Fifteen years ago, movers and shakers wondered what the next engine of Oklahoma commerce would be. Oil and gas reservoirs were tapping out, and wind power wasn’t advanced enough to pick up the slack. Small, independent oil and gas producers started falling out of the market.
Then along came horizontal drilling.
“The industry has dramatically changed from what it was. We drill horizontal wells almost exclusively now. If you tell someone you want to drill a vertical well, they look at you like you’ve taken leave of your senses,” says Kim Hatfield, CEO of Oklahoma City’s Crawley Petroleum.[pullquote]“The big challenges for us are, first, keeping up with technology. Second, this is a terribly capital-intensive game. All of this horizontal drilling and hydraulic fracturing is wonderfully effective but horribly expensive.” [/pullquote]
Hatfield runs a successful independent oil and gas production business. The company employs 43 and sports the culture of a family-run enterprise. It’s no Exxon-Mobile or British Petroleum, but that’s by design. Hatfield, like other small, independent producers, likes doing things his way. And he’s good at it.
Being an independent producer doesn’t necessarily mean being small in impact. But the average independent
producer employs only 14 people, according to testimony delivered to the U.S. Congress in 2013 by Robert Sullivan, chairman of the Oklahoma Independent Petroleum Association and CEO of Sullivan and Company.
With fewer people, resources and less capital to spread around, independent producers specialize, focusing entirely on the “upstream” side of the business: Finding and getting oil out of the ground any way they can. They’re behind 95 percent of the wells operated in the U.S., and they account for 68 percent of domestic production.
Sullivan is eager to share the numbers that independent producers put on the boards year after year. As the chairman of the Oklahoma Independent Petroleum Association, he shared them with Congress on a few occasions. Independents account for more than three percent of the total U.S. workforce, provide more than 4 million jobs and generate almost four percent of the country’s gross domestic product.
Successful operators demonstrate a commitment to excellence that makes them competitive players. Unlike larger companies, they’re not vertically integrated. They do not own refineries, and they do not pump gas. Yet they’re not relegated to the peripheries of the industry. They’re smack dab in the middle, finding and getting oil out of the ground with a precision and speed giving the big guys a run for the money.
“The big challenges for us are, first, keeping up with technology. Second, this is a terribly capital-intensive game. All of this horizontal drilling and hydraulic fracturing is wonderfully effective but horribly expensive,” says Sullivan.
With better technology, wells produce more, but the ante has been “upped.” Wells that cost $2 million in the late 1990s cost around $8 million today.
Over the last decade, the cost of technology has increased by a factor of four, give or take a million. But without that technology – specifically, horizontal drilling and hydraulic fracturing – getting the oil out of the ground would be impossible.
Staying on the cutting edge is challenging for smaller companies without the research and development resources of their larger competitors.
“The industry is becoming more reliant on science and technology than it used to be. Keeping up is a daily challenge. We rely a lot on our geolo
geologists, and it’s a learning curve. Every day we learn something. You take the same ingredients today and make a different cake than you made 15 or 20 years ago,” says Sullivan.
It’s quite a cake, too. Business has been so good for independent producers over the last five years that OIPA is calling for an end to the federal government’s 30-year-old export ban. Thanks to shale fields, oil production has climbed to 1986 levels over the past five years.
Being smaller means being leaner. It’s easier to find efficiencies and, of course, there are fewer mouths to feed. Chaparral Energy has learned how to squeeze more oil out of the ground. When vertical wells start tapping out, bigger companies move on. Chaparral Energy moves in.
One of its two specialties is carbon dioxide enhanced recovery, reclaiming gas that would normally be released into the atmosphere and pumping it back into the well to increase pressure and output. When successful, it increases the well’s longevity by up to 15 percent. Chaparral is the third largest provider of enhanced recovery in the nation. It owns the largest recovery unit in the state, which is employed in Osage County.
Independents can capitalize on their size to take advantage of oil finds and fields that aren’t big enough to capture the attention of larger, integrated producers.
“If you discover a field that has the potential for a lot of wells, that really moves the needles for an independent. It makes a big difference. But the bigger the company, the bigger it needs to be to make an impact,” says Hatfield.
Chaparral also goes for the “pure play” and specializes in local oil and gas holdings. The company recently divested itself of fields in Texas and New Mexico in order to concentrate on the mid-continent oil field. The two-year-old strategy has worked. With roughly 700 employees, Chaparral recently produced one million barrels in one month.
“We’re not in North Dakota. We’re not in South Texas. We’re not offshore. We’re pure play in the mid-continent,” says Earl Reynolds, vice president of business development at Chaparral. “We believe that will benefit our shareholders because we’ll realize economies of scale. We’ll become much more efficient, and we’ll be more effective at being the best. Mother Nature gave us a great set of rocks to explore here, and we’re focusing all of our resources, capital and people on them.”
The shale boom has legs, and as long as smaller producers keep their eyes on the prize, they’ll be poised to grow. But they’ll choose not to. For them, small is the most important ingredient of success.
This story is part of an Oklahoma Energy Special Report. Continue reading additional stories from the report below.