In Texas, Exploration of Shales Fuels Bullishness

SWEETWATER — About a year ago, talk began circulating in this West Texas town about a huge oil-producing formation called the Cline Shale, east of the traditional drilling areas around Midland.

Then the oilmen and their rigs arrived. Now homes and hotels are sprouting, “help wanted” signs have multiplied, and a major drilling company has cleared land to build an office and equipment yard.

“It is coming, and it is big,” said Greg Wortham, the mayor of Sweetwater, who also serves as executive director of the Cline Shale Alliance, a new economic development group.

The Cline Shale, thousands of feet underground in a roughly 10-county swath, is just one of many little-tapped shale formations in Texas and across the nation, geologists say. That means the potential for oil and gas discoveries is theoretically huge, and the reason is technology. The rock-breaking process known as hydraulic fracturing, coupled with the ability to drill horizontally underground, has allowed drillers to retrieve oil and gas from previously inaccessible areas.

Many shales will be too expensive or too small to develop, especially if oil prices fall or environmental regulations tighten. But in Texas, which is already the top oil-producing state, bullishness about a new era is pervasive.

“We’re back into another phase of wildcatting, like the old-timers,” said Jamie Small, the president of Icon Petroleum, a Midland-based company that has worked in areas including the Cline Shale and another early-stage Louisiana formation called the Tuscaloosa Marine Shale.

Barry Smitherman, chairman of the Railroad Commission of Texas, the state’s oil and gas regulatory agency, has said that oil production in Texas could roughly double by 2020.

Much of Texas’ production in the near future is likely to come from well-known formations like the Eagle Ford Shale of South Texas and the shales of the Permian Basin of West Texas. Figures from the Railroad Commission show that oil production in the Eagle Ford nearly tripled between 2011 and 2012, though a December research piece from Deutche Bank projects that the Eagle Ford's rapid growth will slow over the next 12 to 18 months.

But with oil prices relatively high, around $90 a barrel, the quest for new shales is under way, often in regions where drillers had found oil (as they had in the Cline Shale area) in the pre-fracking era. Nearly every month brings reports of promising explorations, from New Mexico to Alaska, though some reports may deserve to be taken with “a grain of salt,” cautioned Icon's Small. Within Texas, shales besides the Cline that are not household names include the Midway Shale, which is closer to the coast than the Eagle Ford in South Texas, and deeper layers beneath well-known formations in the Permian Basin. There is also shale under Austin, geologists say.

Large-scale extraction of oil and gas from shale is relatively new, which is why modern-day oilmen feel like explorers. Hy- draulic fracturing, or fracking, the process of breaking up underground rock with a high-pressure mix of water, sand and chemicals — took off in the late 1990s in the Barnett Shale near Fort Worth. In recent years, aided by companies’ ability to drill thousands of feet horizontally under the earth, fracking has expanded into areas like the Eagle Ford and the Bakken Shale of North Dakota.

Shale, a fine-grained type of sedimentary rock, underlies much of the nation, according to Small, a geologist.

In Texas, shales are especially abundant. That is partly because hundreds of millions of years ago, sediment from much of what is now North America washed down toward modern-day Texas, according to Don Van Nieuwenhuise, director of professional geosciences programs at the University of Houston. Marine organisms, from the days when Texas was covered by a shallow sea, were buried and cooked by the earth’s heat and eventually became oil.

“We have one of the thickest sedimentary wedges in the world,” Van Nieuwenhuise said.

Sedimentary rock in the Gulf of Mexico can reach 50,000 feet in thickness, whereas it is about 3,000 feet thick near the Atlantic coastline, he said. That means that Texas could theoretically drill deeper than current onshore norms of about 10,000 feet to 15,000 feet.

The existence of a shale does not guarantee successful oil and gas production, geologists say. A formation may hold little oil or gas — or it may not be brittle enough for the fracking process to work effectively. Fracking is expensive; one well can easily cost $4.5 million to frack, Van Nieuwenhuise said. So drilling is likely to slow if global oil prices drop, as they have slightly from a year ago when they topped $100 per barrel. Natural gas drilling has already been slowed by lower gas prices.

On the other hand, improving technology could boost production.

“The most optimistic of people believe that we’ve only seen the beginning of a burst of technological innovation, and if you look back from 2020 to fracking techniques in 2013, by 2020 you’ll think these are sort of feudal times,” said Edward Morse, global head of commodities research for Citigroup.

Morse noted that recent production forecasts had “fallen short of where production growth has been.” Still, he said, political or environmental concerns could slow the rush to drill, as could a fall in oil prices.

But with oil prices still high, some areas that were once an afterthought for oilmen feel like boomtowns.

There are “a lot more people coming in looking for hotels,” said Mikala Brownfield, manager of the Hampton Inn in San Angelo, a city in the Cline Shale region. She also gets business from oil workers who cannot find rooms in Midland, a two-hour drive away.

Devon Energy, an Oklahoma City-based drilling company known for pioneering work in the Barnett Shale, has opened offices in the past 18 months in San Angelo and Abilene, in addition to a planned Sweetwater facility. It has nine rigs operating in the Cline and in the nearby Wolfcamp Shale. “We’ve had some encouraging results in the Cline, and we are hopeful and optimistic about our prospects for being successful in this play,” said Chip Minty, a Devon Energy spokesman.

Cities with fast-developing shales may find it hard to keep up with the boom.

If the Cline Shale gets going, “Where are the workers going to be? Where are you going to put them?” asked Diana Davids Hinton, a professor of history at the University of Texas of the Permian Basin and a co-author of Oil in Texas. Already, she noted, Midland’s hotels and schools are full. In Sweetwater, Wortham acknowledged that housing remained a concern. However, he said, the schools and roads were well prepared, partly because the area had already experienced a build-out of wind farms.

“There’s a lot more traffic than there used to be,” he said. “And we haven’t started yet.”