Pioneer Bets On West Texas Shale Oil To Rival Bakken

Two wells drilled by Pioneer Natural Resources have already exceeded expectations. The company has 900,000 acres under lease.

By MARILYN ALVA, INVESTOR’S BUSINESS DAILY Posted 01:41 PM ET

U.S. oil production is enjoying a renaissance, thanks to new technology that has made oil recovery possible in tight shale rock.

The busy Bakken formation in North Dakota and Montana is the largest and best-known oil shale play.

The Eagle Ford in South Texas and the Barnett “combo play” (gas and oil) in North Texas are also fairly famous unconventional plays.

But the Wolfcamp Shale?

“Over the next two or three years, everybody is going to be making a beeline to the Wolfcamp,” said Scott Sheffield, chief executive of Pioneer Natural Resources (PXD).

Spanning numerous counties across West Texas, the Wolfcamp formation is located below the long-plied Spraberry field, which helped make Midland, Texas, oil-central starting in the early 1950s.

Its location in the Midland Basin is within the larger Permian Basin.

Sheffield and other oil experts say the Wolfcamp is probably the thickest of any onshore U.S. oil shale play, with up to 1,000 feet of potential payout across hundreds of thousands of acres.

Biggest And Thickest

“It will be the biggest, and it is already the thickest,” Sheffield said. “So it’s got the most pay zones of any oil shale play in the U.S. I call it the third or fourth coming of the boom in West Texas.”

If Wolfcamp does turn out to be the next big oil shale play, Pioneer is on the ground floor. With 900,000 acres under lease in the Spraberry, it has the largest land position.

Pioneer believes that more than 400,000 of those acres are ripe for horizontal drilling.

Its game plan: drill 10,000 feet down through the Spraberry to the Wolfcamp and then out 7,000 feet horizontally.

For now, it’s targeting 200,000 acres in the southern portion of the Spraberry field.

Pioneer’s two completed wells in the Wolfcamp have already exceeded expectations, each producing 800 to 1,000 barrels of oil a day, and they’re still early in production.

EOG Resources (EOG) started drilling in the Wolfcamp earlier and is now seeing higher output from its 35 or so wells.

But Sheffield says Pioneer will be a bigger operator in the Wolfcamp in the sense that it has 400,000 prospect-worthy acres to EOG’s 100,000.

“We are going to drill 80 wells in 2012 and 2013,” he said.

EOG’s wells in the Wolfcamp are producing 2,000 barrels a day, says Dan Morrison, analyst with Global Hunter Securities.

“Even if Pioneer’s don’t get to 2,000 barrels a day, at 800 barrels a day the play is incredibly economic,” Morrison said.

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Permian Basin of West Texas seeing oil boom

DALLAS — The Permian Basin of West Texas is experiencing an oil boom, leading some of the region’s top oilmen to predict that Texas oil production will double within five to seven years.

Oil drillers over the last eight years have found that the dense oil rock of the basin surrounding Midland and Odessa responds well to hydraulic fracturing, releasing lush yields. Total oil production last year in Texas averaged more than 1 million barrels per day for the first time since 2001.

“Right in the basin, we could get up to 2 million barrels a day,” Jim Henry of Midland-based Henry Resources told The Dallas Morning News for an article in its Sunday’s edition.

“I’ve been totally surprised by the amount of oil we’re finding out in the shale zones,” Scott Sheffield, chairman and chief executive of Irving-based Pioneer Natural Resources Co., told the newspaper.

“We have 30 billion barrels of new oil discoveries,” said Tim Leach, chairman and CEO of Midland-based Concho Resources. “It can be hard to get your mind around that.

The cloud on the horizon is the persistent drought that has gripped the region. Hydraulic fracturing, or “fracking,” requires massive amounts of water to pump into the ground under high pressure.

Drillers also worry about the prospect of tax increases and limits placed on land use by the presence of such endangered species as the dunes sagebrush lizard.

But as long as crude oil prices remain high, around $100 per barrel, drilling will remain profitable.

