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FT Magazine
April 24, 2015 11:50 am
The US shale revolution
Ed Crooks
How it changed the world (and why nothing will ever be the same again)
Juan Ramos, former oilfield worker. When he first arrived in ton, North Dakota, he was paid $24 an hour. In four months, he took home $25,000. ‘I got the opportunity, and I just
Mark Papa, godfather of shale oil. Papa’s former company EOG was a leader in the shale gas industry. When faced with oversupply, the need to switch to finding oil ‘struck me like a
Last summer, Juan Ramos had four jobs; now he has none. A year ago, feeling frustrated and underpaid working in health insurance in Florida, he was stirred by stories of the fabulous money that could be made in the oil boom town of Williston, North Dakota. So he made the 1,800-mile journey north to find a town that lived up to all of his expectations.
A job promised by an acquaintance failed to materialise but it did not matter. He quickly found work doing landscaping, as a nightclub bouncer and with two oil companies, fitting the steel casing used to line wells.
He had no prior experience in oil — his only training was studying videos on YouTube — but that did not bother his employers. He liked the physical work in the oilfield as well as his $24 an hour wages — almost double what he had been making in Florida — and soon he packed in his other jobs and went full-time with one of the oil companies. In four months, he took home $25,000. He was living the dream. “I’d never worked an 18-hour day until I came here. I’d never worked in temperatures of negative 30 degrees,” he says. “I got the opportunity, and I just took it.”
It did not last. In January the company cut his wages to $20 an hour and, soon after that, he was laid off. Kitted out in the roughneck’s uniform of thick beard and dark hoody, he now comes to the state job service office in Williston to polish up his CV. There are still hundreds of jobs in the oil industry on offer here but the number of openings in construction and extraction has fallen by a third since June. A year ago, employers would take almost anyone. Today they can pick and choose.
There are other jobs Ramos could take but he really wants to stay in the oil business. “I’m not going to come out here to work fast food,” he says. “I don’t want to do another job and hate it because it’s not an oil job.”
Innovation of the century
Ramos was brought to Williston by perhaps the most important innovation of the 21st century: the technology for extracting oil from unyielding shale rocks. The Bakken formation, which runs underneath North Dakota and into Montana and southern Canada, is one of the largest oilfields opened up by that revolution. Along with similar oil-producing areas in Texas, it has transformed the outlook for US energy security, created hundreds of thousands of high-paying jobs and rattled the leaders of rival oil-producing countries from Riyadh to Caracas. It has also struck a blow against the idea that world oil production is at or close to its ultimate peak. US oil output peaked in 1970, and until 2009 appeared to be in inexorable long-term decline. Now it has been reborn.
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“The US is going to give Saudi Arabia and Russia a run for their money in terms of being the world’s number-one oil producer,” says Daniel Yergin, author of the classic history of oil, The Prize. “And that just wasn’t on the cards five years ago. It’s that recent.”
The industry is still evolving rapidly. Flourishing innovation in the Bakken and the other centres of US oil production has turned them into the energy industry’s equivalent of Silicon Valley: crucibles of creative activity where engineers collaborate and compete to push back the frontiers of technology. Ideas being developed here could one day be deployed anywhere in the world, because countries from Argentina to China have their own shale reserves, and are looking to follow the US lead.
While the new oil industry is still in its infancy, though, it is facing its first real test. American oil producers have become victims of their own success. In the past nine months, the flood of new oil supply they created has caused a collapse in the price of crude, which dropped from more than $100 per barrel last June to less than $50 in January.
Technology that built a revolution
Horizontal drilling
Traditional oil wells go straight down, but since the 1980s many more commercial wells have gone first down, then round a corner, then out horizontally for another mile or more. Their advantage is that they expose a much greater area in a layer of oil-bearing rock.
Multi-stage hydraulic fracturing
Hydraulic fracturing, or fracking, uses water, sand and chemicals pumped into a well to open small cracks that will release the oil or gas. It has been used since the 1940s. Refinements to the technology have opened up previously unyielding shales for first gas, then oil.
Walking rigs
The most modern rigs are able to “walk” from hole to hole on stubby legs, making them more flexible and cheaper to move.
Proppants
Sand is used in fracking fluids to “prop” open cracks created in the rock so the oil and gas can flow out. Companies are experimenting with various proppants, such as ceramics, which can give better results.
Data analytics
Every well is different, and drilling generates a wealth of data about pressures, types of rock, the way it was fracked, the proppant used. After six years of production, data can be analysed to see which methods and conditions have generated the best results. Deploying that IT effectively is key to the future of the shale revolution.
The price fall has been like a bucket of cold water in the face for Williston and other oil boom towns, waking them up from the frenzy of the past half-decade to a more sober reality. The US oil industry is battling to adapt and survive in these new harsher conditions. The future of world oil markets and, hence, of the world economy, hangs on its success.
The ‘Apple of oil’
Mark Papa remembers the precise moment he decided the American oil renaissance had to happen. Avuncular and mildly spoken, he is the antithesis of the stereotypical two-fisted Texas oilman. But the company he led until the end of 2013, EOG Resources, has been one of the great success stories of the boom, dubbed “the Apple of oil” by the analyst Paul Sankey because of its ability to translate innovation into a profitable business.
EOG came from the most unpromising of beginnings. Its original name was Enron Oil & Gas Company and, until 1999, it was majority owned by Enron, the fraudulent energy group that collapsed in 2001. Having secured EOG’s independence just in time, though, Papa led it to a strong position in the fast-growing shale gas industry.
Innovations driven by an industry veteran called George Mitchell had made it possible for the first time to produce gas at commercially viable rates from formations such as the Barnett Shale of north Texas. EOG was an early adopter of the technology, discovering abundant reserves of shale gas that would provide fuel for power generation and heating, and raw materials for the petrochemicals industry. Unfortunately, many other companies were doing the same.
“The amounts of shale gas that were being uncovered [in 2002-06] were just astonishing,” says Papa, now a partner at the private equity firm Riverstone Holdings. “It was very obvious that there had been just a huge breakthrough in technology, and the amounts of commercial gas available in North America were absolutely mind-boggling.”
