The Permian Basin continues to exceed expectations and outstrip other producing regions. Where it all will lead, no one knows, but our sources discuss the implications, here and beyond the Permian’s borders, of an unprecedented oil and gas turnaround.
[Editor’s Note: In this second installment, we examine the impact of growth within the Permian Basin itself, and in the larger business community that surrounds it.]
First, the energy boom in the Permian Basin became a local phenomenon. Then it became a national phenomenon. And now it has grown to be something recognized around the world.
Chris Whigham, Senior Vice President at West Texas National Bank in Midland, is an energy lender who, like other bankers in the Permian Basin, has witnessed a remarkable uptick in prestige that the Permian Basin has acquired within the financial marketplace—that is, the marketplace that is the wider world.
Asked if the flow of money into the Permian Basin is remaining strong, Whigham said that it definitely is. “There was an interesting speaker at a December luncheon in Midland–Maynard Holt of Tudor, Pickering, Holt and Company–who was saying that people all over the planet are seeing that the oil business is where they can get a higher-than-average return on their investment,” Whigham said. “They’re finding that to be particularly true in the Permian Basin, if not also the Eagle Ford and the Bakken. Those three geographic areas are superior within the oil and gas business, and the Permian is the oldest of those. So, his point was that a wealthy investor in South Korea or China or Japan is recognizing that West Texas and the Permian Basin is a great place to invest money. And he went on to say that there is no telling where all of the money is coming from—the money that is flowing in now—because it’s an international landscape now.”
Just because investments are reaching the Permian Basin from Dallas banks, or Houston banks, or New York-based investment firms—this does not necessarily mean that some of the same money could not have originated further afield—possibly from Asian sources. The word is out that West Texas is hot.
Clint Walker, general manager of Cudd Energy Services, confirmed that the money markets are well aware of the Permian Basin.
“I do the investment relations for our company—myself and another gentleman—and everybody’s focus is on the Permian,” Walker said. “That’s the word in New York and Chicago and Boston. That is where all the focus is and there’s a lot of people excited about it. When it comes to investment scenarios—where are the funds going to put their money into play? In the bond market? Or in some kind of money market? They’re not going to get any kind of return on their investment there. And that’s the reason, too, why a lot of people [in the Permian Basin] are shifting from vertical drilling to horizontal—because the return on invested capital is so much higher.”
Nor is the local prosperity limited to West Texas. The region of southeastern New Mexico is seeing boom times such as it has not seen in decades, if not longer. Mike Miller, a lobbyist there whose firm Professional Directions works for the Permian Basin Petroleum Association in Santa Fe, said that local economies there are benefitting not just from the direct injection of higher employment and higher wages and spending, but from tax dollars that are flowing into various county and city coffers.
Said Miller: “Local governments are socking some of it away, but they’re also using some to do things that need to be done.for their community—infrastructure improvements, things like that. I won’t call it a windfall, but if they didn’t have this fortune, they’d not be able to do [these improvements] in the fashion they are doing them. It’s sewer lines, water lines, and other projects that they might [otherwise] be bonding to get them done. But they’re also putting money away.”
The departure of the major oil companies from the Permian Basin in the 1990s and early 2000s turned out to be a boon to the region, as economist Karr Ingham has indicated. The rise of the region’s independent oil companies and the technological revolution they brought about has not only resurrected the domestic energy business but has brought the majors back to the U.S. onshore markets and especially to the Permian Basin.
Asked how the dynamics have changed in the Permian Basin, Ingham traces matters back to 1998. “We saw the dynamics change in the crash, and it was a crash,” Ingham said. “I try not to use these terms loosely: boom, bust, crash, etc. But it actually was one of those things, so that’s why I’m happy to call it that. So we had an industry crash, an economic crash, in 1998-99. Particularly in the Permian Basin.”
About a decade would pass before prices ratcheted back up to their former levels.
But meanwhile, things were dire within the industry. And yet that crash held the seeds of the contemporary rebound.
“That crash lasted about 18 months—from early 1998 to mid-1999—yet it turned out to be the catalyst for a sea change in the other direction,” Ingham said. “We could see that the majors, the big companies, were exiting the Permian Basin. You could read in the newspaper down there about some company closing its doors and dropping several hundred employees or moving them to a different location. It seemed like a horrible scenario at the time, except that maybe a year or so into that, it became apparent that the phenomenon was working out in favor of the Permian Basin and the small independent produers there, because those assets the majors were leaving behind were ending up in the hands of more localized independents. It was a great thing for the Permian Basin. What looked like a catastrophic set of circumstances—major oil companies and large independents shedding employees by the hundreds—turned out to be a good thing.”