Similar booms are under way in the Eagle Ford Shale of South Texas and the Bakken Shale of North Dakota and Montana. Production also is climbing rapidly in western Alberta Canada, which is now the largest source of U.S. oil imports.

“I could paint a scenario for you where we are producing 3 million more barrels per day by 2016, which would almost get us to the point where we could eliminate 60 to 70 percent of our OPEC imports,” Texas Railroad Commissioner Barry Smitherman told The News. “With that greater control over our own energy security, we could care less about what happens in the Strait of Hormuz.”

The narrow straight between the United Arab Emirates and Iran is considered strategically vulnerable to blockade by Iran’s revolutionary regime.

The United States still imports 45 percent of the 19 million barrels of petroleum that it consumes, but that is a sharp reduction, according to the U.S. Energy Information Administration. In 2005, about two-thirds of all liquid fuels the United States consumed was imported.

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"The Play": Cuero awakens to new shade of green

By Dianna Wray

CUERO – DeWitt County Judge Daryl Fowler, a slight man in the high-ceilinged courtroom, stood at the front, adjusting his wire-framed glasses to address his audience. Everyone knew what they were there to discuss – The Eagle Ford Shale.

Judges, officials, high-powered oil company representatives and landmen from every corner of the Lone Star State gathered at the DeWitt County Courthouse a few months ago for the meeting. The room buzzed with the electric thrill of anticipation. This meeting was one of the most important of their careers. Future wealth and economic growth depended on it. Jobs depended on it. It seemed for these people, at this moment, that their futures were hung up right there in that ancient courtroom.

“This is happening, and it’s happening fast,” Fowler said, his voice cutting through the room as his eyes surveyed the audience. “It is imperative that we maintain an open dialogue and communication. We can’t ignore each other, or this thing will be a complete mess as it grows.”

There was a rustling in the room and chairs creaked as the audience nodded in agreement. Fowler had gathered them here. They settled down to tell each other’s stories, hear what everyone had to say.

As sun streamed in through the courthouse windows, officials traded tales about how their counties have handled the increase in traffic – the torn-up roads, the sudden influx of money – and listened intently as oil company representatives reassured them about their company’s intentions.

“We see this as long-term and we plan on being here for awhile, but you’re right, nothing lasts forever. But we plan to be around for a long time,” a Pioneer Natural Resources representative said from the crowd.

Fowler, a neatly dressed man who wears suits and cowboy boots and sports a mop of carefully combed graying hair, was elected county judge last year. Since taking office, he has worked hard to educate himself on the Eagle Ford Shale play. He reads everything he can about shale drilling and talks about hydraulic fracturing as if he were a petroleum engineer. When the Texas Railroad Commission, the entity that regulates oil and gas in the state, created an Eagle Ford Shale task force in May, Fowler was appointed to the board.

Though Cueroites have spent the past few decades embracing their role as a quirky small Texas town, they are in the midst of becoming something else – a boomtown in the rich tradition of the Old West. Far below Cuero lies the key to its transformation: a brittle hydrocarbon formation rich in oil and natural gas.

The Eagle Ford Shale formation is about 50 miles wide and 400 miles long, stretching from the Texas-Mexico border in the south to East Texas. The formation runs through a chunk of DeWitt County, a vein of black gold thousands of feet below.

The boom begins

Four years ago, Cuero was a community where everybody knew everybody, most people made their money in ranching or farming, and most of the children left as soon as they could.

The town was known, vaguely, in the state, as the “unofficial turkey capital of the world” and the place where chupacabras, mythological monsters who drink the blood of goats, had been sighted.

Then everything changed. Although turkey production had left years ago, the town was still the county seat of one of the top cattle producers in the state and prospered compared with most small Texas towns.

Even as industries died, residents tried to make the best of things. Every October wild turkeys race each other down Esplanade Street as a part of the annual Turkeyfest, and the day after the festival ends, Cueroites are hard at work putting together elaborate Christmas light displays for the town’s famed “Christmas in the Park.”