Papa’s revelation came in January 2007, when he was presenting at a Goldman Sachs conference alongside a couple of EOG’s rivals, listening to them talking about their vast discoveries and their prospects for rapid growth.
“It struck me like a lightning bolt,” he says. “There were so many companies finding so much gas . . . And I thought: ‘You know, the gas price in North America is about to be ruined for the next 30 to 40 years.’ And I sat there on this panel, looking at the two CEOs on my left and my right, and I thought: ‘I wonder if they realise what has just hit me.’
In October of that year, at the annual meeting of EOG’s divisional managers in Scottsdale, Arizona, he spelt out the implications of his insight.
“I hate to tell you this, guys,” he remembers telling them. “You have to go back to your divisions and tell your geologists to stop finding gas — stop finding the component they’ve been looking for for the past 40 years of their careers — and immediately switch to finding shale oil.”
The science of shale
When you look at a piece of heavy, tightly packed shale, it seems inconceivable that oil could ever flow out of it. It would be like squeezing blood from a stone. For decades, conventional wisdom in the industry agreed. Shales were known as “source rock”: the places where oil and gas was formed as organic matter was “cooked” over tens or hundreds of millions of years. But geologists generally believed that the resources could be extracted only if they had migrated to “reservoir rock”, typically sandstones, where there were interconnected pore spaces through which the oil and gas could flow. If you drill a well into reservoir rock, the pressure underground can send the oil and gas flowing up to the surface, in a gusher if you are lucky. Traditionally, if you drilled a well into shale, you were wasting your time.
Advances in two technologies in the late 1990s and early 2000s changed all that, although at first only for gas. Hydraulic fracturing — injecting a mixture of water, sand and chemicals underground at high pressure — cracks the rock to release the gas. Horizontal drilling — sinking a well a mile or more straight down, then a mile or more sideways — made it possible to expose a much greater area of resource-bearing rock. Neither practice was entirely new but refining the techniques and combining them transformed the commercial viability of shale gas.
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Yet even after shale gas production had become an established fact, Papa says, the “industry dogma” was that the same could never be true for oil.
Conventional wisdom held that while small gas molecules might be able to slip through the tiny pore spaces in shale rocks, much larger oil molecules could not. “If you had taken a poll in 2005 of 1,000 industry executives, 999 of them would have said you cannot flow oil commercially through shales, because the hydrocarbon size of oil is too large,” he says.
Rather than taking the conventional wisdom on trust, Papa was determined to find out for himself. EOG studied shales using CAT scanners, and concluded that although the pore spaces were small, they were still big enough for oil to flow through them. Even so, when Papa announced his planned pivot to oil, many of EOG’s managers were sceptical.
“You could have heard a pin drop in that room,” he says. “Some of them probably were thinking, ‘Poor Mark, he’s lost his mind.’”
Regardless of their reservations, though, “like good soldiers”, EOG’s geologists dutifully set about looking for oil. What they found was the Eagle Ford shale of south Texas, running from around Austin south and west into Mexico. It was a formation that was known to hold a lot of oil but the rest of the industry had ignored it because other companies could see no viable way to get the crude out. EOG spent a year quietly signing oil leases with landowners, and drilled its first well there early in 2009, using the same techniques of horizontal drilling and hydraulic fracturing that had proved so effective for gas. The results were a spectacular success. By April of the following year, EOG was able to tell investors that it had found reserves of about 900 million barrels of oil.
While EOG was preparing to drill its first oil well in the Eagle Ford shale, another company called Brigham Exploration was transforming the outlook for the Bakken, 1,300 miles to the north. Hundreds of oil wells had been drilled in North Dakota since 1951, mostly going straight down through the shale to reach the more co-operative reservoir rock below. The state had a mini-oil boom in the late 1970s, achieved by tapping the conventional reservoir rock, but that petered out in the 1980s.
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Since 1987, companies had been drilling horizontal wells to tap the Bakken formation but with only limited success. The rock is not a pure shale: most of the oil is contained in a layer of dolomite sandwiched between two layers of shale, making it somewhat easier to tap than the Eagle Ford, but the wells had always been respectable rather than spectacular producers.
EOG had drilled a successful horizontal well in the Bakken in 2006, near the town of Parshall, east of Williston. But that still seemed to indicate potential for only a small portion of the formation, and Mark Papa was cautious about committing too much investment there.
“We made a tactical mistake in retrospect,” he says now. “We weren’t sure what we had . . . We could have owned the Bakken play, literally, at that time.” Instead of tying up drilling rights to all the acreage in the Bakken, EOG signed up about a fifth of it, leaving plenty of room for its competitors.
Late in 2008, Brigham experimented with a Bakken well called Brad Olson 10-15 #1H. The plan was to drill a long horizontal well, running sideways for about 10,000 feet, and frack it in 20 stages, allowing the force to be applied more precisely.
“At the time there were a lot of people saying, ‘You can’t do that,’” says Russell Rankin, who worked for Brigham then. “There were a lot of firsts. It had never been done, so there’s a lot of naysayers that say you can’t do it.”
The naysayers were wrong. Other wells in the area produced about 240 barrels per day when they started up. The Olson well had initial production of more than 1,400 b/d. Brigham’s later wells did even better. “We not only proved that the technology could be done but we also did it in an area where they didn’t think the rock was good enough,” Rankin says.
EOG’s Parshall well could have been an anomaly. Brigham’s Olson well showed there were large areas of the Bakken that could be made to produce oil at commercially attractive rates. “The economic acreage dramatically expanded with that one well,” Rankin says. “When this well was drilled and completed, people’s minds started opening up.”
Innovations are hard to protect in the oil business, and Brigham’s success was quickly emulated. Companies with drilling rights in the Bakken, including Continental Resources, Hess and Whiting Petroleum as well as EOG, began to pour money into the area, drilling their own horizontal wells with multi-stage fracks. The number of drilling rigs in North Dakota doubled from May to December 2009, from 35 to 75, and then doubled again to 173 by the end of 2010. The sleepy rural town of Williston, residents say, “went crazy”.
