If there was such a thing as a theme for our annual meeting, those two words probably summed it up as well as anything.
By Jesse Mullins | Bobbie Cupell contributed to this article.
Given the rich panoply of presentations—the panels, the educational sessions, the featured speakers—that comprised the program of the Annual Meeting of the Permian Basin Petroleum Association, there had to be a highlight message or moment for anyone fortunate enough to have been in attendance. And if those presenters’ messages could be distilled into a single motif, it would likely be something along the lines of “press on” or—as more than one speaker enjoined—“stay engaged.”
It was an appreciative audience that gathered at the Petroleum Museum for the hospitality reception the evening of Oct. 23 and then descended upon the Petroleum Club Oct. 24 to feast upon the wealth of insightfulness and additional great hospitality there as well.
In a reshuffled breakfast lineup on the 24th, Christi Craddick, a commissioner on Texas’ Railroad Commission, took the podium first to share the Commission’s unique perspectives.
She began by quoting an impactful statistic that recently made the news: that at the end of August, U.S. oil output reached 7.62 million barrels per day—the highest volume since October 1989. And this: Texas is now producing 1.8 million barrels a day, which is up from even the past month’s mark of 1.72, and even farther above the year-ago mark of 1.62 million barrels a day. The state’s natural gas production has been steady at about 20 bcf per day.
And Craddick pointed out what many had been buzzing about in the same week—the fact that the number of horizontal wells for which the Commission issues permits (in the Permian Basin) have finally caught up with and equalled the number of vertical wells that are being permitted.
For comparison’s sake, she cited activity in the Barnett Shale—the play that ignited the current boom of unconventional production. “In 2010, we [Railroad Commission] issued 2,100 permits there,” Craddick said. “This year, to date, we’ve only issued about 400. So production is down there. Numbers are down. Natural gas production topped off at about 5 bcf per day, in the Barnett.”
But in the Eagle Ford, the Commission has issued, year to date, 3,069 drilling permits, she noted. “Last year we gave out about 4,100 there but the telling number of what they’ve got going on is this: in 2008 we issued 26. So from 26 to a high of 4100, and we’re probably going to be somewhere in the 3,500, 3600 permit range this year. That is amazing to me. Their crude oil production also continues to go up. They’re now at about 636,000 barrels per day.”
Craddick said that the Eagle Ford will see about $28 billion in investment in the coming year. That play’s natural gas production is at just over 3 bcf, “so they have gone up slightly in that regard.” And production of condensate, “which is a big piece of what is going on in that world,” is at about 176,000 barrels a day, so that number has been on the increase as well, she said.
That brought her to the Permian Basin. “As of Monday, we’ve issued 6,900 drilling permits for this region,” Craddick said. “Last year we had a high 9,600 permits that we issued. So, when I talk about our 1.8 millions barrels of oil [daily] that are being produced in the state, [it’s noteworthy that] 915,000 of those barrels of oil are being produced in this part of the state.”
Even though permits are down, year to date, completions are up this year, she said. “Last year we had about 15,000 completions and this year year-to-date we’re over 19,000. So the completions continue to go up. And like I said, part of what we realized, and what we understand is, the Permian Basin was late to the horizontal drilling world. So here it comes, folks… and it is going to be an interesting time, I think. And when I say it’s an interesting time, I think it is really important for us to make sure we have good rules in place. I want feedback. And I appreciate you all. I appreciate the PBPA being involved. Because that is really helpful to us. And as some of you know, I pick up the phone and ask questions a lot.”
Craddick said that, in the Texas Legislative Session just past, the Railroad Commission felt it was tasked with getting two main objectives accomplished, one of which she thought would be easy and the other she thought would be hard. And it turned out that the ‘easy’ one was hard and the hard one easy, she said.
The first was getting the agency through its Sunset process. “I thought we would have no problem getting through it,” she said. “At the last day, the last hour, we are still there for four years. Let me tell you what the challenge is—one challenge we have as an industry, and frankly, it’s interesting, but nobody understands what the Railroad Commission does. And we all do—the people in this room—but there’s only six people in the entire legislature who are directly involved in the oil and gas industry. Now we have other friends, let me be clear, but they don’t understand how important the Railroad Commission is, and regulatory certainty, to this industry. So we’ve got a hard sell going forward. And we need to stay engaged and that is part of what I’m doing. Like I said, we have a lot of friends over there, but not always. We’ve got to make sure we are doing our job as far as explaining what the Railroad Commission does.
“So we’re going to be there for four more years. Name didn’t change. Nothing changed. And I think as we go through Sunset again—and I hope we get some of that fixed next session—I hope that they understand what we’re doing. So, stay engaged in that process and please continue working with your members. This is an easy area out here, but please continue working and talking with people. We need to be here as an agency and we think we are doing a pretty good job or y’all would be taking more of your business to New Mexico. [laughter] Please don’t do that.
