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Permian Basin 'the future of horizontal drilling,' Pioneer CEO says

TheCEO of one of the Permian Basin's largest acreage holders believes there is nobetter location in the world to be operating than the prolific West Texas play,which he said represents "the future of horizontal drilling."

Speakingat a Deloitte conference in Houston, Pioneer Natural Resources Co. CEO Scott Sheffield saidhis company has pulled out of international holdings and is focusing ondomestic plays, especially the Permian. The Permian, he said, has become theelite oil field in the world, with numerous low-cost drilling locations in theMidland and Delaware Basins.

"Forthe last 70 years, we've been going after this dirty sandstone that used toprovide wells producing 100 barrels per day," he said. "Now, we'regoing after the source rock, and we're getting wells that are producing 2,000barrels per day."

Pioneerholds about 680,000 acres in the Permian, making it one of the largest acreageowners in the basin behind companies including , and Chevron saidit has the largest stake in the play with over 2 million net acres. Apache'sholdings gained notoriety recently after the company announced a new producingregion in the Permian called Alpine High.

Sheffieldsaid production in the Permian is still growing, in spite of prices stayingbelow $50/bbl, because producers can make a profit at those prices.

"ThePermian is producing nearly 2 million barrels per day, and 1.5 million barrelsper day of that is from tight oil," he said. "The Eagle Ford is down700,000 [bbl/d]. The Bakken is down [200,000 bbl/d]. The Permian is continuingto grow and will really take off in 2017."

Thesigns of how prolific the Permian could once again become, Sheffield said, arealready in place.

"ThePermian Basin is the future of horizontal drilling. Fifty percent of horizontalrigs are in the Permian Basin. The economics are better, and we can easily movethe product to the Gulf Coast," he said. "Our break-even price, we'rearound $28 per barrel to $29 per barrel. Well costs are down 35%, operatingcosts are down 26%. We can operate these horizontal wells for $2/Boe."

Eventhough many oil and gas producers have struggled financially since the pricecollapse began in mid-2014, Sheffield said the balance sheets of companiesoperating in the Permian have remained in solid shape. As a result, they canafford to continue to increase production. Pioneer, for example, has 17 rigsactive in the play and has plans to add six more per year.

"PermianBasin companies are the most unleveraged companies in the U.S.," he said."I think [production] can go from 2 [MMbbl/d] to 5 [MMbbl/d] [by 2025].You'll probably see this impact in 2017. The other shales will decline, sothat'll even it out, but you'll see an increase in production in late 2017 or2018."

Thecost of acreage in the Permian is increasing rapidly as producers try to enteror expand their presence in the play, but Sheffield said the cost is worth it.

"Acreagevalues are skyrocketing in the Permian … There's little acreage left," hesaid. "But there's no play that competes with the Permian, so when someacreage comes up, it gets top dollar. There are three, four or five zones[producers] can go after. They may pay $6 million per location, but they canspread [the cost] out."

Sheffield'sassessment was echoed by Ray Ballotta Jr., a partner in Deloitte's M&ATransaction Services. Ballotta told S&P Global Market Intelligence thatproducers looking to acquire acreage and assets will probably look to thePermian first for the near future.

"Ithink it's going to be primarily Permian Basin," he said. "They'regoing to be centered on the areas that are most economic to develop, and rightnow, that's the Permian and the SCOOP/STACK play in Oklahoma."

Energydeal experts also expect enthusiasm around the basin to motivate someprivate drillers to go public, or at least to use the initial public offeringprocess as a marketing tool for a potential sale.

Pioneeris thankful for its sizeable asset base in the Permian, and Sheffield said theywould not trade it for anywhere else on the planet. "We're100% focused on West Texas," he said. "It's nice to be in West Texas;it's probably the best place in the world to drill today."