Boomtown, USA
Oil companies and the businesses that support them were desperate for workers, and people flocked to North Dakota from all over the country to meet that need. “It was insane,” says Cindy Sanford, manager of the Williston job service. The town grew from 14,787 residents at the 2010 census to an estimated “service population” of about 32,000.
Thousands were put up in “man camps”: clusters of prefabricated huts where workers would sleep and eat while working 12-hour days for two solid weeks, returning to their homes across the country for two-week breaks.
Others turned up on spec without a job or anywhere to live. An NBC Nightly News segment in October 2011, describing Williston as “where the jobs are”, at a time when the US recovery was slow and the national unemployment rate was 8.8 per cent, drew a flood of hopeful newcomers.
“People would walk in here and say, ‘I just came in from Florida,’” Sanford says. “They were sleeping in their cars because there was no housing
The roads were jammed with trucks and Ford pickups. You might have to wait in line for 90 minutes to get your hair cut at Walmart, or for two hours to get a table at one of the town’s handful of restaurants. Rents for single-bedroom homes were the highest in the country, according to a survey for Apartment Guide last year, at $2,394 per month; more than in the metropolitan areas of New York or San Francisco.
Businesses catering to the predominantly male oilfield workforce, including bars, strip clubs and tattoo parlours, did roaring trade. Boomtown Babes, a bright pink hut in a hotel car park, opened with women in vests selling “the Bakken’s breast coffee”, charging more than $7 for a large double-shot latte.
The crime rate, which had been well below the US average, rose sharply. There were 1,328 felony arrests in Williston last year, more than twice as many as in 2013.
Williston’s infrastructure scrambled to keep up. There are new and half-built homes all around the city and plans for a $500m mall development, expansion of the water treatment system and a new airport.
“We’re playing SimCity in real life,” says Jeff Zarling of Dawa Solutions, a local web design and marketing firm. “We had to build everything.”
The sign as you come into Williston still says “Boomtown, USA” but the town is not really booming any longer. The streets are quieter now and the wait for a haircut is shorter. A couple of the man camps on the outskirts of town are closing.
The number of rigs drilling for oil in the Williston Basin has slumped from 190 at the end of November to just 89 at the beginning of April. With each rig supporting about 120 jobs, that is about 12,000 jobs gone from the region in the past five months. Reported unemployment in the county is still only 1.9 per cent — low by any standard — but the days of just turning up and having a choice of jobs are gone.
“We used to say if you walk in through the door, there’s four jobs for you,” says Cindy Sanford. “Now there’s maybe a job and a half.”
The neon adverts around Williston for petrol at $2.49 per gallon, about a third less than it cost last summer, are constant reminders of the reason for that. The Bakken and other centres of the US oil boom have suffered the same fate that Mark Papa foresaw for the gas industry: they have been too successful for their own good.
The oil price collapse
Between 2010 and 2015, US oil production grew in a way that has few parallels in the history of the industry. In 2009 it averaged 5.4 million barrels of crude per day. Last month, it was 9.4 million, approaching the all-time high of a little over 10 million reached in 1970.
Mark Papa had believed that oil was less at risk of becoming oversupplied because, unlike gas, it is sold in an integrated global market. The US does not export much crude oil but it exports a lot of refined products such as diesel fuel, and rising crude production has displaced imports from Africa and the Middle East. From 2011 to the summer of 2014, the steady flow of additional oil from the US was offset in world markets by disruptions to supplies from other countries, including Libya’s civil war and the sanctions imposed on Iran because of its nuclear programme. Even as US output soared, world oil prices remained remarkably steady at about $100-$110 per barrel.
Last summer, though, the balance in the market began to shift. US production was roaring ahead even faster than expected, as oil companies discovered new techniques to boost their output. At the same time, global demand growth was faltering, partly because of the slowdown in China.
The conditions were right for a conflagration in oil markets. When Saudi Arabia signalled that it would not cut its production to support prices, it lit a match. The kingdom, which is the most influential member of Opec, the producing countries’ cartel, had been hinting since October that it would not support production cuts. Right up until the Opec meeting in Vienna on November 27, though, there were many who still hoped the Saudis would spring a surprise and back a cut after all. When that did not happen, the price of oil collapsed. Much of US shale production, which typically has higher costs than oil in the Middle East, became unprofitable.
Production from shale wells declines very quickly, so companies need to keep drilling just to keep their output level. The plunging numbers of active rigs have already been reflected in small falls in oil production in the Bakken and the Eagle Ford shale. If the rig counts stay at these levels or fall further, it is likely that US production will drop, too.
Harold Hamm, the son of an Oklahoma sharecropper who is now the billionaire majority owner of Continental Resources, one of the pioneers of the Bakken, says Saudi Arabia has been engaged in “predatory pricing”, aimed at the US industry.
“They realised that this was a big threat. The development of these shales is a threat to their market share,” he says. “So they are using predatory pricing to try to drag us down, to take the price down and kill this industry. And they’re doing a pretty good job of it. In 120 days they’ve laid down over half the rigs drilling for oil in this country.”
Like many in Williston, Rich Vestal takes a close interest in Opec. But he thinks its power is waning. “The American dream is to be self-sufficient,” he says, and in oil he thinks that point is getting closer, regardless of the latest downturn in the US industry. He came to Williston in the last oil boom, in the late 1970s, working for a company that went bust because it had overextended. With the customers and staff he had built up, and a $15,000 loan that he told the bank was for home improvements, he started his own company, Red River Oilfield Services, which has now been in business for 37 years. A large part of its business is in supplying chemicals for the “mud” used in drilling wells, so its fortunes are directly tied to the number of rigs in the area.
Oil companies are under pressure to cut their costs and strengthen profitability, and that gets passed on to their suppliers. Some have told Red River they want 40 per cent cuts in rates.
“It is tough,” says Curtis Shuck, Red River’s vice-president of business development. “Suppliers are out of flesh to cut and they are getting down to the bone. It’s pretty damn painful.” A year ago the company had about 120 employees; today it is down to 80.
