Independent drilling contractors fuel a significant part of the Permian Basin’s production renaissance.
By Paul Wiseman, special contributor
That the Permian Basin is the epicenter of the planet regarding increases in oil production is not news—figures show 28 percent of North America’s onshore drilling rigs operate here. Half of the rigs in the nation reside in Texas, and more than half of Texas’ rigs are in the Permian. Recent National Energy Administration figures show Texas and North Dakota combine to supply almost half of America’s crude oil, and much of that comes from this West Texas/Southeastern New Mexico play.
What is less apparent is the fact that drilling contractors smaller than the top eight account for 54 percent of active rigs in the Permian Basin, according to Octane Energy CEO/President Jared Blong, who cites Drilling and Rig Data numbers for the first quarter of 2014. Most drilling contractors smaller than the top eight are considered independents.
In comparison, in the nation’s other two top producing basins, the Eagle Ford and the Bakken, only 21 percent of drilling activity comes from independent contractors. “So, what we have here is really, really different,” he said.
Octane is not yet active—still in the process of acquiring its first rigs—but is currently doing consulting for those planning to drill.
Blong said that operator activity in the Permian shows a similar breakdown because independent producers tend to rely on independent drilling contractors for their wells, while major producers use the eight largest contractors. In the Bakken and Eagle Ford, however, even though major drilling contractors hold sway, the slight majority of producers are independents.
He noted that Chevron, the major most active in the Basin, is the number eight producer, after such independents as Concho, Apache, Pioneer, Devon, and others.
“I wish the rest of the world understood that, because BP and Exxon and Chevron and Shell aren’t governing what we do out here. Because independents can deploy capital so much more efficiently, that’s what happens,” he said.
He sees independent drilling contractors as small enough to be nimble, to try some new technologies quickly and also to pull back on short notice if something is not working.
“I love the fact that we’ve got such a high concentration of independents out here both in the operating side and the drilling community side,” he said. “It makes for a really different environment. It’s super competitive and very innovative and always intense. And yet, there’s still this spirit of, ‘Hey, man, we’re all from West Texas, we’ve got to figure out how to get along together.’”
Ray Brazzel is on the other end of the experience spectrum, having started in the oil business in 1956. He and his wife, Ann, founded Bandera Drilling Co. in Abilene in 1975. The company currently has five rigs that have drilled a total of just over 100 wells per year since the current boom got into full swing. Bandera drills most of its wells for independent producers in the Permian Basin. Depths are usually between 800’ and 15,500’.
Brazzel and Blong both noted that the general public often confuses drilling contractors with producers when using the term “independent drillers.” Brazzel said, “Normally the media understand independent drillers to be independent oil companies—non-majors. To differentiate, we generally say drilling contractors, as opposed to drillers.”
While technology has changed greatly over his 40 years in business, Brazzel feels the industry’s two most basic issues are still the same: “Keep the rigs busy and keep enough hands to operate them.”
Even the boom does not faze him in regards to the latter issue because it stays the same in boom or bust times. “We found that in the doom days you have a tendency to lose a lot of your good people because they don’t see any future. So it really doesn’t matter, there’re always hand problems in the oilfield.” Bandera currently employs about 140 people.
Keeping technology current is important for Bandera, which has no equipment older than 2006. When asked if that was because older equipment wears out or becomes obsolete, he asked, “What about your cell phone?”
One could say that the direction of drilling has changed in recent years, with Bandera now doing about 80 percent of its work on horizontal wells. Pad drilling is in the mix as well.
Change, he noted, is a constant in any business, including oil, with price fluctuations and technology always moving, but one possibly new realm of change is in the type of clients who are looking for oil. In previous times clients were mostly local—names might change due to mergers or spinoffs, but they were primarily local or regional companies.
Now, however, the influx of money from distant financial markets in the Northeast and elsewhere has changed the game. “Now we’re drilling for a lot of startup fund companies,” he said. “You may have a company that just started last week, but they start with $2 billion, that’s not a bad nest egg to start with.”
These companies are usually transitory. “Their whole reason for being is to get in and get out of the business as quickly as possible. If they become an old company, they’ve failed.” Most want in and out within 2-5 years, he observed.
On the other end of the spectrum are those who “failed” to sell, but instead grew so fast they had to go public.
The influx of money is also directly affecting drillers, many of whom have sold to outside investors or have grown so big that they went public. Brazzel said he has no plans to sell, even to expand his fleet of rigs, for two reasons: He prefers to invest his own cash and he likes what he does and would like to keep doing it.
The main difference between this boom and its predecessors, for Brazzel, is the acknowledgement that it doesn’t last forever. Having had extras like his own airplane and more the last time around, he is much more conservative now. “If we need an airplane now, we call Jet East or Abilene Aero. That’s a lot cheaper than having your own pilot,” he noted, wryly.
One drilling contractor convinced that the independents are on the cutting edge is Rod Johnson of Hope Drilling. His company has a single rig drilling at approximately 900 feet at the southern edge of the Permian Basin.
“The independents are the ones that find things,” he said, referring to the shallow plays that have become of more interest in recent years. “Sometimes you have to think outside the box.” Independents, he said, often find a way to get oil that the majors overlook due to economics.
“I drilled one of the first horizontal wells in Texas as an independent,” Johnson said. He pointed out that independents drill along for years and often either go bankrupt or they find a way to stay with it. Some stay with it by taking at least part of their pay in participating in the well’s profits, should there be any.
Independent drillers like Johnson look for opportunities for themselves in the process. Johnson said when they drill through shallower formations to get to larger plays at greater depths for larger companies, contractors like him may take note of the shallower plays with an eye toward coming back later in some fashion to get that oil. The larger producers will skip the shallow plays because the plays are not economical on a large enough scale for those producers—but they can be for smaller operators.
With the feast-or-famine nature of the oil business—“right now it’s a feast”—drillers have to be creative to stay afloat, while staying up with technology.
Matching availability with need is a difficult balancing act. Johnson said many smaller companies go under during slow times, then when business picks back up there is a shortage of drillers. During this boom, “I get calls every day to drill, and I can’t go—I’m nine-and-a-half wells out.” He estimated each well at about 10 days.
He listed PDC (polycrystalline diamond compact) bits, which have boosted footage rates, as a beneficial new technology for independents. “It saves fuel for the operator and increases, by at least two times, the penetration rate.
During the boom, Johnson is looking at adding a second rig in order to take better advantage of opportunities.
Independent drilling contractors come in all shapes and sizes, from the experienced veteran like Ray Brazzel to the statistic-laden startup like Jared Blong to the “thinking outside the box” driller/operator like Rod Johnson. These and many others are all-in on the deeper and wider reach of oil production.
A freelance writer in Midland, Texas, Paul Wiseman has written extensively on the oil business and on business in general. He can be reached at firstname.lastname@example.org.