“So the other piece that I thought was going to be really hard was that we wanted to spend some money in our agency,” she continued. “And as a lot of you know, we’ve done a lot of cutting through the years. But one of the things that we were allowed to do, at about the session before this last session, was raise our permit fees about 150 percent…”
But the Commission did receive more funding during the session. They are upgrading their computers—some of which have been very dated and all but obsolete.
Relations with Washington have been critical for the Commission as well.
“I’ve been up [to Washington] in July and testified, and I’m now going up in December on another issue,” Craddick said. “We have a lot of good friends up there and they want to hear what this state has to say, and, not to belittle our friends in New Mexico, but as goes Texas, so goes the rest of the country. They kind of understand—we’ve been a leader for a long time in this state [in energy matters], and they want to know what we’re doing.
“One of the challenges we have is EPA [Environmental Protection Agency]. Every day of our lives. Somebody asked me if we are getting along with the new administrator—the regional administrator—and the answer is that we have had a meeting with him. I don’t know if that means that we are getting along, but we are trying as an agency to work with them—just because if you don’t, it’s worse. And he seems to get it… But we’ve been giving comments to them about their frac’ing rules. They are going to put frac’ing rules on top of our frac’ing rules, and the Bureau of Land Management wants to put more frac’ing rules on top of that, so you could have three layers of frac’ing rules before you’re finished, and how efficient and effective is that? So EPA has potential rules that they want to draft and put out, and we might see a draft in March. I’m now being told that that might get pushed back, which is even better for us, so keep pushing back and keep talking to your congressman and saying, hello, we already have fracking rules in our state and we don’t need them.”
Craddick said that Texas has air pollution issues, where the feds are concerned. “We found out this week that there’s to be a hearing before the U.S. Supreme Court on our cross-state air pollution,” she said. “So we are already in process as a state, through the attorney general, filing comments and we think we’ll have oral arguments sometime early next year and we might potentially win those. If we don’t, that affects us as a state. It affects our power plants, it affects our manufacturing, it could potentially affect us where we’re drilling. So this is a huge fight for us as a state, and it’s important that EPA stays out of our business or at least puts fair rules in place because it could cost all of us money.”
Then there’s the Bureau of Land Management.
“They [BLM] have tried to promulgate rules. They got 1.2 million comments on their rules as of the end of August, when they closed the comment period. You know, the plus of the federal government being shut down, for a couple of weeks recently, was that in the EPA only 7 percent of their people were necessary to show up [laughter] and at the Bureau of Land Management it was about the same.
“Only two percent of our lands in Texas are federal lands—unlike New Mexico—but that’s still a cost to you. We [Railroad Commission] can do a permit in two to five days, sometimes one to three, but the Bureau of Land Management takes up to 290 days. And they are estimating that you have to add 25,000 people to the Bureau of Land Management for them to put frac’ing rules in place. That’s ridiculous! We all have frac’ing rules in the Western United States. We all know how to do it. Just let us do our business and stay out of it! So we have made comments on that as well.
“And the last issue [with the feds] that you’re going to hear about—a lot about—is endangered species. I want to commend this association for taking the lead on the Dunes Sagebrush Lizard. We are excited about the fact that we got something done. As for the Lesser Prairie Chicken, I still don’t understand how it is endangered when Kansas still has a hunting season for it. [laughter] But we’ve got to be aware that those are two of 125 species on the list [of possible future endangered species]. So we’ve got to stay engaged. I know it’s a cost to your companies. But that is important to us as a state. It is important to the economics of the state. And frankly to the economics of the oil and gas industry.”
Craddick said that the U.S. oil and industry is set to surpass Saudi Arabia’s by the end of the year, in terms of overall oil production. And as for natural gas, “the opportunities in this country are huge.”
“Between the Eagle Ford, the Barnett Shale, and the Permian, we are sitting on some of the biggest plays, not only in this country, but in the world. We have an opportunity, if we ever get Keystone XL Pipeline built in this century—and they’ve put 5 billion dollars into it so far and still haven’t gotten a permit—but we’ll have an opportunity, with our friends in Canada and Mexico, to be energy independent in this country. We have that opportunity with you continuing to drill. I appreciate everything you do and we look forward to continuing to work with you.”
Business Friendly
New Mexico’s Lieutenant Governor John Sanchez was next up to speak. “It’s a pleasure to be here in Midland,” he began, adding, “or, as we say in New Mexico, it’s good to be back in southeast New Mexico.” [laughter]
The lieutenant governor, in his message, carried forward some sentiments expressed in 2012 when Susanna Martinez, governor of New Mexico, addressed the PBPA from the same podium. Those sentiments were of the “New Mexico is open for business” variety.