But Vestal remembers times that have been just as bad in the past. In 1985, the North Dakota rig count fell from 225 to just two. “We went for 32 days without filling a single delivery,” he says. “It was really ugly.” The industry has been up and down and up before, and he expects it will be up again in time.
Petroleum Services is another Williston oil industry supplier that has been shedding jobs, laying off about 30 people from its workforce of 137 last year. If conditions do not improve, says Mihir Varia, its business analyst, it will have to lose 30 more. It is under huge pressure to cut the rates it charges customers. But Varia says there are limits on how far its rates can go. “If we need another 20 per cent off the selling price, we can’t survive.”
Petroleum Services and companies like it, however, offer part of the solution to the industry’s crisis. Costs tend to be higher in the Bakken than in the US oil boom areas in Texas, in part because North Dakota has not developed an ecosystem of suppliers to support a large-scale industry. When something breaks, the replacement part has often had to be trucked in from Houston or Calgary, at great cost in time and money. Building up a stronger network of local suppliers will be one way to keep costs down.
In rolling grassland about an hour from Williston, the peace is broken by the roar of machinery. Packed into a gravel area a few hundred yards across are 12 large trucks with high-pressure pumps, a row of water tanks, and trailers carrying sand, to frack a group of wells for Statoil, the Norwegian oil company. Statoil bought Brigham Exploration for $4.4bn in 2011, and has since been the most successful foreign operator in US shale.
The workers, masked against the flurries of sand that get whipped up into the air, keep the frack job ticking like a well-regulated machine. There are eight wells on one site, spreading out below the surface, and four are being completed simultaneously. The pumps are connected to a well, and about 200,000 gallons of water are pumped in to frack a single section. Then a plug is put in to seal that well temporarily while a stage is fracked on the next one, and so on, in rotation.
Drilling and completing wells this way can be a much cheaper and more efficient way to operate than making each of them a one-off. Russell Rankin, now a manager of geology at Statoil, says that in 2013-14, a well took them 22 or 23 days to drill and complete. Now it takes just 10 or 11.
In the early days of the shale boom, it was the smaller companies such as EOG and Brigham that innovated. Now, Rankin says, Statoil and other larger companies need to be equally nimble and creative, to drill more wells with each rig, and recover more oil from each well. “You keep pushing that envelope,” Rankin says. “There’s a lot of efficiencies left to gain there.”
New technologies are coming into use all the time: new fracking fluids, better drills, more sensors to deliver data on what is happening down the well, and more computer power to analyse that data to inform decisions about how the next well should be drilled. There are also more straightforward savings to be achieved simply by managing operations better.
During the boom, the industry was “out of control”, says Curtis Shuck of Red River. “When things were going crazy, nobody had time to think about it. You couldn’t help but make money,” he says. “Now we’re doing it right.” There is no “one single silver bullet that’s going to cure the woes of the entire industry,” he adds. “But by everybody digging deep and pulling together, all of a sudden the economics start to make sense.”
There is a consensus in Williston that if oil were to rebound to $70 per barrel for benchmark US crude, compared to $56 last week, the industry would pick up. In effect, that would put a ceiling on oil prices, because as soon as oil becomes expensive enough, there will be more drilling and more supply coming on the market. Harold Hamm of Continental Resources expects oil to recover but thinks the rebound will be limited. “We’ll maybe get $75 or $80,” he says. “But we won’t get the $120-$130 that the Saudis want.”
Global instability
The US oil boom has had profound implications for the rest of the world, boosting economic growth and enhancing America’s global influence. The Prize’s Daniel Yergin, who is vice-chairman of IHS, the research firm, argues it was critical in putting pressure on Iran to negotiate a deal over its nuclear programme. International sanctions that cut Iran’s oil exports were effective because oil markets were reassured that rising US production would provide an alternative source of supply. Without the shale boom, Yergin says, “There would not be a preliminary agreement with Iran, because Iran would not have had to come to the table.”
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The boom has helped put pressure on other geopolitical rivals of the US. In Russia, the collapse in the price of oil, its principal export, has added to the problems facing President Vladimir Putin, already squeezed by western sanctions over the undeclared invasion of eastern Ukraine. Low oil prices are an indiscriminate weapon, though: they also hurt US allies including Saudi Arabia, Nigeria and Iraq, which has been warning that the strain on its finances is hampering its fight against the Islamic State.
If the international oil price does hit a new ceiling at about $80 per barrel, the countries that need a higher price to balance their budgets will come under growing financial strain.
A weaker oil price is on balance good news for the world economy, adding an expected 0.5 to 1 per cent to global growth this year, according to World Bank estimates. The effect on some of the losers from cheaper oil, however, could be catastrophic. “The shale revolution is the most politically disruptive factor in the global oil market since the formation of Opec in 1960,” says Edward Morse, head of commodity research at Citigroup. Financially weaker countries that rely on their oil revenues, that have not built up large reserves to cushion against price swings, and that cannot readily diversify into other industries, face the threat of government dysfunction or even “state failure”, Morse says. “This is a recipe for global instability.”
Past periods of low or falling oil prices have contributed to political upheavals including the Iranian revolution of 1979, the Soviet Union’s collapse in the late 1980s-early 1990s, and the 1998 election that gave Hugo Chávez the presidency of Venezuela. Consumers enjoying lower fuel prices resulting from the US shale boom should watch out for the turbulence following in its wake.
Oil producers praying for relief from low prices might take heart from the lost jobs and idled rigs in the US. But the American strengths that made the boom — entrepreneurial culture, depth of knowledge in oil and gas, innovation and supportive capital markets — are now being deployed to keep it alive. Recent history suggests it would be rash to bet against them.
“Look how far we’ve come since 2006,” says Russell Rankin of Statoil. “It’s incredible. So for us to think that we’re through with the technology . . . to say that that’s over is kind of idiotic . . . We’ll always come up with a solution.”