The cycle has taken yet another twist, Ingham noted, in that the major oil companies have begun the migration back to the Permian Basin.
“The scenario has swung back the other way as we’ve cracked open the possibilities there to a much greater extent,” Ingham said. “Production is rapidly on the rise, activity is on the rise, drilling is increasing. And while we’re just talking broadly about the last four or five years, it is clear that the majors and the large independents are attracted back to the Permian Basin. And it certainly looks like the scenario is favorable to the larger companies having a huge presence there for a long time to come. I don’t think they would be there if they didn’t see a scenario like that. I don’t think they would be building the buildings there that they are building. I think that’s what they’re planning on, and I think that that is probably what will happen.”
Cudd Energy Services has been both a beneficiary of this region’s O&G upsurge and a contributor to it as well. Cudd showed its confidence with the development of a 50-acre facility in Odessa’s South Business Park. According to Cudd general manager Clint Walker, the project had a price tag of around $15 million.
Houston-based Cudd maintains a large presence in the Permian, which is its biggest market. Walker attributes the transition from vertical drilling to horizontal drilling as the main difference-maker in these parts.
He cited the recent disclosure by Texas Railroad Commissioner Christi Craddick, at October’s PBPA annual meeting, that more than 50 percent of the rigs permitted in the Texas portion of the Permian Basin are now horizontal rigs, as contrasted with the figure from a year previous of a mere 23 percent.
“So that turns what was a 300- or 400-foot section into a 4,000 or 5,000-foot section, even a 7,500-foot section,” Walker said. “So the amount of pay [payzone] just skyrockets up.”
Most observers recognize the impact that has for exploration and development companies, and for those companies’ investors. What is not so obvious is the impact on Permian Basin service companies.
For Cudd, a service company, the implications are huge. “It means that we’re on location longer, we pump more sand into the formation, we pump more fluid, more gel, more water, more everything,” Walker said. “And what makes the Permian unique, as opposed to some of these other areas around the country, is that you’ve got over 20 different horizons that you produce oil and gas out of. It’s mind boggling, really.”
Cudd—which does not lease land or undertake drilling programs of its own—has as its customers just about anyone who does. The company works with everyone from the major oil companies through the major and even minor independents, on down “to the guys who do one or two wells a year,” Walker said.
What does he like about the niche they find themselves in? Walker doesn’t hesitate: “When you look at where the majority of our equipment is located, it’s in the Permian. That’s where the majority of the activity is. What makes the Permian so unique is the diversity of the customer base. As I mentioned, you’ve got the majors, as well as the major independents, and the guys who drill only one or two wells yearly. There are some 400 to 500 oil and gas operators within five miles of downtown. It’s amazing, really.”
Does the largesse keep filtering down to the communities themselves?
“I do think so,” Walker said. “And I think you are starting to see it in the way that the major chains are migrating into the Midland-Odessa area. Chain restaurants and chain retail outlets. They don’t make an investment there unless they think there is something positive going on there for the long run.”
Home is Where the Heart Is
Another reason why so much money is seeking a temporary abode in U.S. oil and gas fields is because the foreign fields do not look nearly so promising, despite the frequent announcements about finds in overseas lands.
Said Whigham: “I’m sure there are places around the world where there are reserves that are yet to be discovered that will be similar to some of our shale plays, but those countries don’t have the infrastructure and the friendly means of commerce—and by that I mean a friendly business environment—to explore for those reserves. So, you find a place like the Permian Basin, which has been doing it a hundred years, and we’ve got the service companies and the work force and the roads. And the markets and the transportation capabilities, whether it is pipeline or train. If you’re in the Bakken, a lot of that oil is transported by train, but you’ve got the means to move it, whereas there have been oil companies that have found plays around the world that, whether they were in Australia or the Indian Ocean or somewhere else, they found it and then 20-plus years later they’re still looking at it. They have it on their books but they don’t have a means of getting it out of there. It’s not marketable. But that is not the case here. There might be some bottlenecks here, but those are being resolved.
Whigham, an engineer by training (he earned his degree at Texas A&M) has divided his career between stints at banks and one lengthy stint—11 years—as a reservoir engineer at Parker & Parsley, an oil company, later to be known as Pioneer Natural Resources. He also worked at Concho Resources. His tenure at West Texas National Bank now has reached nearly a decade, and he remarked that having the industry experience has been invaluable to him as a lender.
