If companies like Heritage Oil & Gas are right, the United States could reclaim its oil production to once again become one of the world’s leading oil producers. According to a 2012 International Energy Agency report, this could happen within a decade, and it could reduce the amount of oil imported to the U.S. As Paul Henley, CEO of Heritage puts it, "Our processes for mining stripper wells is a technological breakthrough in oil production because the wells in Texas alone have more oil than we ever expected." This could also be a major breakthrough in making the U.S. less reliant on oil from outside its borders for the foreseeable future.
The epicenter for this new movement is the East Texas oil field. The 140,000-acre landscape is the second-largest oil field in the U.S. with 30,340 historic and active oil wells. Since its discovery in 1930, the East Texas oil field has been the top producer of oil nationwide, which is why Paul Henley decided to re-examine its oil wells. "I spent a lot of time in the East Texas oil field because pretty much every major oil company had been there. But they left in the early 90s when production rates declined," he said. "It did not make economic sense for Hess, Chevron, etc to produce 4-6 barrels per day per well when oil was $18 per barrel. The result is that many of these wells are no longer producing, but these oil and gas leases are now in the hands of smaller companies, some of which have been very successful in building a critical mass of production in the 3-5,000 barrel a day range."
The East Texas oil field is the key location for stripper oil production in the U.S. because there is still high quality oil in its wells. However, these wells simply do not produce at high rates any more. This is where smaller companies like Heritage have taken advantage of its wells because they have cost-effective methodologies of retrieving the oil. With many wells available, Heritage and other small oil and gas producers can make a substantial profit. "The key is to figure out what to do to make these wells profitable. The East Texas field is a natural water drive, so we are really in the business of moving water," Henley explained. "The oil cut is somewhere in the 1-2% range. So it is not unusual to be moving 250 barrels of water per day per well, and that water is injected back into the oil reservoir."
According to John Bell, a petroleum engineering expert and 20-year veteran of the East Texas oil field, "1-2% of oil per day from all the water pumped from the wells is more than worth it. Costs are curtailed utilizing a variety of new and older technologies. Since the field has been in production for over 80 years, the older technologies in place keep investment costs minimized."
The real innovation for companies like Heritage is the fact that although these wells have declined in production, they will always produce oil, even if only 3-4 barrels per day. In fact, Bell explained that these wells will produce as long as oil prices encourage these companies to keep pumping them. Despite their longevity, the key to success for these companies is to maintain costs: "The key is to get critical mass of wells so a company can keep their own crews busy and not outsource to costly third party contractors for maintenance work."
New Opportunities
There is cutting edge technology and new drilling techniques that allows companies to pull oil and gas out of areas that have never been economically viable before. Innovative strategies like horizontal drilling have given companies the capability to go back to old wells and oil fields to retrieve oil that has been left behind. This allows smaller companies to expand their reach in oil wells by using new techniques such as 3D seismic technology to help them identify additional pay zones. Some companies have even begun using this technology to exploration in new virgin territories to expand their yield; this is a development which could potentially lead to millions.
In fact, Heritage has already benefitted from these new technologies. Their research has allowed them to receive approval to add 50 inactive wells. So with their flourishing operation, they have an opportunity to not only build on that, but pioneer new ground for domestic oil production. More importantly for the company though, Heritage has the technology to identify profitable wells from a production and financial standpoint. This enables them to build up a critical mass from what they already have, giving them the ability to move on to other areas. As a result, Heritage expects to produce 100-200 barrels per day, which generates $8-10M in revenue. With exponential growth for a company their size, the company plans to grow the company to a 100 million market cap operation within 3 years. This success has opened the door for competitors to join Heritage in stripper well operations in Texas.
This is due to the fact that the Texas legislature passed a law 3 years ago that put pressure on the Texas Railroad Commission to push owners of unused properties to put them into production. There have been owners sitting on reserves and leases for financial reasons that have not produced oil recently. Now they have a timeline to develop or else they will be stuck with a large financial liability. This has stimulated the opportunities for a value-driven smaller company to expand. In this position, these companies can take advantage of familiarity with the area, so they can move quickly and grow without governmental constraints. Ultimately, this allows companies like Heritage to concentrate on the low risk/ high return areas, where they can extract oil economically.
According to Bell, "In the East Texas field, some people buy oil wells like an annuities because they produce cash on a monthly basis with zero decline." To put that in perspective, on the high end, if a company produces 10 barrels per day, they can sell that for half a million dollars because of low operating costs. "We are trying to get these properties equipped to try to get oil out where we have $15-20,000 invested per producing barrel per day," said Henley. "If we can accumulate 1,000 to 2,000 barrels per day of production, then we have taken a small amount of money and turned into a big gain for our shareholders. From a business standpoint, our board of directors all have investment experience in producing oil on a large scale. This helps us compete in the sector as a whole."
Domestic Oil Sector
Companies like Heritage are increasing the domestic oil production. In general, the U.S. is on track to be the largest energy producer in the world again within the next year. This trend that has been ongoing in both new exploration and development of old energy reserves. There is a clear market for old oil production because these smaller companies are producing proven fields that have been abandoned or neglected or did not make economic sense for larger companies, but have become high growth areas for small producers. What is more encouraging about this surge of domestic oil production is that it is moving the U.S. closer toward energy independence with the development of alternative sources.
In fact, Exxon and Shell have put extensive funding into alternative energy such as liquefied natural gas, which is now used to power trucks. Distribution of energy resources like this will not only help domestic GDP and energy efficiency long-term, but it will do wonders for the environment and the reduction of carbon emissions. As Henley explains, "This makes a company like ours more appealing because stakeholders know we operate both effectively and responsibly."
Future of Domestic Oil
The biggest risk to oil production strategy is that as long as oil prices are somewhere north of $65 barrel, the current lifting costs should ensure growth. However, from a long-term perspective, oil prices are a risk for profitability for anyone in this business because they are subject to change. Particularly as production shifts domestically.
Although the current key to the future success of Heritage and its' competitors is knowledge, "Companies need to do several things, so knowledge of the East Texas field and the oil capital markets as a whole is vital to the decisions they make and the technology they use," explained Bell.
In the end though, domestic oil production will only survive if Heritage and oil production companies like it can continue to direct traffic, and be unconstrained in doing so, for the foreseeable future. As Henley states, "In order to ensure that we can keep our crew busy, we need to know where to produce. But our success is no different than any other company. You need the best team around you so you can excel in whatever business you're in."
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