Raised in humble circumstances and steeped in bootstrap beginnings, Sanchez is from a family that built a construction business from scratch, eventually attaining considerable success.
“Along the way I decided to get involved politically, because my wife simply got tired of hearing me complain about the business community, right?” Sanchez said. “You know, we were always talking about higher taxes and everything else. And she just said, ‘Either do something about it or shut up.’ [laughter] So I ran for my first office and I beat a very liberal incumbent mayor and took my position on the city council.
“In 2000 we did the impossible,” he said. “For many of you who know the political arena in New Mexico, we have for many years had a tandem of very, very liberal anti-business and—we believe—anti-oil and gas folks serving in our legislature. One was the Speaker of the House, and his partner was the senate leader. Well, after a lot of hard working people from throughout Southeastern New Mexico in the oil and gas industry, and folks from all over the country, actually, gave their support, we were able to do the impossible. We beat the longest serving Speaker of any house in the country. [Meanwhile] his partner in the New Mexico state senate, who was his ‘partner in crime,’ literally, today serves in a federal prison. So that is real change you can believe in, right?” [laughter]
“I ran for governor in 2002 against Bill Richardson, and many of you know what Bill Richardson did to the oil and gas industry in New Mexico. And I predicted, as I challenged Richardson, I said that if Richardson became governor, that he would have unchecked power in our state and would take advantage of the proceeds from the oil and gas industry and would use them to expand his own personal, liberal agenda.
Unfortunately I was not able to defeat Richardson. And we saw in New Mexico this great industry, the oil and gas industry, which was producing jobs and economic opportunities and billions and billions in taxes in our state—we saw it pummeled by the Richardson administration. And for many of you who had businesses in our state, and no longer do, or did, during his administration, we apologize for that. I am proud to say there is a new sheriff in town. Governor Martinez. And many of you know her. And I am so proud and honored to serve with her as we work hard every single day to restore New Mexico’s ability to create jobs and to refurbish and to rebuild the oil and gas industry. I know it’s working, because as lieutenant governor I go to Hobbs and I can’t even find a hotel room. [laughter] And that’s a good problem to have, right?
“What does the oil and gas industry mean to New Mexico? Our state-permitted fund is created by the oil and gas industry and the billions of dollars that it sends every year to Santa Fe to ensure that we don’t have to raise taxes. That we can fund education and build infrastructure. It means jobs and we see right now because of new leadership under Gov Martinez that New Mexico’s economy is being re-energized because of the fact that we have the oil and gas industry in our state. We have reversed many of the rules that Richardson imposed to penalize the oil and gas industry, but it is just the beginning. We helped push back the onerous pit rule that was killing the opportunity for people to do work in New Mexico. We are trying to make sure that New Mexico is the most pro-business, business-friendly state. We want to compete with not only Texas but with every other state out there to make sure that we give every opportunity for businesses to flourish. You know, business is like water. It will follow the path of least resistance. And we’re trying to make that happen in our state.”
Sanchez said he is proud to have been one of the leaders in New Mexico who fought against the listing of the Dunes Sagebrush Lizard. “I spent many a day in southeastern New Mexico fighting that, both in my role as lieutenant governor and in the National Lieutenant Governors Association. We are simply trying to bring good government back to New Mexico. And it means that we are trying to cut the size of government and the overreach that government has, every day in our lives.”
The lieutenant governor said he is trying to bring common sense back to state government.
“That’s what’s missing today. It’s missing in Washington. But when you get government out of the way and you bring common sense in regard to the regulatory environment, then the private sector will do what it does best, and that is create opportunity. And that is what we are trying to do.”
While Richardson was detrimental, Martinez has been beneficial, Sanchez said.
“In 2014, at this time, approximately, next year, the governor and I will be up for re-election and I am not here asking for money. But I am here to say that we want to make sure that we offer something. We want to offer to the people, the producers, in the Permian Basin an environment of predictability. Of continuity. And here I speak not only as lieutenant governor but as a longtime business owner. [I’m saying that] when you offer predictability in the regulatory environment, when it comes to how rules are going to be implemented, then what you are doing is telling people who are willing to risk capital that your investment is going to be certain. Look, clearly, we want to do everything we can to protect our groundwater, our natural resources, our children. We have a stake in this! But I want you to know that if you like what you see today in New Mexico, and I believe that you have seen that there is a new attitude in our state that is business friendly, that it is just the beginning. The governor and I have talked about the future, when we get re-elected, in 2014, as to what we’re able to do. But not only for the remainder of her four years, but [beyond] 2018, [we’ve talked about] the ability to string together back-to-back, pro-business, pro-energy administrations in our state, that will allow the predictability, and the continuity, of your investment in New Mexico. It’s just the beginning, folks. I want you to know that…”
Concluding, he added:
“We will lead, along with Texas, the growth in our country. We in New Mexico want to compete with every state out there and make sure that we give every opportunity for businesses to flourish. On behalf of the state of New Mexico, thank you very much to the oil and gas industry for what you do for our state.”
