By Erin Ailworth
MIDLAND, Texas -- Using a proprietary app called iSteer, Brian
Tapp, a geologist for EOG Resources Inc., dashed off instructions
to a drilling rig 100 miles away. This tool is among the reasons
the little-known Texas company says it pumps more oil from the
continental U.S. than Exxon Mobil Corp. -- or any other
producer.
A rig worker received Mr. Tapp's iPhone alert and tweaked the
trajectory of a drill bit thousands of feet underground, to land
more squarely in a sweet spot of rock filled with West Texas
crude.
U.S. shale drillers transformed the energy industry over the
past decade with hydraulic fracturing and horizontal drilling, in
the early days using brute force to unleash a torrent of oil and
gas that altered the balance of power among oil-producing nations
and triggered a global glut.
Now, with oil currently trading near $50 a barrel, these
producers are trying to unleash fracking 2.0, the next step in the
technological transformation of the sector that is aimed at
extracting oil even faster and less expensively to eke out profits
at that level.
The promise of this new phase is potentially as significant as
the original revolution. If more producers can follow EOG's lead
and profitably ramp up output from shale drilling even at lower
prices, the sector could become a lasting force that challenges
OPEC's ability to control market prices.
For a sector in which the previous era's success was tied to the
rapid expansion of output, the shift toward finding more
cost-effective ways to get to that oil and gas is full of
challenges. When oil prices dropped, critics wondered if the shale
industry -- rife with heavily indebted companies that had never
turned a profit -- would collapse.
EOG, with its longtime focus on low-cost production, is the
producer many hope to emulate, thanks to the iSteer app and dozens
of other homegrown innovations. Dubbed the "Apple of oil" by one
analyst, EOG made its name as a pioneer in horizontal drilling and
in finding ways to get oil out of shale -- often dense layers of
rock that hold oil and gas in tiny pores -- a feat many once
believed impossible.
Competitors such as Chesapeake Energy Corp. and Pioneer Natural
Resources Co. also are finding new ways to profit amid low energy
prices. Many are experimenting with longer, supersize wells, and
fracking them with millions of pounds of sand. Other producers,
however, have said the industry needs oil prices of at least $55 to
$60 to truly rebound.
The price of oil plunged about 75% from its peak of more than
$100 a barrel in mid-2014, and the natural-gas price sank by half
in the same period. More than 420,000 oil and gas jobs world-wide
have been lost, according to energy consulting firm Graves &
Co., and, since the start of 2015, over 200 U.S. energy companies
have filed for bankruptcy, according to law firm Haynes & Boone
LLP.
EOG, part of Enron Corp. until 1999, now drills horizontal wells
in West Texas more than a mile long in 20 days, down from 38 days
in 2014. It has done it in as few as 10 1/2 days. It estimates it
can get at least a 30% rate of return on wells at $40 a barrel, and
that at $50 it can boost oil production at least 15% a year through
2020.
The company said it produced roughly the same amount of oil last
year as it did in 2014 with a budget that was 67% smaller.
The iSteer app and other proprietary programs EOG designed are
partly why.
EOG uses iSteer to help navigate through rock thousands of feet
underground, landing in identified layers with more precision. A
device behind the drill bit underground transmits information --
including depth and direction but also readings to identify types
of rock and the presence of gas -- to a geologist at the office.
The numbers are crunched, using EOG's databases on the location's
rock layers and on previous wells, and course corrections are sent
to the driller on the rig.
EOG said adjustments can happen in minutes, instead of a process
that in the past took at least 30 minutes. The quick modifications
keep the drill in a 10-to-15 foot window, which EOG said improves
the output and consistency of a well.
The apps help employees work at the "speed of thought," said
Sandeep Bhakhri, EOG's chief information officer.
The company now uses 65 apps it designed after realizing it
needed tools with capabilities it couldn't find off the shelf.
Along the way, it boosted its staff of data scientists, and over
the past three years has hired recent computer-science graduates
from the University of Texas at Austin.
The apps help EOG answer a range of questions, such as how much
pressure to use to crack a particular geologic stratum, to
identifying ideal trajectories for drills, to more mundane queries,
such as the fastest route to drive from one drilling site to the
next.
"I look at [the apps] first thing in the morning, on the
exercise bike or during breakfast -- it gives me a head start on
the day," said Ezra Yacob, general manager of EOG's Midland
operations.
Tinkering, core to the company's culture, was evident on a
recent visit to the division office in Midland, a city of about
124,000 at the heart of the oil-rich Permian Basin in West
Texas.
