Late to the Per­mian boom, Big Oil is mak­ing up for lost time

Houston Chronicle Sunday - - FRONT PAGE - By David Hunn

MID­LAND — Jim Purvis started in the oil field dig­ging ditches, sold his first prospect at 21, and then, in cow­boy hat, bolo tie and dou­ble-pocket shirt, spent the next 60 years roam­ing the ex­panse of desert known as the Per­mian Basin, hop­ing to find oil be­fore some­one else did.

The com­pany he founded, Purvis Op­er­at­ing Co., was among the small Texas wild­cat­ters that took big risks for big re­wards, re­ly­ing on in­stinct and ex­pe­ri­ence, as much as sci­ence, to make the Per­mian what it is to­day, the cen­ter of U.S. oil pro­duc­tion. But the fu­ture of Purvis Op­er­at­ing is now un­cer­tain.

“Are we go­ing out of busi­ness? No, sir, we’re not,” said Purvis’ wife, Mar­garet, who took over the firm af­ter his death in 2016. “Is it more dif­fi­cult with all th­ese com­pa­nies in and pay­ing lots of high prices? Yes.”

The world’s big­gest oil com­pa­nies — the ma­jors — have ar­rived in the Per­mian, where they are for­ever chang­ing how crude is pro­duced in the na­tion’s most pro­lific shale play. With deep pock­ets, ad­vanced tech­nol­ogy and global reach, they are el­bow­ing aside the old ways — full of Texas pas­sion, in­tu­ition and guts — and re­plac­ing them with the cool ef­fi­ciency of man­u­fac­tur­ing.

The ma­jors have plans to drill thou­sands of wells, stream­line op­er­a­tions, max­i­mize pro­duc­tion and cre­ate what they call frac fac­to­ries

to suck hun­dreds of thou­sands of bar­rels of oil a day from the 48 mil­lion acres of shale rock across West Texas and eastern New Mex­ico.

The 3-year-old oil price crash weeded out the weak­est U.S. oil pro­duc­ers and forced the sur­vivors to vastly im­prove drilling ef­fi­ciency. But the big­gest oil com­pa­nies have taken those lessons and started to em­ploy them at an un­prece­dented scale, us­ing big data to re­lent­lessly track op­er­a­tions, creat­ing com­puter mod­els to pre­dict pro­duc­tion po­ten­tial, and ap­ply­ing it all to work in acreage as much as 10 times larger than their smaller com­peti­tors, aim­ing to pro­duce not just more oil but also more profit.

Some ex­ec­u­tives, an­a­lysts and lo­cal of­fi­cials laud the ac­tiv­ity as th­ese frac fac­to­ries ramp up: More truck driv­ers, frac crews, drillers and jobs. But oth­ers warn that, as a man­u­fac­tur­ing mind­set takes over and drives to­ward ever greater ef­fi­cien­cies, the ap­proach will slash jobs, force small drillers to sell, and drive out the very wild­cat­ters who made the Per­mian.

Exxon Mo­bil, Royal Dutch Shell and Chevron Corp. have all in re­cent years bought hun­dreds of thou­sands of acres in the heart of the Per­mian, in­vest­ing bil­lions of dol­lars in land, rigs and drilling in pur­suit of a steady, re­li­able stream of prof­its to pay their share­hold­ers. Chevron, for ex­am­ple, needs to gen­er­ate $8 bil­lion a year just to cover share­holder div­i­dends.

For decades, Chevron has re­lied on off­shore fields to pay the bills. A sin­gle Gulf of Mex­ico deep­wa­ter well, for in­stance, re­quires bil­lions of dol­lars and up to 10 years to de­velop, but will then pump 150,000 bar­rels of oil and gas and mint $9 mil­lion in rev­enue, ev­ery day.

But Chevron says its Per­mian op­er­a­tion has the po­ten­tial to triple that pro­duc­tion in less than half the time it takes to de­velop an off­shore field. By 2020, it plans to have drilled thou­sands of wells — as many as 2,000, an­a­lysts say — that to­gether could pro­duce as much as 450,000 bar­rels a day.

“The Per­mian is ex­tremely im­por­tant to Chevron,” said Bruce Niemeyer, vice pres­i­dent of Chevron’s North Amer­ica Ex­plo­ration and Pro­duc­tion. “We’re at the dawn of a world-class as­set.” Buy­ing in

The oil ma­jors were widely mocked for miss­ing the shale revo­lu­tion, los­ing out to faster-mov­ing in­de­pen­dents will­ing to take risks on oil fields that the in­dus­try had viewed as all but played out just two decades ear­lier. Pro­duc­tion in the Per­mian Basin, for ex­am­ple, had peaked at about 2 mil­lion bar­rels a day in 1973.

By 2009, when Exxon Mo­bil bought Per­mian driller XTO for $41 bil­lion, in­de­pen­dent com­pa­nies had been hor­i­zon­tally drilling wells and frack­ing to re­lease oil and gas from shale rock for more than a decade. Shell came even later, buy­ing into the Per­mian in 2012, when it snapped up leases un­der 618,000 acres for $1.9 bil­lion from Ok­la­homa City’s Ch­e­sa­peake En­ergy Corp.

“When all the in­de­pen­dents were talk­ing about the Per­mian,” said Sven Del Pozzo, an an­a­lyst at re­search firm IHS Markit, “the ma­jors didn’t know what the heck they were talk­ing about.”