Ed Crooks is the FT’s US industry and energy editor
FT Magazine
April 24, 2015 11:50 am
The US shale revolution
Ed Crooks
How it changed the world (and why nothing will ever be the same again)
Juan Ramos, former oilfield worker. When he first arrived in ton, North Dakota, he was paid $24 an hour. In four months, he took home $25,000. ‘I got the opportunity, and I just
- [IMG]file:///C:\Users\ajohnson\AppData\Local\Temp\msohtmlclip1\ 01\clip_image001.jpg[/IMG]
Mark Papa, godfather of shale oil. Papa’s former company EOG was a leader in the shale gas industry. When faced with oversupply, the need to switch to finding oil ‘struck me like a
Last summer, Juan Ramos had four jobs; now he has none. A year ago, feeling frustrated and underpaid working in health insurance in Florida, he was stirred by stories of the fabulous money that could be made in the oil boom town of Williston, North Dakota. So he made the 1,800-mile journey north to find a town that lived up to all of his expectations.
A job promised by an acquaintance failed to materialise but it did not matter. He quickly found work doing landscaping, as a nightclub bouncer and with two oil companies, fitting the steel casing used to line wells.
He had no prior experience in oil — his only training was studying videos on YouTube — but that did not bother his employers. He liked the physical work in the oilfield as well as his $24 an hour wages — almost double what he had been making in Florida — and soon he packed in his other jobs and went full-time with one of the oil companies. In four months, he took home $25,000. He was living the dream. “I’d never worked an 18-hour day until I came here. I’d never worked in temperatures of negative 30 degrees,” he says. “I got the opportunity, and I just took it.”
It did not last. In January the company cut his wages to $20 an hour and, soon after that, he was laid off. Kitted out in the roughneck’s uniform of thick beard and dark hoody, he now comes to the state job service office in Williston to polish up his CV. There are still hundreds of jobs in the oil industry on offer here but the number of openings in construction and extraction has fallen by a third since June. A year ago, employers would take almost anyone. Today they can pick and choose.
There are other jobs Ramos could take but he really wants to stay in the oil business. “I’m not going to come out here to work fast food,” he says. “I don’t want to do another job and hate it because it’s not an oil job.”
Innovation of the century
Ramos was brought to Williston by perhaps the most important innovation of the 21st century: the technology for extracting oil from unyielding shale rocks. The Bakken formation, which runs underneath North Dakota and into Montana and southern Canada, is one of the largest oilfields opened up by that revolution. Along with similar oil-producing areas in Texas, it has transformed the outlook for US energy security, created hundreds of thousands of high-paying jobs and rattled the leaders of rival oil-producing countries from Riyadh to Caracas. It has also struck a blow against the idea that world oil production is at or close to its ultimate peak. US oil output peaked in 1970, and until 2009 appeared to be in inexorable long-term decline. Now it has been reborn.
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“The US is going to give Saudi Arabia and Russia a run for their money in terms of being the world’s number-one oil producer,” says Daniel Yergin, author of the classic history of oil, The Prize. “And that just wasn’t on the cards five years ago. It’s that recent.”
The industry is still evolving rapidly. Flourishing innovation in the Bakken and the other centres of US oil production has turned them into the energy industry’s equivalent of Silicon Valley: crucibles of creative activity where engineers collaborate and compete to push back the frontiers of technology. Ideas being developed here could one day be deployed anywhere in the world, because countries from Argentina to China have their own shale reserves, and are looking to follow the US lead.
While the new oil industry is still in its infancy, though, it is facing its first real test. American oil producers have become victims of their own success. In the past nine months, the flood of new oil supply they created has caused a collapse in the price of crude, which dropped from more than $100 per barrel last June to less than $50 in January.
Technology that built a revolution
Horizontal drilling
Traditional oil wells go straight down, but since the 1980s many more commercial wells have gone first down, then round a corner, then out horizontally for another mile or more. Their advantage is that they expose a much greater area in a layer of oil-bearing rock.
Multi-stage hydraulic fracturing
Hydraulic fracturing, or fracking, uses water, sand and chemicals pumped into a well to open small cracks that will release the oil or gas. It has been used since the 1940s. Refinements to the technology have opened up previously unyielding shales for first gas, then oil.
Walking rigs
The most modern rigs are able to “walk” from hole to hole on stubby legs, making them more flexible and cheaper to move.
Proppants
Sand is used in fracking fluids to “prop” open cracks created in the rock so the oil and gas can flow out. Companies are experimenting with various proppants, such as ceramics, which can give better results.
Data analytics
Every well is different, and drilling generates a wealth of data about pressures, types of rock, the way it was fracked, the proppant used. After six years of production, data can be analysed to see which methods and conditions have generated the best results. Deploying that IT effectively is key to the future of the shale revolution.
The price fall has been like a bucket of cold water in the face for Williston and other oil boom towns, waking them up from the frenzy of the past half-decade to a more sober reality. The US oil industry is battling to adapt and survive in these new harsher conditions. The future of world oil markets and, hence, of the world economy, hangs on its success.
The ‘Apple of oil’
Mark Papa remembers the precise moment he decided the American oil renaissance had to happen. Avuncular and mildly spoken, he is the antithesis of the stereotypical two-fisted Texas oilman. But the company he led until the end of 2013, EOG Resources, has been one of the great success stories of the boom, dubbed “the Apple of oil” by the analyst Paul Sankey because of its ability to translate innovation into a profitable business.
EOG came from the most unpromising of beginnings. Its original name was Enron Oil & Gas Company and, until 1999, it was majority owned by Enron, the fraudulent energy group that collapsed in 2001. Having secured EOG’s independence just in time, though, Papa led it to a strong position in the fast-growing shale gas industry.
Innovations driven by an industry veteran called George Mitchell had made it possible for the first time to produce gas at commercially viable rates from formations such as the Barnett Shale of north Texas. EOG was an early adopter of the technology, discovering abundant reserves of shale gas that would provide fuel for power generation and heating, and raw materials for the petrochemicals industry. Unfortunately, many other companies were doing the same.