Working Together
Ross Melinchuk, the assistant director of Texas Parks and Wildlife, spoke on the subject of endangered species. He remarked that Texas Parks and Wildlife and PBPA and its various members started working “pretty diligently” together almost two years ago on “a particular species” that the U.S. Fish and Wildlife Service had proposed for listing as “threatened” under the Endangered Species Act.
That species, of course, was the Dunes Sagebrush Lizard.
Melinchuk laid some necessary background:
“Just so you know, Texas Parks and Wildlife Department is the state agency responsible for the management of fish and wildlife resources in this state,” he said. “Texas is home to 5,000 species of plants, 1,200 species of vertebrates, and 30,000 species of invertebrates: insects, mollusks, crustaceans. So when we talk about one species, the Lesser Prairie Chicken, it’s just one of many that we have responsibility for. Currently there’s 103 species listed as federally threatened or endangered in Texas. You may have heard something about the [U.S.] Fish and Wildlife Service entering into a multi-district litigation settlement in 2011. That set into motion a series of reviews that the Service that mandated to undertake on slightly over 250 species in the next 5 years. That takes us to 2016. If all of those species were to be listed as threatened or endangered, that would increase the number of federally threatened species by 80 percent. So when we got notice about the intent to the proposal to list the Prairie chicken, that was a species that made us all sit up and take notice about. This was one out of those 250 that could have huge economic impact, given its range across the five states.”
Melinchuk said that, as state agencies, the various wildlife departments in neighboring states work together on many things. He said the agencies don’t always agree on all the prescriptions or all the approaches. “But because we’re states, we allow, and respect, that authority for states to do things differently across the border: in New Mexico, Texas, Oklahoma, for example,” Melinchuk said. “In this case [of the Lesser Prairie Chicken], the five states that constitute the range of the Lesser Prairie Chicken are Oklahoma, Kansas, Colorado, Texas, and New Mexico. We came together in really an unprecedented effort, and said that the stakes are too high here. We have to work together to develop a plan that will hopefully preclude the need to list this species. We’ve got the experts, the science… we’ve had the management authority for this bird for the last 50 years. We also have the relationships with landowners. And now, I’m happy to say, at least with one segment of industry, we’re working together. And what that has resulted in is a plan of more than 300 pages that we submitted to the Fish and Wildlife Service for approval.
“The plan basically constitutes the blueprint for us to be able to work with land owners, industry, and state and federal agencies across the range, to go and conserve the species in the face of this proposed listing,” he said. “And I can’t say enough about the hard work and engagement of this organization and the leadership of Ben and others—your executive members, but others, too—individuals, many of whom are in this room, who have sat across the table from the state fish and wildlife agency biologists, rolled up their sleeves, and literally spent hours working through these documents, to try to work up something that will be palatable and effective for your industry, but also satisfy the needs of the species and what we think the Fish and Wildlife Service is demanding in order for it to be not listed.
“The beauty of this plan is that even if a species does get listed, this is an effective road map, although the statistics are not bright in terms of the number of species that have come off of the Endangered Species List. Our job with the Prairie Chicken and this green light we’ve been given, is to implement this plan, and that’s a tall order. This is about a 40-million-acre landscape that the Prairie Chicken is occupying. We don’t need a chicken on every acre, but what we do need is strategic conservation across that landscape. So we’ve developed a tool that I think the industry can use and it will allow you to go and look at whatever your development is and see where the hot spots, or priority habitats, are for this bird. It will also provide you with a calculator estimator of what the costs would be if you decide to do a development inside that high priority habitat.”
CEO Panel
The panel of Permian Basin CEOs was an insightful discussion that generated a number of conversations among members well after the panel had finished. The three participants represented some of the most successful oil and gas ventures in the region. Tim Leach, a past PBPA “Top Hand Award” recipient, is chariman and CEO of Concho Resources. Randy Foutch is head of Laredo Petroleum, one of the main players in the fast-growing Cline Shale. And Tim Dove is president and COO at Pioneer Natural Resources, the company with the biggest stake in the Midland Basin.
Leach was the first on the panel to speak. His message was that Concho’s story tells a lot about what is going on in the Permian Basin.
Concho went public in 2007 after several private equity “build-it-up-and-sell-it experiences,” as Leach put it. The company finally came into a set of assets that management thought was the appropriate set of assets to build a public company around.
