How a ‘Monster’ Texas Oil Field Made the

U.S. a Star in the World Market

Innovation, investment and inviting geology have given new
life to an oil patch that once seemed spent. The oil field is
now the world’s second most productive.
Feb. 3, 2019

A fracking operation at a Shell site. Shell has developed algorithms to replicate and
standardize the most effective drilling and fracking methods worldwide.Tamir Kalifa for The
New York Times

MIDLAND, Tex. — In a global collapse of oil prices five years ago, scores
of American oil companies went bankrupt. But one field withstood the
onslaught, and even thrived: the Permian Basin, straddling Texas and
New Mexico.

A combination of technical innovation, aggressive investing and copious

layers of oil-rich shale have transformed the Permian, once considered a
worn-out patch, into the world’s second-most-productive oil field.
And this transformation has apparently inoculated Texas against its
traditional economic enemy, the boom-and-bust cycle pegged to oil
prices.

Even now, with prices still far below their peak, the Permian is bursting
with production and exploration, and the biggest concern is how to
create more capacity to get all that oil to market.

The shale-drilling frenzy in the Permian has enabled the United States
not only to reduce crude-oil imports, but even to become a major
exporter for the first time in half a century. Its bounty has also
empowered the United States diplomatically, allowing it to impose
sanctions on Iran and Venezuela without worrying much about
increasing gasoline prices. Mounting Texas crude exports have
pressured global oil prices down, and are a major reason that Russia and
Saudi Arabia recently cut their own production to push oil prices back
up.

“OPEC producers never thought the Permian could be the next star
world producer,” said René Ortiz of Ecuador, a former secretary-general
of the Organization of Petroleum Exporting Countries. “They never
thought one field — one, and not a country — could actually be the
monster field of their imaginations.”

Last year alone, the Permian’s production rose by a million barrels a day,
and it could surpass the Ghawar field in Saudi Arabia, the world’s
biggest, within three years. Now producing four million barrels a day,
the Permian generates more oil than any of the 14 members of OPEC
except Saudi Arabia and Iraq.

Floorhands work on an drilling rig contracted to Shell in West Texas.

Shell produces 145,000 barrels of oil a day in the Permian and projects it
can increase production to 200,000 barrels a day by 2020.Tamir Kalifa
for The New York Times
Ron Dube, Shell’s Permian operations manager. Shell has made clear that
it aims to continue to expand in the Permian, where big companies have
been snapping up smaller ones.

All told, domestic oil production increased by two million barrels a day
last year, for a record of 11.9 million barrels, making the United States
the world’s top producer.

Permian production has quadrupled over the last eight years, in contrast
with the decline of most other established oil fields, for several reasons.

Companies found ways to lower exploration and production costs in

tapping the Permian’s accommodating shale. New technologies for
drilling and hydraulic fracturing helped bring the break-even price for
the best wells from over $60 a barrel to as low as $33.

The Permian, as vast as South Dakota, is distinct from other shale fields
because of its enormous size, the thickness of its multiple shale layers —
some as fat as 1,000 feet — and its proximity to refineries on the Gulf of
Mexico. Some shale fields produce too much natural gas, which is worth
less than oil. Others have uneven layers of rock difficult to drill through.
The Permian is rich in oil, and its shales are relatively easy to tap with
today’s rigs.
Today the biggest risk, at least for producers, is that too much output
might drive down prices too much and jeopardize their profitability.
They could also prompt another round of aggressive actions from OPEC
and its new ally, Russia.

“If U.S. production grows another two million barrels a day, we could
take market share, but how long would OPEC allow that to happen?” said
Scott D. Sheffield, chairman of Pioneer Natural Resources, a major
Permian producer. “You could have another price war.”

That may be inevitable.

As many as 15 oil and gas pipelines serving the Permian are expected to
be completed by the middle of 2020, potentially increasing exports from
the Gulf of Mexico fourfold to eight million barrels a day after 2021,
according to a recent Morningstar Commodities Research report.

A Shell central processing facility, where crude oil and natural gas is first
processed. Exxon Mobil, Chevron, BP and Shell have been making big
new investments in the Permian despite uncertainty about prices.Tamir
Kalifa for The New York Times

The Permian has been producing oil for a century, and provided much of
the fuel the allies needed to win World War II. By 2008, it was a field in
steep decline. Many major oil companies left, selling their land to smaller
ones for a song.

But as the big companies looked for fields deep under oceans and in the
Arctic, independents like Concho Resources and Parsley Energy
pioneered shale drilling here, giving the field new life.

When oil prices took a dive, the upstarts experimented. They drilled
longer wells and spaced them closer together in a zipper design to
penetrate more shale. They tinkered with their formulas of chemicals
and sands that they blast through the rocks, and they used computer
technology to steer drill bits more accurately.

“OPEC changed the price of poker and the Permian had the best hand,”
said Dale Redman, chief executive of ProPetro, one of the basin’s biggest
fracking service companies. “They unleashed our creativity. They forced
us to do things better and cheaper.”
ProPetro laid off 250 workers three years ago, after oil prices fell below
$30 a barrel. But the company has since hired back those employees and
added hundreds more, including 600 when they completed an
acquisition on Jan. 1.