“The amounts of shale gas that were being uncovered [in 2002-06] were just astonishing,” says Papa, now a partner at the private equity firm Riverstone Holdings. “It was very obvious that there had been just a huge breakthrough in technology, and the amounts of commercial gas available in North America were absolutely mind-boggling.”
Papa’s revelation came in January 2007, when he was presenting at a Goldman Sachs conference alongside a couple of EOG’s rivals, listening to them talking about their vast discoveries and their prospects for rapid growth.
“It struck me like a lightning bolt,” he says. “There were so many companies finding so much gas . . . And I thought: ‘You know, the gas price in North America is about to be ruined for the next 30 to 40 years.’ And I sat there on this panel, looking at the two CEOs on my left and my right, and I thought: ‘I wonder if they realise what has just hit me.’
In October of that year, at the annual meeting of EOG’s divisional managers in Scottsdale, Arizona, he spelt out the implications of his insight.
“I hate to tell you this, guys,” he remembers telling them. “You have to go back to your divisions and tell your geologists to stop finding gas — stop finding the component they’ve been looking for for the past 40 years of their careers — and immediately switch to finding shale oil.”
The science of shale
When you look at a piece of heavy, tightly packed shale, it seems inconceivable that oil could ever flow out of it. It would be like squeezing blood from a stone. For decades, conventional wisdom in the industry agreed. Shales were known as “source rock”: the places where oil and gas was formed as organic matter was “cooked” over tens or hundreds of millions of years. But geologists generally believed that the resources could be extracted only if they had migrated to “reservoir rock”, typically sandstones, where there were interconnected pore spaces through which the oil and gas could flow. If you drill a well into reservoir rock, the pressure underground can send the oil and gas flowing up to the surface, in a gusher if you are lucky. Traditionally, if you drilled a well into shale, you were wasting your time.
Advances in two technologies in the late 1990s and early 2000s changed all that, although at first only for gas. Hydraulic fracturing — injecting a mixture of water, sand and chemicals underground at high pressure — cracks the rock to release the gas. Horizontal drilling — sinking a well a mile or more straight down, then a mile or more sideways — made it possible to expose a much greater area of resource-bearing rock. Neither practice was entirely new but refining the techniques and combining them transformed the commercial viability of shale gas.
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Yet even after shale gas production had become an established fact, Papa says, the “industry dogma” was that the same could never be true for oil.
Conventional wisdom held that while small gas molecules might be able to slip through the tiny pore spaces in shale rocks, much larger oil molecules could not. “If you had taken a poll in 2005 of 1,000 industry executives, 999 of them would have said you cannot flow oil commercially through shales, because the hydrocarbon size of oil is too large,” he says.
Rather than taking the conventional wisdom on trust, Papa was determined to find out for himself. EOG studied shales using CAT scanners, and concluded that although the pore spaces were small, they were still big enough for oil to flow through them. Even so, when Papa announced his planned pivot to oil, many of EOG’s managers were sceptical.
“You could have heard a pin drop in that room,” he says. “Some of them probably were thinking, ‘Poor Mark, he’s lost his mind.’”
Regardless of their reservations, though, “like good soldiers”, EOG’s geologists dutifully set about looking for oil. What they found was the Eagle Ford shale of south Texas, running from around Austin south and west into Mexico. It was a formation that was known to hold a lot of oil but the rest of the industry had ignored it because other companies could see no viable way to get the crude out. EOG spent a year quietly signing oil leases with landowners, and drilled its first well there early in 2009, using the same techniques of horizontal drilling and hydraulic fracturing that had proved so effective for gas. The results were a spectacular success. By April of the following year, EOG was able to tell investors that it had found reserves of about 900 million barrels of oil.
While EOG was preparing to drill its first oil well in the Eagle Ford shale, another company called Brigham Exploration was transforming the outlook for the Bakken, 1,300 miles to the north. Hundreds of oil wells had been drilled in North Dakota since 1951, mostly going straight down through the shale to reach the more co-operative reservoir rock below. The state had a mini-oil boom in the late 1970s, achieved by tapping the conventional reservoir rock, but that petered out in the 1980s.
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Since 1987, companies had been drilling horizontal wells to tap the Bakken formation but with only limited success. The rock is not a pure shale: most of the oil is contained in a layer of dolomite sandwiched between two layers of shale, making it somewhat easier to tap than the Eagle Ford, but the wells had always been respectable rather than spectacular producers.
EOG had drilled a successful horizontal well in the Bakken in 2006, near the town of Parshall, east of Williston. But that still seemed to indicate potential for only a small portion of the formation, and Mark Papa was cautious about committing too much investment there.
“We made a tactical mistake in retrospect,” he says now. “We weren’t sure what we had . . . We could have owned the Bakken play, literally, at that time.” Instead of tying up drilling rights to all the acreage in the Bakken, EOG signed up about a fifth of it, leaving plenty of room for its competitors.
Late in 2008, Brigham experimented with a Bakken well called Brad Olson 10-15 #1H. The plan was to drill a long horizontal well, running sideways for about 10,000 feet, and frack it in 20 stages, allowing the force to be applied more precisely.
“At the time there were a lot of people saying, ‘You can’t do that,’” says Russell Rankin, who worked for Brigham then. “There were a lot of firsts. It had never been done, so there’s a lot of naysayers that say you can’t do it.”
The naysayers were wrong. Other wells in the area produced about 240 barrels per day when they started up. The Olson well had initial production of more than 1,400 b/d. Brigham’s later wells did even better. “We not only proved that the technology could be done but we also did it in an area where they didn’t think the rock was good enough,” Rankin says.
EOG’s Parshall well could have been an anomaly. Brigham’s Olson well showed there were large areas of the Bakken that could be made to produce oil at commercially attractive rates. “The economic acreage dramatically expanded with that one well,” Rankin says. “When this well was drilled and completed, people’s minds started opening up.”
Innovations are hard to protect in the oil business, and Brigham’s success was quickly emulated. Companies with drilling rights in the Bakken, including Continental Resources, Hess and Whiting Petroleum as well as EOG, began to pour money into the area, drilling their own horizontal wells with multi-stage fracks. The number of drilling rigs in North Dakota doubled from May to December 2009, from 35 to 75, and then doubled again to 173 by the end of 2010. The sleepy rural town of Williston, residents say, “went crazy”.