“We are a bit unique for the size company we are,” Leach remarked. “When you look at our peer group, we are one of the only companies that are purely focused on the Permian. So that is really all we do.”
Among its peer group, Concho is the only company with a significant spread of assets both in the Delaware Basin and in the Midland Basin, and the company is drilling horizontal wells in both locations.
After starting “from scratch,” Concho has become the second-largest oil producer in the Permian, behind only Pioneer Natural Resources. Concho produces about 130,000 barrels of oil a day, gross operating production. Their “net” out of that is roughly 100,000 barrels.
“So in New Mexico that makes us the largest oil producer in New Mexico,” Leach said. “I think in the state of Texas we are about the sixth largest producer. And that’s all in a very short period of time. So it’s been a very dramatic growth story. Right now we are running about 25 drilling rigs. Eighty percent of those drilling rigs are drilling horizontal wells . That is going to be a big part of the story—the whole transition to horizontal drilling. When I look out into the future, I see us next year running about 35 rigs, and in the year after that, about 45 rigs. So it is continuing to grow dramatically, especially the horizontal component. Almost all the rigs we are going to be adding are going to be drilling horizontal wells.”
Leach said that in 2012, he and his management team began talking about the success they were having drilling horizontal wells. From there, the conversation moved to the idea that what Concho was doing was transitioning to horizontal development. He showed data (on screen) of the rig count in the Permian Basin going back to the first quarter of 2011, and how horizontal rigs have comprised an ever-larger share of that count. While the rig count has actually declined since 2011, the horizontal component has continued to grow.
“That’s a lot like Concho,” Leach said. “Two years ago, we got to a rig count high of about 45 rigs that we were running, drilling mostly vertical wells. As I said earlier, we are back to 25, and we can get as much capital invested with 25 horizontal rigs as we could with 45 drilling vertically. So I think you are seeing that throughout the entire Permian Basin. The takeaways from that are, the amount of oil and gas that is going to be produced out of the Permian Basin—I still think people are trying to get their minds around all it means, but it is going to be really exciting for the companies around here. And then I think everybody around here knows the strain on the infrastructure with all this activity But it is going to have a positive effect on our state, and a positive effect on our nation.”
Randy Foutch took the microphone to share the findings of his own firm, Laredo Petroleum. He described Laredo as similar to Concho in the sense that Laredo, too, had a lot of past experience with private equity.
More recently, though, Laredo “found a model that we thought had a lot of running room,” Foutch said. “Not just two years, or three years, or five years, but 20 or 30, or whatever the number turns out to be.”
That model has something to do with a concentration on Permian assets and on a program of building “production corridors” to maximize efficiencies within the acreages Laredo is working.
“We leased our acreage in the Glasscock/Howard County area, in the depositionally deepest part of the Basin,” Foutch said. “That was very much a goal of ours, and we think it has proved to be worthwhile. We are seeing tremendous resource potential.”
In 2012, Laredo spent a lot of time delineating and drilling “one-off” wells, but the company’s goal in 2013 has been to get into development mode and even into manufacturing mode, Foutch said.
“We’ve done some things to recently to really help us on our balance sheet,” he said. “We like where we stand. We sold out of Oklahoma. I’ve had, literally since 1981, exploration activity in the Permian and the Anadarko Basin and the Mid Continent area. This is the first time that I have not had activity in the Anadarko, and I think that just demonstrates how strong we believe in our properties in this part of the world.”
The Glasscock/Howard area falls within a play called the Cline Shale, and Foutch directed many of his remarks toward the Cline’s potential.
“We view it as having 2,000, maybe 2,500, feet of total section that was deposited in the center of the Basin. It’s very very thick, very very organically rich. And I think the well results have been very very satisfactory.”
He said that in that area, Laredo has drilled about 75 horizontal wells, the first of which dates back to the latter part of 2008.
“In 2010 we were still drilling principally Cline,” he said. “We were kind of drilling those wells 4,000 foot, ten stage. We’d try something to improve that incrementally, then wait a while, drill another one. But along about the end of 2010 or ‘11 we started figuring this out.”
Foutch said they’d tested the acreage, which he described as “kind of a block that is about 20 miles wide and 80 miles long, more or less north-to-south.”
“We think on the four zones that we have proven have great commercial horizontal production,” he added, noting that for Laredo, the recoverable reserves could be in the “44, 45 million barrel range.”
As part of this effort, Laredo is building what it calls a “production corridor.” That development spreads over a centrally located area some 5 to 7 miles long within the acreage in which the company is building low pressure and high pressure gas lines, water treatment systems, water reclamation facilities, and oil pressure facilities.
