It was sand, water, logistics, services, and completion technology as the second full day of the DUG Permian Basin Conference brought the event to a conclusion. The two days in Fort Worth were an immersion course in Basin basics.
Hart Energy’s DUG Permian Basin Conference and Exhibition at the Fort Worth Convention Center in Fort Worth, Texas, Tuesday, May 22, 2018.
By Jesse Mullins | Photography by Tom Fox
Last month we shared the messages of Day One of the DUG Permian Conference, produced by Hart Energy Conferences and held at the Fort Worth Convention Center May 22 and 23. That was a day of E&P executives and Midstream experts sharing their experiences, strategies, and adjustments as they have adapted to the fast-paced, high-intensity landscape that is the Basin in mid-year 2018.
This month we wrap up the event as we share the presentations of the concluding day, which organizers termed their “Technology” program. Perhaps an equally good way of describing it would be to say that this was a day given over to the Services sector of the industry, after Tuesday had been devoted to the oil companies.
Readers who read our installment last month may have noticed how “high level” the talk was. That’s typically the case in oil conferences. Representatives of the E&Ps, in discussing their companies’ activities, are generally sharing fairly impactful information. Where the E&Ps go, and what the E&Ps do, drives all else that follows in the upstream-midstream dynamic.
And so it is that, when the podium is turned over to the service companies, the talk sometimes sounds less “universal” and somewhat more company-specific, in the sense that the talk sometimes revolves around that particular service company’s particular issues or their virtues. But in all fairness to the service companies, that sort of thing is unavoidable.
The oil companies—the E&Ps—don’t have customers, per se. They find and produce oil. They raise their capital in the public and private markets, but from there they go their own way. At a conference like this, the E&Ps don’t have clients in the room.
Not so the service companies. They must cater to the operators. It is essential that they present themselves as responsive—as necessary—to the E&Ps. So they don’t always have the luxury of being able to sound so “non-commercial” (so to speak) as the E&Ps.
Even so, it is surprising how much market-wide insight is delivered by the service companies—the “technology” sector, as Hart Energy terms them—in their presentations. And to some degree, even the internal workings of the service companies, and the market conditions that they answer, or that they control, are themselves vital market factors that everyone else in the room needs to grasp, the E&Ps included. Oil and gas is a highly diversified field—operating with a reciprocality and a specialization of trades that is maybe unmatched by any other industry—and so what happens in one sector, or even in one market niche—can affect all.
The Services Sector
So as the second day arrived in Fort Worth, the service companies gave their side of the picture, and it was one of challenges and breakthroughs alike.
It ought be said that we are examining an entire day’s worth of talk, and the space we can commit here affords only the smallest fragment of that talk to be shared. What follows will be just isolated, representative remarks of what the day held.
The morning began with a panel on sand. Entitled “Sand Focus: A West Texas Haboob is Brewing,” the session featured Rhett Bennett, CEO of Black Mountain Sand; Hunter Wallace, COO of Atlas Sand Co. LLC; and Laura Fulton, CFO of Hi-Crush, another major sand company.
Bennett, in his turn, said that Black Mountain Sand, with its two large mines, has the largest capacity of any sand operation based solely in the Basin. They have 10 million annual tons of mine capacity. Their Vest mine is already serving 500 trucks a day, and that number is climbing, Bennett said. Their El Dorado mine is ramping up quickly, having had its first shipment May 2.
Efficiency is apparently a key metric for sand mine operators—given what the audience heard in Fort Worth—and Bennett was careful to indicate performance figures in that vein. Black Mountain charts a load time of less than ten minutes, gate to gate. They pride themselves on being able to load 23 tons onto a truck in 2.5 minutes.
Other panel participants cited impressive figures as well. It’s clear that regional sand, as a market, is cognizant of all the implications of their relationships with the E&P companies.
Laura Fulton, in her portion of the discussion, brought the perspective of a company (Hi-Crush) that operates not just in the Basin but in the northern marketplace (Wisconsin) as well.
Northern sand will continue to be a factor in the sand marketplace, as Fulton pointed out.
As for the in-Basin sand marketplace, which has been the big conversation of 2018, and in which Hi-Crush is itself the first entrant and a major player, there are misconceptions about in-Basin sand that need to be addressed, Fulton said.
“There is a big difference between the expectations that people have had versus the reality that is out there,” Fulton said. “The expectation has been that the sand is available almost immediately upon the announcement of a new sand mine being constructed. The reality is that it is a lot of hard work. It takes quite a bit of effort to build the facilities, to get them operational, to ramp them up to full capacity, etc. in the meantime, demand for sand is continuing to be strong and continuing to grow.
“Our expectation here is that about 25 to 30 million tons of Permian sand will be available on the market by the end of 2018,” she said. “That will grow as more facilities are built and as they ramp up the capacity. Currently, I believe there are about eight facilities that have opened, including our Hi-Crush facility that we opened in July of 2017, several months ahead of our competition. But as I mentioned, there have been considerable delays out there by the others who are building these mines, partly because of the construction—it just takes longer than people anticipated. Some of them were delayed because people weren’t able to get the financing to be able to put together the facilities, and the logistics constraints, I think, are going to cause issues as well.”