Boomtown, USA
Oil companies and the businesses that support them were desperate for workers, and people flocked to North Dakota from all over the country to meet that need. “It was insane,” says Cindy Sanford, manager of the Williston job service. The town grew from 14,787 residents at the 2010 census to an estimated “service population” of about 32,000.
Thousands were put up in “man camps”: clusters of prefabricated huts where workers would sleep and eat while working 12-hour days for two solid weeks, returning to their homes across the country for two-week breaks.
Others turned up on spec without a job or anywhere to live. An NBC Nightly News segment in October 2011, describing Williston as “where the jobs are”, at a time when the US recovery was slow and the national unemployment rate was 8.8 per cent, drew a flood of hopeful newcomers.
“People would walk in here and say, ‘I just came in from Florida,’” Sanford says. “They were sleeping in their cars because there was no housing
The roads were jammed with trucks and Ford pickups. You might have to wait in line for 90 minutes to get your hair cut at Walmart, or for two hours to get a table at one of the town’s handful of restaurants. Rents for single-bedroom homes were the highest in the country, according to a survey for Apartment Guide last year, at $2,394 per month; more than in the metropolitan areas of New York or San Francisco.
Businesses catering to the predominantly male oilfield workforce, including bars, strip clubs and tattoo parlours, did roaring trade. Boomtown Babes, a bright pink hut in a hotel car park, opened with women in vests selling “the Bakken’s breast coffee”, charging more than $7 for a large double-shot latte.
The crime rate, which had been well below the US average, rose sharply. There were 1,328 felony arrests in Williston last year, more than twice as many as in 2013.
Williston’s infrastructure scrambled to keep up. There are new and half-built homes all around the city and plans for a $500m mall development, expansion of the water treatment system and a new airport.
“We’re playing SimCity in real life,” says Jeff Zarling of Dawa Solutions, a local web design and marketing firm. “We had to build everything.”
The sign as you come into Williston still says “Boomtown, USA” but the town is not really booming any longer. The streets are quieter now and the wait for a haircut is shorter. A couple of the man camps on the outskirts of town are closing.
The number of rigs drilling for oil in the Williston Basin has slumped from 190 at the end of November to just 89 at the beginning of April. With each rig supporting about 120 jobs, that is about 12,000 jobs gone from the region in the past five months. Reported unemployment in the county is still only 1.9 per cent — low by any standard — but the days of just turning up and having a choice of jobs are gone.
“We used to say if you walk in through the door, there’s four jobs for you,” says Cindy Sanford. “Now there’s maybe a job and a half.”
The neon adverts around Williston for petrol at $2.49 per gallon, about a third less than it cost last summer, are constant reminders of the reason for that. The Bakken and other centres of the US oil boom have suffered the same fate that Mark Papa foresaw for the gas industry: they have been too successful for their own good.
The oil price collapse
Between 2010 and 2015, US oil production grew in a way that has few parallels in the history of the industry. In 2009 it averaged 5.4 million barrels of crude per day. Last month, it was 9.4 million, approaching the all-time high of a little over 10 million reached in 1970.
Mark Papa had believed that oil was less at risk of becoming oversupplied because, unlike gas, it is sold in an integrated global market. The US does not export much crude oil but it exports a lot of refined products such as diesel fuel, and rising crude production has displaced imports from Africa and the Middle East. From 2011 to the summer of 2014, the steady flow of additional oil from the US was offset in world markets by disruptions to supplies from other countries, including Libya’s civil war and the sanctions imposed on Iran because of its nuclear programme. Even as US output soared, world oil prices remained remarkably steady at about $100-$110 per barrel.
Last summer, though, the balance in the market began to shift. US production was roaring ahead even faster than expected, as oil companies discovered new techniques to boost their output. At the same time, global demand growth was faltering, partly because of the slowdown in China.
The conditions were right for a conflagration in oil markets. When Saudi Arabia signalled that it would not cut its production to support prices, it lit a match. The kingdom, which is the most influential member of Opec, the producing countries’ cartel, had been hinting since October that it would not support production cuts. Right up until the Opec meeting in Vienna on November 27, though, there were many who still hoped the Saudis would spring a surprise and back a cut after all. When that did not happen, the price of oil collapsed. Much of US shale production, which typically has higher costs than oil in the Middle East, became unprofitable.
Production from shale wells declines very quickly, so companies need to keep drilling just to keep their output level. The plunging numbers of active rigs have already been reflected in small falls in oil production in the Bakken and the Eagle Ford shale. If the rig counts stay at these levels or fall further, it is likely that US production will drop, too.
Harold Hamm, the son of an Oklahoma sharecropper who is now the billionaire majority owner of Continental Resources, one of the pioneers of the Bakken, says Saudi Arabia has been engaged in “predatory pricing”, aimed at the US industry.
“They realised that this was a big threat. The development of these shales is a threat to their market share,” he says. “So they are using predatory pricing to try to drag us down, to take the price down and kill this industry. And they’re doing a pretty good job of it. In 120 days they’ve laid down over half the rigs drilling for oil in this country.”
Like many in Williston, Rich Vestal takes a close interest in Opec. But he thinks its power is waning. “The American dream is to be self-sufficient,” he says, and in oil he thinks that point is getting closer, regardless of the latest downturn in the US industry. He came to Williston in the last oil boom, in the late 1970s, working for a company that went bust because it had overextended. With the customers and staff he had built up, and a $15,000 loan that he told the bank was for home improvements, he started his own company, Red River Oilfield Services, which has now been in business for 37 years. A large part of its business is in supplying chemicals for the “mud” used in drilling wells, so its fortunes are directly tied to the number of rigs in the area.
Oil companies are under pressure to cut their costs and strengthen profitability, and that gets passed on to their suppliers. Some have told Red River they want 40 per cent cuts in rates.