“What we are really trying to do is take advantage of the manufacturing mode, getting our costs down as low as we can. The infrastructure needs, when you start looking at drilling 64 wells on three sections, and at the kind of rates we are talking about, well, it is pretty staggering.”
In the end, “Who knows what that 140,000 acres [Laredo’s acreage position] might actually contain?” Foutch said. “It will be years and years and years before we really get a handle on how great this depositional center of the Basin is.”
Pioneer’s Pioneering Ways
Tim Dove, president and COO at Pioneer Natural Resources, commended the PBPA membership for its accomplishments and predicted that the organization will have an even-greater impact going forward. Partly that has to do with the overall rising influence of the Permian Basin itself, a region whose prosperity continues to draw the attention of state officeholders and office-seekers.
Dove began with some statistics. Since 1949, he said, there have been 56,000 wells drilled in the Midland Basin. “Of course, not all are producing now,” he said. “But of those wells, some 7,000 are Pioneer-drilled wells. So we [Pioneer] speak with pretty good authority on what to expect.”
Interestingly, though, what Dove found to comment on was an item of considerable irony.
“Now, we look back and say, ‘Why did we drill those 7000 wells?’” he asked, somewhat tongue-in-cheek. “Those 7,000 mostly vertical wells. Now it seems like nonsense and stupidity was the order of the day. And that’s simply because where this going is clearly in the direction of horizontal drilling. I think I make the case here that the resource potential here in the Midland basin, and for that matter both basins, [which is] what Tim [Leach] was talking about, is going to be mind boggling in its impact.”
Dove displayed a chart that indicated 4.6 billion boe of resource potential in Pioneer’s northern Midland and southern Midland Basin acreage. And this is calculated on the basis of 140-acre spacing,” Dove said. “But it’s pretty clear that this Basin can be drilled down significantly less than that. We are doing pilot drilling right now to test 70-acre spacing and probably will be testing 35 acre spacing next year.
“It’s coming,” he said. “We are going to be downspacing. So you can actually two-times those [reserves] numbers if, in fact, 70-acre spacing works across the Basin.”
Infrastructure Insights
Alan Means, moderator of the Infrastructure Panel, opened by saying that “We have never dealt with the challenges of infrastructure like we are dealing with them today. And it is good to see that the CEOS are seeing those kinds of things also.”
Means, who has been active in the Midland area for more than 20 years, is an owner of Cambrian Management, a project management company that has been in business 12 years. “We do a lot of drilling,” he said. “We do a lot of production operations. We do a lot of engineering consulting.
“And I tell you what, Tim Leach just tickled me pink today,” Means quipped. “Concho, a thousand employees, has 22 to 25 rigs running. Cambrian Management: 24 employees, five rigs running. The math looks pretty good to me.” [laughter]
Means put much of the current situation into perspective when he related some local recent history.
“Several years ago, we got hit up to do a lot of this Wolfberry stuff,” he said, speaking of Cambrian Management’s team. “And back in those days, people would call you up and say, ‘I need to drill 10 Wolfberry wells in Martin county—let’s get ‘er done.’ And back then, I’d say, ‘Okay, do you have a frac date?’ ‘No… why would we need a frac date?’ ‘Well, we can drill these things all day, but we’re waiting four, six, seven months sometimes for frac dates, depending on how big of a player you are.’”
It got worse.
“Then we started running into sand problems,” Means continued. “Couldn’t get enough sand, couldn’t get the right sand, couldn’t get acid. In New Mexico, we actually ran into some shortages of cement. It’s changing. Those are supply and demand things. Not enough sand, not enough acid, not enough drilling rigs.
“Well, it’s changed now [again],” he said. “Because of the demand we were out here, supply has shown up. I couldn’t tell you half of the frac companies that are running around out here in West Texas… And as a result, when somebody calls me about drilling a well, and ‘Do we need to get a frac date?’ ‘No, we’re good.’
“But I can tell you right now, you’d better be calling Encore, you’d better be talking to your gas supplier, you’d better be thinking about who is going to buy your crude oil, because that is where we are at today. And not to pick on you guys at Encore, but we are at up to seven months waiting time. Never in my career have I seen it where it is this difficult to get things done. There are a lot of issues. If you fly into Midland at night, kind of look around, it looks a lot like back in the 1930s, ‘40s, and ‘50s, where the question was, ‘What are we going to do with this gas? Well, we’ll just burn [flare] it.’ Well, it is starting to look a lot like that again.”
Those are the different kinds of issues facing operators and producers today.
The panel was composed of four individuals from varying occupations: Pat Ennis, president of Priority Power; Toni Gordon, senior energy analyst with Pioneer Natural Resources; David Stone, vice president of Southeast New Mexico DCP Midstream; and Jarrett Vick, president of Permian Crude Transport, a trucking company.