But, as Eagle Ford Shale became a reality, and slick black crude began gurgling up from below, the town had a new role to play – suddenly, Cuero had power.

Like scouts blazing the trail to the West, the landmen came first. Back in 2009, when most of the people of Cuero had never heard of the Eagle Ford Shale, strangers began pulling into town. Their cars and trucks, sporting license plates from across the country, surrounded the DeWitt County Courthouse. They crammed themselves into the county clerk’s office, as many as 60 at a time jostling to get to heavy, bound books of old sales receipts and certificates of ownership all looking for the same thing – the people who own pieces of the Eagle Ford Shale.

Once landowners began leasing their mineral rights, the rest of the oil field crowd began to arrive, and oil and drilling companies tapping into the shale – Pioneer, Petrohawk, Geo Southern among others – chose to make Cuero their hub.

It wasn’t an obvious choice – Gonzales is also a county seat and there is a comparable amount of drilling going on there – but Cuero had something else to offer. Cueroites have seen ups and downs over the years, but they have never given up on their community. They have never been willing to see Cuero die the typical death of a small Texas town. Cuero Economic Development Executive Director Randall Malik pointed to that attitude and the ability to embrace the Eagle Ford Shale as the black gold rush swept into town.

Danny Barker, the regional facilities director for Pioneer, chose to build a 90,000-square-foot office building in Cuero because of the location, but Cuero’s attitude made it an easy choice, he said.

“Cuero already had the infrastructure, and they had a good attitude and seemed progressive in their approach to things, and that’s why we chose to build there,” Barker said.

Seemingly overnight, Cuero has transformed from a pit stop on the way between the Gulf Coast and Austin or San Antonio, to a town full of life and possibility.

Trucks roar through town; oilmen pack the restaurants; and the courthouse and the grocery store are expanding their hours to accommodate the flood of business.

Talking turkey

The first weekend in October, Mayor Sara Post Meyer rode through downtown Cuero in the annual Turkeyfest parade. Earlier that morning, she had cheered along with the rest of the onlookers as Cuero’s wild turkey mascot, Ruby Begonia, lost another race. Meyer smiled and waved alongside her grandchildren, just as she did the year before when she first took the reins as mayor.

Meyer, a retired high school government teacher, has the look of a vigorous grandmother, but her brown eyes are sharp and she holds her chin at a no-nonsense angle.

Cuero had always seen a little bit of drilling for oil and natural gas, but the Eagle Ford Shale took Meyer by surprise.

Across town, they had all noticed the landmen at the courthouse, and when a couple of oil companies offered to pay the courthouse employees overtime to stay open on Saturdays, Meyer knew something big was about to happen.

“That was when we thought, ‘OK, maybe something is going on here,’ but no one said, ‘Hey ‘y’all are about to be inundated,” Meyer said, with a laugh.

Sitting in her office, upstairs in the city administration building, she can’t hear the traffic, but the noise is a steady buzz in her ears the moment she steps outside. Since the boom began, the roar of 18-wheelers hefting through town has become a constant, as steady as the ocean.

The motels stay filled to capacity, and the Best Western, still so new the smell of fresh paint fills your nose when you walk in, is adding another wing to accommodate demand.

RV parks have mushroomed across the town.

When people began applying to build RV parks at the beginning of the year, Meyer said city officials were caught by surprise and were without any ordinance laws for the development. They had to scramble to put together ordinance laws that would protect property owners around the parks, but stay loose enough to entice people to further develop Cuero.

City coffers swell

It was this past year’s sales tax revenue that turned the murmurs of change into actual dollar signs.

Between 2010 and 2011, sales tax revenue already has jumped by more than 30 percent – and counting. Two years ago, Cuero took in a record-setting tax revenue of $1.2 million. So far this year, that total already has risen past $1.6 million with two months left in the year.

Fracking a well takes millions of gallons of water, and Cuero has started selling its water in bulk for the first time in history.

All of this growth has meant extra money for the city.