“It is tough,” says Curtis Shuck, Red River’s vice-president of business development. “Suppliers are out of flesh to cut and they are getting down to the bone. It’s pretty damn painful.” A year ago the company had about 120 employees; today it is down to 80.
But Vestal remembers times that have been just as bad in the past. In 1985, the North Dakota rig count fell from 225 to just two. “We went for 32 days without filling a single delivery,” he says. “It was really ugly.” The industry has been up and down and up before, and he expects it will be up again in time.
Petroleum Services is another Williston oil industry supplier that has been shedding jobs, laying off about 30 people from its workforce of 137 last year. If conditions do not improve, says Mihir Varia, its business analyst, it will have to lose 30 more. It is under huge pressure to cut the rates it charges customers. But Varia says there are limits on how far its rates can go. “If we need another 20 per cent off the selling price, we can’t survive.”
Petroleum Services and companies like it, however, offer part of the solution to the industry’s crisis. Costs tend to be higher in the Bakken than in the US oil boom areas in Texas, in part because North Dakota has not developed an ecosystem of suppliers to support a large-scale industry. When something breaks, the replacement part has often had to be trucked in from Houston or Calgary, at great cost in time and money. Building up a stronger network of local suppliers will be one way to keep costs down.
In rolling grassland about an hour from Williston, the peace is broken by the roar of machinery. Packed into a gravel area a few hundred yards across are 12 large trucks with high-pressure pumps, a row of water tanks, and trailers carrying sand, to frack a group of wells for Statoil, the Norwegian oil company. Statoil bought Brigham Exploration for $4.4bn in 2011, and has since been the most successful foreign operator in US shale.
The workers, masked against the flurries of sand that get whipped up into the air, keep the frack job ticking like a well-regulated machine. There are eight wells on one site, spreading out below the surface, and four are being completed simultaneously. The pumps are connected to a well, and about 200,000 gallons of water are pumped in to frack a single section. Then a plug is put in to seal that well temporarily while a stage is fracked on the next one, and so on, in rotation.
Drilling and completing wells this way can be a much cheaper and more efficient way to operate than making each of them a one-off. Russell Rankin, now a manager of geology at Statoil, says that in 2013-14, a well took them 22 or 23 days to drill and complete. Now it takes just 10 or 11.
In the early days of the shale boom, it was the smaller companies such as EOG and Brigham that innovated. Now, Rankin says, Statoil and other larger companies need to be equally nimble and creative, to drill more wells with each rig, and recover more oil from each well. “You keep pushing that envelope,” Rankin says. “There’s a lot of efficiencies left to gain there.”
New technologies are coming into use all the time: new fracking fluids, better drills, more sensors to deliver data on what is happening down the well, and more computer power to analyse that data to inform decisions about how the next well should be drilled. There are also more straightforward savings to be achieved simply by managing operations better.
During the boom, the industry was “out of control”, says Curtis Shuck of Red River. “When things were going crazy, nobody had time to think about it. You couldn’t help but make money,” he says. “Now we’re doing it right.” There is no “one single silver bullet that’s going to cure the woes of the entire industry,” he adds. “But by everybody digging deep and pulling together, all of a sudden the economics start to make sense.”
There is a consensus in Williston that if oil were to rebound to $70 per barrel for benchmark US crude, compared to $56 last week, the industry would pick up. In effect, that would put a ceiling on oil prices, because as soon as oil becomes expensive enough, there will be more drilling and more supply coming on the market. Harold Hamm of Continental Resources expects oil to recover but thinks the rebound will be limited. “We’ll maybe get $75 or $80,” he says. “But we won’t get the $120-$130 that the Saudis want.”
Global instability
The US oil boom has had profound implications for the rest of the world, boosting economic growth and enhancing America’s global influence. The Prize’s Daniel Yergin, who is vice-chairman of IHS, the research firm, argues it was critical in putting pressure on Iran to negotiate a deal over its nuclear programme. International sanctions that cut Iran’s oil exports were effective because oil markets were reassured that rising US production would provide an alternative source of supply. Without the shale boom, Yergin says, “There would not be a preliminary agreement with Iran, because Iran would not have had to come to the table.”
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The boom has helped put pressure on other geopolitical rivals of the US. In Russia, the collapse in the price of oil, its principal export, has added to the problems facing President Vladimir Putin, already squeezed by western sanctions over the undeclared invasion of eastern Ukraine. Low oil prices are an indiscriminate weapon, though: they also hurt US allies including Saudi Arabia, Nigeria and Iraq, which has been warning that the strain on its finances is hampering its fight against the Islamic State.
If the international oil price does hit a new ceiling at about $80 per barrel, the countries that need a higher price to balance their budgets will come under growing financial strain.
A weaker oil price is on balance good news for the world economy, adding an expected 0.5 to 1 per cent to global growth this year, according to World Bank estimates. The effect on some of the losers from cheaper oil, however, could be catastrophic. “The shale revolution is the most politically disruptive factor in the global oil market since the formation of Opec in 1960,” says Edward Morse, head of commodity research at Citigroup. Financially weaker countries that rely on their oil revenues, that have not built up large reserves to cushion against price swings, and that cannot readily diversify into other industries, face the threat of government dysfunction or even “state failure”, Morse says. “This is a recipe for global instability.”
Past periods of low or falling oil prices have contributed to political upheavals including the Iranian revolution of 1979, the Soviet Union’s collapse in the late 1980s-early 1990s, and the 1998 election that gave Hugo Chávez the presidency of Venezuela. Consumers enjoying lower fuel prices resulting from the US shale boom should watch out for the turbulence following in its wake.
Oil producers praying for relief from low prices might take heart from the lost jobs and idled rigs in the US. But the American strengths that made the boom — entrepreneurial culture, depth of knowledge in oil and gas, innovation and supportive capital markets — are now being deployed to keep it alive. Recent history suggests it would be rash to bet against them.
“Look how far we’ve come since 2006,” says Russell Rankin of Statoil. “It’s incredible. So for us to think that we’re through with the technology . . . to say that that’s over is kind of idiotic . . . We’ll always come up with a solution.”
Ed Crooks is the FT’s US industry and energy editor
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