Ennis addressed the issues in obtaining electrical power.
“The load growth in this area is not just oil and gas,” Ennis began. “It’s housing, it’s commercial, it’s office buildings. Each one of those new projects takes wires to connect into the grid so that you can have air conditioning, electricity to your horsepower, and lights and power for your computers. Just a real quick look at the Texas area—we are in what we call the far west zone of ERCOT (Electric Reliability Council of Texas). Think in terms of ERCOT being the FAA of the power grid. They operate the grid and oversee all the protocols and rules. In the far west zone, we cumulatively have about 2,250 megawatts of load out here. In 2012 oil and gas was about 1400 of that 2250. All others (residential and commercial) is about 850.”
Electrical power is the main resource that the oil and gas industry calls upon to power their compressors, their wells, their sub pumps, their tank batteries, pipelines, and just about everything else, Ennis said. Maintaining those utility transmission and distribution lines is extremely important, whether it be for businesses or schools, churches, homes, etc.
“How important is power? As everyone in this room probably realizes who has tried to get a meter installed in the last 12 to 15 months, it can be challenging,” Ennis said. “Expect delays. If you are trying to drill wells and you need servicing out there, and if you are on the low side of that list, then the only source you probably have is generators, and of course generators cost a lot of money. I’ve talked to lots of my clients, that they are desperately in need of electricity at times, and they don’t want to pay those $250 to 300-400 dollars a day on small generators and the diesel that goes with them.
“Power is running about 5-10% of your L.O.E. And this is just the electric invoice that’s received. It doesn’t include power outages or the cost to wait on a service to get to you. It doesn’t include labor costs or repair costs… those costs are hard to quantify.
Ennis said that power consumption is going way up because, with the boom, more and more horsepower is being put on the system. “A challenge we face now is that sometimes it takes a long time to get a meter installed,” he said. “So you’re just left hanging out there with an expensive generator or no power at all. A couple of things we can expect in the near future: power prices are going up. Not just the delivery piece—that Encore or ADP piece—but commodity prices are also increasing. Texas is short of generation. We need gas-fired generation plants built in Texas and we need them quickly. We are running our old plants more hours per year, and those old plants are less efficient than new plants.”
Congestion charges, too, are driving costs up. The congestion charge last year in the west zone was around $280 million.
“There are lots of power lines being built,” Ennis said. “Expect costs each time you request a meter. As you plan and develop new properties, bring in the utility company early in the process and see what those costs are.”
Toni Gordon, senior energy analyst with Pioneer Natural Resources, related the electrical power quandary as it is felt on the user side. Gordon introduced herself as a Pioneer employee who is responsible for all of Pioneer’s “owned company systems.”
Said Gordon: “Pioneer owns approximately 1,500 miles of our owned company systems, so I play the middleman in keeping our systems healthy and also work with utilities to make sure that they have the information that they need in a timely manner to upgrade their systems to accommodate our load. We have seen a change over the last few years, actually, with the increased growth and the demand that we are putting on the system. And the critical need for all of this to work together to make this Basin successful.
“Power needs are the number one driver of the majority of our facilities,” Gordon continued. “This is basically what I have been doing the last couple of years. Ben Sheppard and I have started to work together to create a coalition to get everybody involved. We’d like to get more producers involved. We’d like to get people up to speed as far as what is going on the Basin is concerned.”
Gordon’s we’re-all-in-this-together stance reflects current realities. More, she extended the new realities to wider realms than mere electricity. “We’re not stand-alone producers anymore,” Gordon said. “When it comes to water needs and our roads, all the infrastructure, pipeline… we are not stand-alone producers any more. We have got to work together to make this work. All of our loads and all of your loads affect these systems. It’s not just Pioneer’s load, it’s not just Concho’s load, it’s not just Laredo’s, Apache’s. We are a consolidated group now, and we are seeing a huge effect, and a lot of the utilities are calling and saying, our systems are overloaded… your increased [usage] is causing problems on our systems.
Gordon and others in similar positions are charged with coming up with “load projections” that they convey to utility companies who take steps to attempt to meet that shifting need. The load projections are based, at least in part, on the wells that a company like Pioneer is drilling. Those lists of wells are constantly changing.
Said Gordon: “Lately, over the past, I would say, year, our systems have come up to speed… to the point we have been able to provide the internal data. So I’m actually starting to be able to monitor our own systems and get further out to be able to project things and know exactly what systems our load is going to be on, and to be able to provide that to utilities in a more timely manner. It is imperative that we do partner with our utilities. It has been incredibly frustrating for all of us, I know, when you are waiting on power, but we have to constantly remember that our utilities are trying to work with us and do want to partner with us. It is as important to them as to us. They are not our enemy. so it is important that we all get involved and make our voices known and be heard in these situations. So that is basically where Pioneer stands, as far as electrical needs in the Basin.”