But the ma­jors, like an oil tanker that takes a long time to turn, have since gained mo­men­tum and speed. Chevron has added 250,000 acres in re­cent years, and now has 2 mil­lion acres in the Per­mian, while Exxon has in­creased its Per­mian stake by some 300,000 acres, most of that ac­quired through a $6.6 bil­lion pur­chase last year of sev­eral pri­vate com­pa­nies held by the Bass fam­ily of Fort Worth.

Over the next three years, Chevron, Exxon and Shell will each at least dou­ble the num­ber of wells they drilled in the Per­mian in the past six years, ac­cord­ing to Hous­ton en­ergy re­search firm Wood Macken­zie. By 2020, the ma­jors’ Per­mian pro­duc­tion should triple from 2014, ris­ing by al­most 550,000 bar­rels of oil and gas per day to more than 850,000 — al­most one-third of the Per­mian’s cur­rent 2.7-mil­lion-bar­relper-day pro­duc­tion.

“It’s amaz­ing,” said Amir Gerges, Royal Dutch Shell’s gen­eral man­ager in the Per­mian. “This is a truly long-term play for the en­ergy in­dus­try. We’re just scratch­ing the sur­face of what we can do.” 700,000 bar­rels a day

Chevron’s frac fac­tory is a chore­ographed ex­er­cise in ef­fi­ciency. Com­puter al­go­rithms iden­tify drilling sites. Ge­ol­o­gists map out well lengths and lo­ca­tions. Teams of con­trac­tors, rough­necks and engi­neers mount 800,000-pound drilling rigs that cost tens of thou­sands of dol­lars a day.

The rigs drill one 10,000-foot lat­eral, slide over a few feet, and then drill another. Com­put­ers au­to­mat­i­cally chart progress, and drill op­er­a­tors, sit­ting in a glass box on the rigs, con­stantly mon­i­tor the process, watch­ing for the first in­di­ca­tion the pipe is stray­ing out of the shale sweet spot.

Ev­ery 12 hours each drilling team re­views its work, com­par­ing progress to the most ef­fi­cient per­for­mances in Chevron’s fleet, and makes cor­rec­tions to their own drilling, to catch up.

At Shell, the process is so dig­i­tized and au­to­mated, ge­ol­o­gists and engi­neers guide Per­mian rigs from the 11th floor at Shell’s Wood­creek campus in Hous­ton, al­low­ing them to drill and mon­i­tor 24 hours a day, seven days a week. They didn’t even stop when Hur­ri­cane Har­vey hit this sum­mer.

Shell’s fu­ture, Gerges said, will in­creas­ingly rely on au­toma­tion and mech­a­niza­tion: wire­less sen­sors to check well lev­els, pres­sures and tem­per­a­tures; drones to travel to pipe­lines, pump jacks and drill pads. Such tech­nolo­gies would au­to­mat­i­cally re­port bro­ken equip­ment, and match con­trac­tors to jobs, much as ride­hail­ing ser­vices match driv­ers with pas­sen­gers.

“It’s the Uber­iza­tion of the in­dus­try,” Gerges said. Shell ex­pects to test the au­toma­tion tech­nol­ogy in the Per­mian by 2019 or 2020.

Chevron plans to spend $3.3 bil­lion in the Per­mian this year, one of its two largest in­vest­ments, be­hind the $3.7 bil­lion for the su­per-gi­ant Ten­giz oil field in Kaza­khstan, pro­jected to take 40 years to fully de­velop. Chevron’s pro­duc­tion at Ten­giz is over 350,000 bar­rels of oil and gas a day. Last year, Chevron CEO John Wat­son said the com­pany’s Per­mian wells could pro­duce 700,000 bar­rels a day within a decade. ‘They’re wily’

With the ma­jors gob­bling up land and prices soar­ing, it’s hard for small com­pa­nies to cob­ble to­gether prospects, said Mar­garet Purvis. She said she’s think­ing of putting her com­pany’s leases up for sale.

“I don’t know what’s go­ing to hap­pen to the small op­er­a­tor,” she said. “Some are go­ing to sell out and go out of busi­ness. Some are go­ing to keep do­ing what they’ve al­ways done and find a lit­tle niche. What am I go­ing to do? I have no idea.”

Oil field vet­er­ans, wist­ful for the days when wild­cat­ters abounded, have be­gun to ac­cept that there is less room in this new Per­mian for the prospec­tors upon which the basin was founded.

“I think we’ve got to come to that re­al­iza­tion,” said Tom Cam­bridge, an 82-year-old ge­ol­o­gist, former Mid­land oil com­pany CEO and cur­rent owner of Cam­bridge Pro­duc­tion in Amar­illo.

But the best of the wild­cat­ters will adapt and sur­vive, said John Yates Jr., 67, former chair­man of New Mex­ico’s Yates Petroleum. Yates sold his com­pany to the Hous­ton oil and gas in­de­pen­dent EOG Re­sources in 2016 for more than $2.3 bil­lion, but now he’s back at work look­ing for oil.

Yes, the ma­jors will make prospect­ing more dif­fi­cult in the Per­mian, he con­ceded.

“But that’s the thing about the in­de­pen­dents,” Yates said. “They’re wily.”

Michael Ciaglo / Hous­ton Chron­i­cle

A drill rig sits on a pad site at a Chevron drilling and frac­tur­ing site in Mid­land. Ma­jor oil com­pa­nies have plans to drill thou­sands of wells in the Per­mian Basin.

Michael Ciaglo / Hous­ton Chron­i­cle

A worker holds a used charge sleeve af­ter hy­draulic frac­tur­ing op­er­a­tions in Mid­land. Some be­lieve the rise of “frac fac­to­ries” will mean more drilling and oil field ser­vices jobs.

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