Suddenly, Cuero’s city government doesn’t have to issue bonds or scrimp to afford things. There are plans to build an animal control shelter, an updated recycling center and a new city administration building. Where it once would have required years to undertake these projects, the town may be in a position to do it all in a matter of months, Meyer said.

“It’s like going from being able to buy a pair of Nike shoes to being able to buy those high-heeled shoes with the red leather soles. Nike has been in my vocabulary, Manolo hasn’t,” Meyer said, smiling.

Dark side of the boom

Still, there are questions to wrangle with about the play. The town’s oil and gas ordinances – the rules that govern how and where oil companies can drill – haven’t been updated since the last flurry of oil activity in the 1950s. They are being reviewed and modified now, and the way they are written will go a long way toward determining the kind of town Cuero will be in the future.

“This community is going to make a decision about whether they want to look like Luling, with pump jacks in the city limits, or do we keep them out,” Meyer said.

There’s also the question of whether to lease city property for drilling, and what to do with the money that it brings in.

“In North Texas, several of the cities did, and they were able to take the money and create a foundation that gave grants to nonprofits in the city. That would be great, as long as the integrity of the community wasn’t compromised,” she said, pausing at the thought.

But there are other concerns. Like Fowler, Meyer is determined to avoid the traps other communities have become ensnared in when shale drilling came to town. She has studied what happened in the Marcellus Shale in Pennsylvania and the problems people have dealt with as companies drilled for natural gas in the Barnett Shale in North Texas. She doesn’t want to see too-large a divide grow between people, like with the Bakken Shale in North Dakota.

Drilling in the Marcellus Shale in Pennsylvania led to accusations of contaminated water, ruined farm land and stories of towns and cities wrangling to keep oil companies out. After land had been drilled in the Barnett Shale, homeowners watched their home values plummet and there were stories about water so full of natural gas it could be lit as it ran from the faucet. The Bakken Shale resonated with Meyer, because, even with all of the money coming from that play, the wealth didn’t spread in the community.

“We don’t want that to happen to us, where there are the haves and the have-nots,” she said.

Statewide attention

Texas Railroad Commissioner Elizabeth Ames Jones spoke to the Guadalupe Blanco River Authority at a meeting at the Chisholm Heritage Museum in June. Jones beamed at her audience as she looked out and talked with them about hydraulic fracturing.

“I’m here to reassure all of you that you have nothing to fear,” Jones said.

More than 100 people packed into the hall to hear what she had to say, and Jones, who is running for U.S. Senate in 2012, handled their questions with a reassuring tone and a benign smile that never left her face. Hydraulic fracturing was safe, she said. The chemicals are shot thousands of feet down into the earth and those chemicals will stay safely in the ground, far below the water table. It was the same speech she had been making as she traveled across the state, but the fact that Jones came through town at all was remarkable. She isn’t the first politician to find it worth her time to stop in Cuero in recent months, and she won’t be the last, Meyer said.

“They never would have darkened a door in Cuero, Texas, before this, but now they make a point to stop here” she said, shaking her head.

As thrilling as it all is, the city is trying to stay grounded about the reality of a boom, Meyer said. The law of gravity says that everything that goes up has got to come down, and the same goes for oil booms – history shows that for every boom there comes a bust.

Texas tea

That’s been the case since Texas became a source of oil at the beginning of the 20th century. Everyone laughed when a one-armed mechanic named Pattillo Higgins ran around Beaumont trying to scare up investors to drill for oil in the coastal plain, according to oil history expert Dan Yergin. They stopped laughing and started drilling themselves when the first Spindletop well came in, the first big oil find in Texas.

Beaumont, a sleepy little Texas town, flooded with fortune hunters, gamblers, oil field workers and men looking to make deals. The town’s population swelled and tents, saloons, gambling houses and whorehouses sprang up overnight. Beaumont was suddenly a town to be reckoned with, and the land and mineral rights went for thousands of dollars.

It was all because of the oil that had come roaring out of the ground. Without any regulation in place, oil came gurgling out of the ground and sank the market, with prices falling to 3 cents a barrel, cheaper than water in some places.