“I think one of the most amazing things to me is that in the many years the Permian Basin has been being exploited, there have been numerous times the experts have said, ‘This is the last go-round.’” Whigham said. “It’s the idea that we are in the last phase. That we are in depletion mode. And you don’t have to look very far to see that the major oil companies left in the Seventies, and there was some consolidating in the Eighties, and some other companies left in the Nineties, when they decided that they were just ‘depleting an asset’ here in the Permian Basin. They were just going to move their money overseas, to other prospects, and it has been just remarkable to see how, meanwhile, the technology advanced here at the same time that the price of oil was improving, which has allowed us to pay for some of these technological advances. Those were two things that worked together to transform what had been viewed as just a depleting reservoir. Now, we don’t know what the upper level is.”
Whigham cited an illustration he gleaned from a presenter at the Executive Oil Conference in October.
“There was a fascinating display that showed the gross production interval,” Whigham said. “It showed the range—if you’re drilling down into the ground—from the top of what could be considered productive to the bottom of what could be productive. And the comparison was made to the same [gross production interval] in the Bakken and the Eagle Ford and East Texas and different places around the country. But the stacked pays and the total possible productive column, in the Permian Basin, just dwarfs the other areas.”
Like some executives in the region, Whigham finds that the prosperity sometimes seems like a two-sided coin. He remarked that his church has tried to attract talented personnel to their work, but they’ve not been able to find or afford housing for their hiring prospects.
“It’s very difficult to go to restaurants,” he said. “Or even the grocery store. We’ve got the same number of grocery stores that we had when our HEB opened, and that was years ago. And [meanwhile] we’ve got one-and-a-quarter to one-and-a-half times as many people. [He laughs.] No, it makes me feel sorry for grocery stores and doctors and medical people. And again, I’m just speaking about Midland Odessa. There’s just more people that you are competing with [for services].”
The New Mexico Experience
Across the state line, in New Mexico, things are hardly different. Prosperity has brought challenges.
“It’s really interesting,” said Mike Miller, the lobbyist for PBPA. “The industry has had an amazing impact on the local economies. Everything always presents some problems, and housing’s been a difficult problem. But it’s also provided the resources to address that problem, in some cases. I know the City of Hobbs has adopted a couple of ordinances that have allowed for incentives for [housing] developers to come in and the city is using part of the rewards they are reaping from the oil and gas industry to… make things better. In New Mexico we have a gross receipts tax [similar to a sales tax in Texas, but more broad-based] and the City of Hobbs received, in one month this summer, a gross receipts tax of $6.9 million. For one month.”
Miller shared an anecdote he has shared before in these pages, but it is still relevant.
“There was a sign in Hobbs at the Pizza Hut that said, ‘Drivers needed—paying up to $25 an hour.’ And we’ve got people in Congress talking about raising the national minimum wage. No, we need to create jobs like the oil and gas industry has and the minimum wage will take care of itself.”
Miller cited Hobbs, Artesia, Roswll, and Carlsbad as just some of the New Mexico towns that are experiencing heavy growth and high employment.
“At Carlsbad, the mayor there held an energy conference late in the summer,” Miller said. “They had it at the Convention Center and the room was packed. Again, it was a sign of recognizing the value of the industry. In Hobbs, which is in Lea County, they have oil and gas, but they also have potash, which is another industry that is doing very well.”
Where From Here?
Back in Midland, Whigham, asked if the region looks to be in line for continued strong growth, answered affirmatively. “Midland does continue to be constrained by some lack of infrastructure, whether it is water-related, or housing or roads. Unfortunately, all of our little two-lane roadsthat go off in every direction from Midland, outside of I-20, those are a concern just because there is so much traffic on each of them.
“And yet it is hard to project… could anybody years ago, even five years ago, have projected what the population of Midland would be today? I’ve lived in Midland my whole life and I still am just amazed at what I see, whether it is at the Petroleum Club or in restaurants around town, or on our streets. Just the congestion and the number of out-of-town license plates and rental cars and etc. And the hotel occupancy. It’s just hard to imagine what it has done. So when you hear somebody say that the population could double, well, that’s pretty hard to imagine, too, but we couldn’t have imagined five years ago where we are today either.”
Next month: We continue this exploration with more input from oil company executives, as well as industry observers and analysts.