Moreover, the labor market in the Permian Basin is “just incredible,” Fulton said.
“There are more jobs than you can possibly imagine for very few people who actually live out there,” she said. “There is a big boom for hotels and for man camps to bring in the labor, not just for the construction of the facilities, and the labor for the facilities, but also the trucking and everything else that goes with it.
“So today we are seeing a situation where there is tremendous demand and a lot of that supply is being built and constructed, which means that the demand for sand in the Permian Basin is still largely being filled by Northern White sand. Our expectation going forward in 2018, and I think this is very similar to what Rhett [Bennett] was presenting earlier, is that we still will have a lot of demand for Northern White sand. [Meanwhile] a lot [of the local demand] will be supplied by the Permian Basin in-Basin sand, the 100 mesh sand, with some coming from regional sand [Fulton used the term “regional sand” to refer to sand in Texas that is outside of the Basin], but ultimately it is regional sands that are getting displaced. Those that are in Central Texas are going to be moving more and more toward the Oklahoma markets and the Eagle Ford markets, and not going toward the Permian Basin because of the trucking costs that are involved.
“It truly is all about logistics,” she continued. “Logistics truly are the name of the game, and the Northern White sand has an advantage because of its ability to get into the Basin [via train service], compared to the trucking costs of the regional sand. Certainly the in-Basin sand has an advantage because of its proximity, and [because of its] not incurring those transportation costs by rail. But ultimately you have to get the sand where the customer really wants it to be. And that is where Hi-Crush has really focused its attention. It’s not enough to just mine the sand and produce it at your facility. You have to be able to move it. And more important than that, as we’re seeing the evolution of the industry, is the ability to be able to actually manage the sand for our customers. This is where Hi-Crush has really evolved with the industry over time.
Here Fulton began a side narrative on Hi-Crush’s internal evolution and their products and services, including the PropStream service, and for those details anyone can visit their website.
Sand Transport
Sand transport has become such a big subject that it merited a panel of speakers on its own. In the “Sand and Logistics Focus,” which was dubbed “Proppants Hit the Road,” Hart Energy presented three panelists: Kevin Fisher, CEO of PropX; Greg Garcia, EVP of Solaris Oilfield Infrastructure, Inc.; and Taylor Robinson, president of PLG Consulting.
Fisher stated that the industry is facing a myriad of challenges.
“The silica exposure, for one,” he said. “As of June of this year the people who are exposed to silica on-site will have to be [assessed], and that will become an annual thing. If they are above the exposure limits—the actual limit changes in a couple of years to half of that—25 micrograms, and that is not very much dust. The truck traffic is another [challenge]. We hear every day about the traffic jams on the road, on the traffic jams leaving the mine, that back production up. It definitely is an issue.
“Demurrage—that is a thing that really hits you in the pocket, when you’re not doing things right. Letting trucks back up. I’ve heard stories, in times past, of as much as ten percent of the cost of delivering that sand, being [attributable to] demurrage. I know it is being handled better today, but it has not gone away.”
Fisher continued: “You also have to deal with footprint issues at the wellsite. And in terms of efficiency—you’ve heard the stories, again, that the laterals are longer, we’re pumping more sand per foot of lateral, the frac crews are more efficient and they have less down time, and techniques like zipper frac’ing allows us to switch from well to well, so that you can barely idle those pumps for a little bit before you’re back to going into the ground with massive amounts of sand for 24-hour periods.
“And so this whole scenario of challenges out there and they must be met in a cost-competitive manner,” he said.
Fisher also commented, as did others, on the impact of mobile containers (for sand) and the benefits of the same.
Later in the day the focus shifted to more tradition well service(s), and attendees were addressed by a panel of experts on Completions and Logistics. The speakers were Ron Grusek, president of Liberty Oilfield Services; James F. Newman, SVP of Region Operations for Basic Energy Services Inc.; and Luke Costesso, VP of Operations, U.S. Land, OneStim, for Schlumberger.
At one point in this conversation, panel moderator Richard Mason posed a question about “DUCs stacking up” due to the oil price differential issue. (DUCs being, of course, Drilled Un-Completed wells.) He asked: “Is that happening, to the best of your observations, and will that reduce the demand for pressure pumping services. So… assuming the price for WTI is at $71, but the differential in Midland is $17 dollars less than that… [does that impact the number of DUCs?] And if we are seeing reports on increases in DUCs, does that lead to an increase in demand for pressure pumping services?
He put the question to Jim Newman of Basic Energy Services. Newman replied that he felt that the perception of “more DUCs” is perhaps more a function of fundamental shifts in the industry, in how it does business today.