Then things turned the other way. Soon there were too many wells drilled too close together, and just as suddenly as it had started, oil production flagged and the boom ended.

Since then, the oil towns of West Texas and North Texas tell similar stories of fortunes coming and going as communities have lived and died by the price of oil.

“That’s what keeps me up at 2 o’clock in the the morning, knowing that it always ends,” Judge Fowler said.

Sitting in his office in the DeWitt County Courthouse, Fowler leaned back in his chair behind his heavy wooden desk. He keeps a 3-foot stack of newspapers and magazines about the Eagle Ford Shale play, and the issues that come with it, in the corner of his office. He has binders of business cards and county statistics on drilling in the Eagle Ford. Keeping up with the pipelines, the drilling, the news and the rumors takes effort, and he’s always working at it, to stay ahead of the curve.

“It could all change overnight,” Fowler said. “If oil goes to $50 a barrel, all the companies start rethinking their drilling plans. We try to be very aware of that.”

Paradise lost – or found

Sheriff Jode Zavesky moved to Cuero in 1997 because he and his wife were looking to live in a small town where everybody knows everybody. In Cuero, they got that.

Since shale became a byword, that has begun to change. If the traffic rumbling through town at all hours wasn’t a clue, Zavesky suddenly found he couldn’t step out of the sheriff’s office at 12:15 p.m. on a weekday and expect to get a table for lunch. If he did get a spot, the odds were good he wouldn’t recognize most of the people in the restaurant.

“I don’t think anybody realized the traffic problems the Eagle Ford Shale play would bring along with it,” he said.

Traffic accidents, tickets, DWIs – the number of vehicles coming through town doubled in six months, and the DeWitt County Sheriff’s Office and the Cuero Police Department have worked hard to cover all of the traffic problems that have burbled to the surface along with the increase in the population.

The worst of it has been the increase in new commercial truck drivers, Zavesky said.

Thousands of barrels of oil are pumped out of the shale a day. Soon, pipelines will crisscross the county as if someone had dumped a box of dry spaghetti on the map, but for now companies need truck drivers to move the oil to refineries, so anyone with a commercial license can get behind the wheel employed as a truck driver.

“It takes experience to become a real trucker. We’re getting a bunch of people who have only been driving for six months. Inexperience causes accidents,” Zavesky said.

Good timing

Despite the drawbacks Zavesky has seen, he has joined in with those who have a sparkling vision of a new vibrant Cuero. Zavesky and his wife, Gina, have even taken the opportunity to get in on the action. They are opening a restaurant, Ruby’s Diner, at the end of November in the American Legion Hall.

The space is covered in dust and construction grime, but Zavesky already can see an American diner filled with familiar faces taking in some good food and atmosphere. It’ll be a return to the Cuero where every face is familiar, he hopes. But it was the shale drilling that made the Zaveskys step up and give their idea a try.

“It’s a double-edged sword. We’ve loved our community because you know your neighbor. Because of everything, we’re growing exponentially, so there’s bound to be changes in our community,” Zavesky said.

During a Fourth of July church picnic at the Cuero City Park, Cory Thamm, the official caretaker of Ruby Begonia, unloaded the wild turkey and sat her down where everyone could see. Children ran over to peer at the bird’s bright feathers, and the black-eyed bird looked at them through her cage.

“Why’s there a turkey here?” a woman asked.

Thamm’s eyes widened, and he couldn’t keep the surprise from his voice.

“That’s Ruby Begonia,” he exclaimed.

The woman’s expression didn’t change.

“Oh,” she said, turning and walking toward the hamburger line.

“She must be from out of town,” Thamm muttered, looking down at Ruby Begonia.

Meyer admitted change is inevitable, but she thinks Cueroites will hold onto their traditions, the shared knowledge of their history that marks them as unique.

“It’ll be wonderful, however long it lasts, and when it does go away, if it goes away, we’ll deal with it. We’re going to look differently as a community, and we’re going to be different, but I think we’ll stay the same at the core,” Meyer said

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