What makes the payroll additions all the more remarkable is that they
come in the wake of the most recent downturn in oil prices — from $76
a barrel in early October to $42 in late December before recovering to
more than $55 on Friday.

Despite the ups and downs, there are signs of expansion everywhere in
the West Texas desert. Trucks line up at dawn for half a mile to pick up
sand at local mines for the day’s fracking jobs. Competition for workers
is so fierce that fast-food restaurants have blinking signs advertising
their salaries. Anadarko Petroleum and Plains All American Pipeline are
constructing new regional offices to add to those built in recent years for
Chevron and Apache.

Pump jacks, a common sight throughout West Texas, are painted on a

wall in downtown Midland. Tamir Kalifa for The New York Times

An exhibit at the Permian Basin Petroleum Museum in Midland. The

region has produced oil for nearly a century. Tamir Kalifa for The New
York Times

Motel rates and apartment rents have climbed so much that trailer parks
are the only option for many workers. But few seem to mind.

“I will have work here forever,” said Mike Wilkinson, a truck driver who
came from Dallas a year ago and moved into a trailer with his teenage
daughter. “As hard a place as this is to look at, they are going to need
guys like me to move equipment around here for years to come.”

Mike Wilkinson, a truck driver, outside his trailer in Midland. “I will have
work here forever,” said Mr. Wilkinson, who moved from Dallas a year
ago with his teenage daughter. Tamir Kalifa for The New York Times

Mr. Wilkinson has reason for enthusiasm, given the giant new
investments that Exxon Mobil, Chevron, BP and Shell have begun to
make here despite all the price uncertainty.
With a major acquisition in New Mexico last year, Exxon Mobil became
the most active driller in the basin, and projects that it will increase
production fivefold by 2025. Also growing rapidly here, Chevron
estimates that one in six of every barrels it produces globally will come
from the Permian by 2021.

After regaining a foothold in the Permian last year, BP is expected to

invest heavily, contributing to a total investment of more than $10
billion by the major oil companies here this year, according to IHS
Markit, the energy consultant.

Royal Dutch Shell is just beginning to catch up, after buying acreage from
Chesapeake seven years ago. It already has 1,300 wells that produce
145,000 barrels of oil a day and associated gas, a 200 percent increase
since January 2017. The company projects it can increase production to
200,000 barrels a day by 2020.

Shell’s chief executive, Ben van Beurden, said Thursday that his company
was seeking to increase its footprint in the Permian, the most recent sign
that big oil companies will continue to snap up smaller ones.

“For Shell, the Permian is absolutely critical,” said Gretchen Watkins,

president of Shell Oil. “The Permian is massive; it’s a game changer for
U.S. shale. It is the powerhouse field.”

But the output of shale wells declines quickly, making the drilling here a
never-ending treadmill. And that has been a challenge for the small
companies that have been the innovators here but are now facing
demands from investors to show financial discipline.

Typical of the smaller producers is Parsley Energy, one of the most

active drillers in the basin with some of the most productive wells. Its
share price was cut in half over the last two years as it outspent its cash
flow grabbing land and ramping up production.

Technicians at work in a hydraulic fracturing operation at a Parsley

Energy site. Parsley, a smaller producer, has been one of the most active
drillers in the Permian, with some of the most productive wells. Tamir
Kalifa for The New York Times

A worker waits as oil is transferred from production tanks to a tanker

truck at a Parsley Energy facility. Because of last year’s decline in oil
prices, Parsley is reducing spending on exploration and production this
year by $300 million. Tamir Kalifa for The New York Times

Late last year, as oil prices fell, Parsley changed course. It is reducing
spending on exploration and production this year by $300 million. It
decommissioned two of its 16 rigs late last year, and two more in
January.

“We all have to be prepared,” said Matt Gallagher, Parsley’s chief

executive, for a six-month slump in prices. “We’re one Twitter message
away from a deal with Iran and $40 oil.”

The multinationals have the wherewithal to stick by their aggressive

development plans and take a longer view.

They bring an arsenal of tools that the smaller companies lack. With
their size and reach, they can make the best deals for equipment like
drill rigs and fracking services. Many have their own pipelines, refineries
and global trading personnel to sell their oil for the highest price.

In January, Chevron agreed to acquire a refinery in Pasadena, Tex., from

the Brazilian company Petrobras for $350 million to refine more
products coming from the Permian. The announcement came only days
after Exxon Mobil announced a major expansion of its Beaumont, Tex.,
refinery to process more local crude.

The major companies also aim to cut production costs even further with
increasingly sophisticated applications of artificial intelligence. Shell, for
instance, has developed algorithms to replicate and standardize the most
effective drilling and fracking methods worldwide.

“We are not here through one boom and bust,” said Amir Gerges, Shell’s
Permian general manager. “We are here developing a generational
resource.”