There, geologists, engineers and technicians could be found
constantly on their computers and iPhones using EOG's apps. The
company says all workers are encouraged to fiddle and find novel
solutions to problems.
It's an outgrowth of the company's habit of ignoring
conventional wisdom as it looks for ways to become a better
producer.
In the early 2000s, EOG was determined to show that vast
supplies of natural gas could be unlocked by drilling horizontally
through shale. It drilled 15 uneconomic wells in the Dallas-Fort
Worth-area field known as the Barnett, while its employees
experimented to find better techniques, according to former CEO
Mark Papa. It succeeded on the 16th.
As the shale boom took off, scores of producers borrowed heavily
to lease land for drilling. EOG moved in the opposite direction,
keeping debt low and favoring technological innovation and returns
over rapid growth.
When Mr. Papa in 2007 realized gas prices were headed for a
drop, he said the company started shifting to oil. At the time, few
in the industry thought oil could be economically extracted from
shale formations.
A bespectacled EOG geologist named Bill Thomas, then the head of
the company's Fort Worth office, was among those who did.
He became CEO in 2013, and now can often be found in his
35th-floor office at EOG's headquarters in Houston scrutinizing
data about well productivity. Instead of a secretary, the assistant
outside his office is one of the company's top geo-technicians,
responsible for analyzing information.
The company's market cap is now $55 billion. Shares closed at
$97 Wednesday, down 18% from their price at oil's mid-2014 peak,
beating the SPDR S&P Oil and Gas Exploration and Production
ETF, a common industry benchmark, which dropped 55% in that
time.
EOG regularly solves problems in-house. When, in the early days
of drilling for crude in North Dakota's Bakken Shale, the company
hit logistical problems getting its oil to market, it built a rail
terminal and pipeline to help move it from North Dakota to the
trading hub near Cushing, Okla.
These days, it designs its own motors to power drill bits,
allowing its engineers to constantly incorporate fixes that improve
performance. Oil is pumped into olive-green storage tanks made to
EOG's specifications, cutting down costs and the number of tanks it
needs in the field.
It often works with smaller services contractors, instead of
giants such as Schlumberger Ltd. and Halliburton Co., so it can
negotiate costs and find expertise tailored to its needs. The
partnerships save it money and give it more control over the
logistics and supplies needed for any given project, EOG said.
For example, a larger services company might ask EOG to use a
particular sand supplier or employ a standard mix of sand, water
and chemicals when fracking a well. With a smaller services
company, EOG can potentially use sand from a company-owned mine --
it bought one in 2008 when the specialized grains started becoming
hard to find -- and design fracks to meet specific needs.
Heath Work, an EOG drilling manager in Midland, compared the way
the company operates to a championship Nascar driver and crew, who
make small adjustments that add up over time. "Jimmie Johnson has
won seven times and he does it with the same engine as his
competitors; he just figures out how to change tires faster," Mr.
Work said.
Competitors are innovating too, as producing oil for less
becomes more important than merely finding and pumping new
supplies.
Chesapeake Energy recently used a record 50 million pounds of
sand to frack a megawell in Louisiana, reaping cost savings via
economies of scale. Chesapeake, which some believed was close to
bankruptcy in early 2016, said the giant wells are part of its
turnaround strategy.
Pioneer Natural Resources said it saves money by mining some of
its own sand and has been building its own system to transport the
water it needs. Chief Executive Tim Dove said those operations are
integral to the company's goal of producing one million barrels of
oil equivalent a day by 2026 while still having cash to cover
expenditures.
Critics have questioned EOG's habit of quickly ramping up
production from individual wells, arguing that can cause wells to
peter out prematurely. The company used the strategy to supercharge
returns in the Eagle Ford, an oil-rich region of South Texas where
it was ahead of the pack in leasing more than 500,000 acres for a
tiny percentage of what others would pay later.
Mr. Thomas, the CEO, said trial and error has proven its Eagle
Ford wells aren't damaged when allowed to flow aggressively. "You
increase your returns because the wells pay out so much quicker,"
he said. "If you get a higher return and it doesn't damage the
well, then why not do it?"
EOG expanded in the Permian region by 310,000 acres in October
when it acquired Yates Petroleum Corp. for $2.4 billion. Swallowing
an entire company was an uncharacteristic move for EOG that will
test whether it can export its corporate culture.
A day after the deal closed, EOG was already using its apps and
data to steer a Yates well.
"The whole industry has gotten better, but we've gotten better a
bit faster," Mr. Thomas said.
(END) Dow Jones Newswires
March 30, 2017 13:36 ET (17:36 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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