Midstream Matters
So much for electricity. The panel conversation turned to midstream and gathering systems. To takeaway matters. Yet here, again, the issue was demand and the business of communicating with the infrastructure providers. David Stone, vice president of Southeast New Mexico DCP Midstream, took the floor.
The issue, Stone said, is to increase the communication lines with utility businesses. “The farther out front you can get, the better you’re going to be,” Stone said. “And that works both on the utility side, on the midstream side, and on the takeaways. And it is the same thing that you encounter with your contacts in the service industries. So the better that we can partner and have that communication, the quicker we are going to be able to respond, both on the midstream and utility side, to help you reach those production targets that are so important.”
To date, since 2011, DCP has added 230 million process capacity, Stone said. “But with that said, what we have actually done is try to leverage a limited system. And two things are going on there. We not only are expanding capacity on the footprint we have today, but this is a legacy system, [so] we are also having to go back in and remediate.
“What this system was originally built for was the vast majority of the 56,000 wells that Tim Dove talked about being drilled out here.That were originally vertical [wells] with much lower IP rates. So on your legacy systems out here, we are having to go back in and we’re having to address the higher IP rates that you’re starting to see from your horizontal programs. Additionally, we’re having to build out with additional capacity to match that.”
Stone referred to a timeline to, as he said, help set some expectations. “Some of you in the room who have done your own self builds on processing capacity will feel the pain that we feel on the timeline basis,” he said.
It’s an 18 to 20 month process for DCP to build a plant, Stone said. “We’re currently building three in different regions today,” he said. The time depends on the environmental permit, on the “long lead equipment,” and on producer support.
“But that is really the best case timeline,” Stone said. “And when you actually see construction, we’re generally going to be in a 10 to 12 month range. That is from breaking ground, until we are starting to actually turn compression and take gas in. So prospectively, for us to be able to keep up with the development that you have out here, that communication and partnership has to be very long-lead. And especially when it comes to the processing side.”
The final participant on the panel, Jarrett Vick of Permian Crude Transport, echoed the same concerns as those who preceded him.
“It’s all the same issues everybody else is dealing with. We build a truck station, it’s six months as we sit there and wait for electricity and have to run a generator.
“We run 100 transports,” Vick said. “We don’t have enough pipe [pipeline] in the ground, so if anyone wants us to come do that [transport their crude oil], we’re glad to come do it.
“I love the business we’re in. And if anybody can call and give us at least 24 hours before all the frac tanks are full, that’d be helpful. Other than that, I’ll just say that the roads in New Mexico are too damn rough, and if they could get those smoothed out, that would be great, too.”
Speaker’s Sentiments
In the final session of the meeting, Texas’ Speaker of the House of Representatives, Joe Straus, addressed the luncheon gathering. His talk included the following remarks:
“We are far and away the nation’s leading state for private sector job growth,” Straus said. “We have a balanced state budget with billions of dollars in reserve. Innovation in your industry and others have brought tremendous opportunities to this state. This innovation has also brought millions of people to Texas. The population of our state is growing twice as fast as the country as a whole. Over the past 12 years, our Texas population has increased by about six million people. As beneficial as this growth has been, it’s also brought new demands on our water supply, our electric grid, and on our roads. It certainly has put more children in our public schools.
“Today more than five million students are enrolled in Texas public schools. Over the past decade our student enrollment has grown by 20 percent. In the same time, the number of students who speak limited English or no English at all, has increased by 39 percent. These figures show that not only is our state growing but it is changing very, very rapidly. That change has put some very important decisions in front of those of us who work in the state capitol. This year we passed a balance budget that puts additional resources into our public schools, colleges, and universities. We designated $450 million to improving the roads in the oil and gas corridor so that this critical sector of our economy can continue to thrive.
“For more than 50 years Texas has had various versions of a state water plan. That plan was revised about 20 years ago in order to give local officials more input, but it has never received the funding to be fully implemented. As this plan has collected dust somewhere on the shelf, our water shortages have only grown worse. Not only has growth put a tremendous strain on our water supplies, but there has also been a long and punishing drought. The drought has cost our economy billions and billions of dollars. It has forced strict limits on water use all across Texas. Members of the House have developed a plan to fund critical water conservation projects across the state.”
[Editor’s note: As much as we’ve been able to share with you from the annual meeting, we were not able to share full remarks from anyone and in some cases we were not able to share any notes from certain speakers. This circumstance is no reflection of the importance of the speakers—our own reporting limitations were the reason for any omissions.]