“We’re drilling multi-well pads, for… and we’re waiting for [drivers and other personnel] to complete all those wells at once. You can have 90 plus days, or 120 days, between the time when the well is drilled and the well is actually completed. But, again, that is driven by efficiency.” By efficiency, Newman indicated that the higher-horsepower jobs, and the multi-staged, multi-contractor completions might be taking longer to assemble, and might be taking more time to arrive at a frac site, but once they are on site they are doing more work there, and tapping more oil there, than ever before. Thus, some so-called DUCs are not necessarily jobs that are awaiting more-favorable oil prices. They are, or can be, jobs that are simply awaiting the ever-bigger teams of pressure pumpers who must make the rounds.”
Water Matters
Following the Completions forum, the subject matter turned to water. A session entitled “Water, Water Everywhere?” featured three panelists: J. Michael Anderson, president of Layne Water Midstream; Thomas F. Darden, CEO of Wolfcamp Water Partners LLC; and Jim Summers, CEO of H2O Midstream.
Summers, for his part, was emphatic. “It’s a no-brainer to get water off the trucks and into pipelines,” he said.
His point—and the others’ as well—was that water infrastructure gives the industry a tremendous cost advantage.
Said Summers: “Presentation after presentation, you hear each producer talk about the importance of that water infrastructure and the development of a water midstream infrastructure, in the same vein as you would talk about gas or crude infrastructure…. That’s quite a journey from where we’ve been, historically. And it’s where the industry is today. In fact, you’d be hard pressed to pick up a quarterly earnings report, from a major producer, and not even see a slide or a topic of conversation around that. The big question that we have today is, ‘Who is going to claim that industry? Who is going to build it?’ The most obvious question is about the producers themselves. Really, every producer is focused on water, and water capacity, but the level of commitment and the level of planning to that varies across the board.”
Summers laid out three possible models for water infrastructure.
* Producer Self-build
* Affiliate (for example, a wholly owned subsidiary, such as Pioneer Natural Resource’s subsidiary, Pioneer Water LLC, or an MLP “drop down,” such as is seen in Antero, Rice, Anadarko (Western Gas), and Noble).
* Third-Party Midstream
Addressing the first of these, Summers remarked that “It’s the same thing for those of us who have been around 20, 25 years in the midstream sector. We saw this with natural gas. This is where gas midstream actually started… is that the early infrastructure was actually built by gas producers. I’d say 90 percent plus of the money that’s being spent today is being spent by producers today.
“The second model that we’re seeing is what I call an Affiliate model, and one of the best examples of this is Pioneer,” Summers said. “Pioneer created a water midstream group several years ago really to focus exclusively on their large contiguous acreage position in the Midland Basin… This was a wholly owned subsidiary of Pioneer, but it focused entirely on water.”
His third model was the one that is most novel, and most imposing, to most hearers. It’s the idea of a water midstream as an industry sector unto itself, just as the crude oil pipeline system today is an industry unto itself.
“So how do you get from where we were just two, three years ago, when I’ll bet very few people put “water” and “midstream” together into the same sentence together, to where things need to go? I think that today, if you want to talk about water midstream or water infrastructure, it’s difficult to advance your cause and you’re probably not going to be treated very well by analysts on the street today. So how do you get from here (points to one slide) to here (points to slide that shows a “realized” midstream for water)? You probably know the story. We had a traditional oil business for decades where we drilled wells and water always existed and in some cases you had a significant amount of water relative to oil. But just the scale, the amount of water you’re dealing with (then) was in the thousands of barrels.”
In those times, the idea of a “midstream” for water would have been not just impractical but ludicrous. But today things have changed. It seems the industry is indeed headed toward some kind of water midstream. But what model will be adopted? Or what combination of models, and to what degrees does each participate.
There is much yet to be decided on these issues. Hart Energy Conferences held an event in Midland in June on this topic. Permian Basin Oil and Gas attended, and we hope to share information from that event in a later issue.
And the Rest
The rest of the day was taken up with another panel on completions, this one on “Completions and Production: Building Wells That Last a Lifetime.” Panelists were Cody Teff, GM of Well Discipline for Shell Oil Company; Brian Zwart, EVP of Engineering and Co-founder of Percussion Petroleum LLC; and Victor Figueroa, DFW/Southern U.S. Shale Director/OFS, Baker Hughes.
R. Colby Williford, VP of Land for Rosehill Resources drilled down into the data for his presentation on “Doubling Down in the Permian.”
And in something a bit different than the foregoing presentations, the last event of the day was a panel on Big Data. “IoT’s Role in Production Optimization” was handled by panelists Blake Carlson, president and COO of WellAware; and Alex Robart, CEO of Ambyint.
We regret that we cannot share the conclusions of these knowledgeable sources, nor of Dr. Robert Gulley, of the Texas Comptroller’s Office, who spoke earlier in the day on the Texas Conservation Plan. But space just does not permit. Please watch our website in early August to see if we have slideshows from various Conference participants that we (might perhaps) be allowed to post.