withstand even dire projections of $40 oil.
Beyond the potential of a massively rewarding first discovery at Little Swan, and the brilliant economics, Bayhorse has also demonstrated a knack for management in times of crisis and for keen diversification to further reduce risk to shareholders.
To its attractive Little Swan play right in the heart of the best wildcat venue in North America, Bayhorse adds a newly acquired silver mine in Oregon, also with low-cost revenue potential and two highly prospective New Zealand gold mines.
On the final frontier of North America, there is still hope for investors who know how to find the sweet spots where low production costs can promise revenues even with low oil prices, and while the Permian is on everyone’s radar to this end, Little Swan is flying under the radar.
But not for long: Drilling on Saturn’s adjacent property—Bannock—is set to begin in early February and what comes up there will be indicative of the potential of Little Swan.
By. James Burgess of Oilprice.com
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