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Fracking 2.0: Shale Drillers Pioneer New

Ways to Profit in Era of Cheap Oil
Texas producer EOG has led the industry in extracting oil
from shale faster and cheaper; challenge to OPEC’s control
over prices?
EOG has long focused on innovations to boost returns on its wells. Above, Juan Guel, a driller, operated
controls from the main platform on an EOG oil rig in Gillett, Texas, in December. Photo: Matthew Busch
for The Wall Street Journal

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By

Erin Ailworth

Updated March 30, 2017 1:51 p.m. ET

MIDLAND, Texas—Using a proprietary app called iSteer, Brian Tapp, a geologist for EOG
Resources Inc., EOG 1.58% dashed off instructions to a drilling rig 100 miles away. This tool is
among the reasons the little-known Texas company says it pumps more oil from the continental
U.S. than Exxon Mobil Corp. —or any other producer.

A rig worker received Mr. Tapp’s iPhone alert and tweaked the trajectory of a drill bit thousands
of feet underground, to land more squarely in a sweet spot of rock filled with West Texas crude.

U.S. shale drillers transformed the energy industry over the past decade with hydraulic fracturing
and horizontal drilling, in the early days using brute force to unleash a torrent of oil and gas that
altered the balance of power among oil-producing nations and triggered a global glut.

Now, with oil currently trading near $50 a barrel, these producers are trying to unleash fracking
2.0, the next step in the technological transformation of the sector that is aimed at extracting oil
even faster and less expensively to eke out profits at that level.

The promise of this new phase is potentially as significant as the original revolution. If more
producers can follow EOG’s lead and profitably ramp up output from shale drilling even at lower
prices, the sector could become a lasting force that challenges OPEC’s ability to control market
prices.
For a sector in which the previous era’s success was tied to the rapid expansion of output, the
shift toward finding more cost-effective ways to get to that oil and gas is full of challenges.
When oil prices dropped, critics wondered if the shale industry—rife with heavily indebted
companies that had never turned a profit—would collapse.

EOG, with its longtime focus on low-cost production, is the producer many hope to emulate,
thanks to the iSteer app and dozens of other homegrown innovations. Dubbed the “Apple of oil”
by one analyst, EOG made its name as a pioneer in horizontal drilling and in finding ways to get
oil out of shale—often dense layers of rock that hold oil and gas in tiny pores—a feat many once
believed impossible.

Competitors such as Chesapeake Energy Corp. and Pioneer Natural Resources Co. also are
finding new ways to profit amid low energy prices. Many are experimenting with longer,
supersize wells, and fracking them with millions of pounds of sand. Other producers, however,
have said the industry needs oil prices of at least $55 to $60 to truly rebound.

The price of oil plunged about 75% from its peak of more than $100 a barrel in mid-2014, and
the natural-gas price sank by half in the same period. More than 420,000 oil and gas jobs world-
wide have been lost, according to energy consulting firm Graves & Co., and, since the start of
2015, over 200 U.S. energy companies have filed for bankruptcy, according to law firm Haynes
& Boone LLP.

EOG, part of Enron Corp. until 1999, now drills horizontal wells in West Texas more than a mile
long in 20 days, down from 38 days in 2014. It has done it in as few as 10½ days. It estimates it
can get at least a 30% rate of return on wells at $40 a barrel, and that at $50 it can boost oil
production at least 15% a year through 2020.

The company said it produced roughly the same amount of oil last year as it did in 2014 with a
budget that was 67% smaller.

The iSteer app and other proprietary programs EOG designed are partly why.

EOG uses iSteer to help navigate through rock thousands of feet underground, landing in
identified layers with more precision. A device behind the drill bit underground transmits
information—including depth and direction but also readings to identify types of rock and the
presence of gas—to a geologist at the office. The numbers are crunched, using EOG’s databases
on the location’s rock layers and on previous wells, and course corrections are sent to the driller
on the rig.

EOG said adjustments can happen in minutes, instead of a process that in the past took at least 30
minutes. The quick modifications keep the drill in a 10-to-15 foot window, which EOG said
improves the output and consistency of a well.

The apps help employees work at the “speed of thought,” said Sandeep Bhakhri, EOG’s chief
information officer.
Bill Thomas, center, EOG’s chief executive, with floor hands Adrian Avalos, left, and Julian Moreno Jr. at
the Gillett oil rig. Photo: Matthew Busch for The Wall Street Journal

The company now uses 65 apps it designed after realizing it needed tools with capabilities it
couldn’t find off the shelf. Along the way, it boosted its staff of data scientists, and over the past
three years has hired recent computer-science graduates from the University of Texas at Austin.

The apps help EOG answer a range of questions, such as how much pressure to use to crack a
particular geologic stratum, to identifying ideal trajectories for drills, to more mundane queries,
such as the fastest route to drive from one drilling site to the next.

“I look at [the apps] first thing in the morning, on the exercise bike or during breakfast—it gives
me a head start on the day,” said Ezra Yacob, general manager of EOG’s Midland operations.

Tinkering, core to the company’s culture, was evident on a recent visit to the division office in
Midland, a city of about 124,000 at the heart of the oil-rich Permian Basin in West Texas.

There, geologists, engineers and technicians could be found constantly on their computers and
iPhones using EOG’s apps. The company says all workers are encouraged to fiddle and find
novel solutions to problems.

It’s an outgrowth of the company’s habit of ignoring conventional wisdom as it looks for ways to
become a better producer.

In the early 2000s, EOG was determined to show that vast supplies of natural gas could be
unlocked by drilling horizontally through shale. It drilled 15 uneconomic wells in the Dallas-Fort
Worth-area field known as the Barnett, while its employees experimented to find better
techniques, according to former CEO Mark Papa. It succeeded on the 16th.

As the shale boom took off, scores of producers borrowed heavily to lease land for drilling. EOG
moved in the opposite direction, keeping debt low and favoring technological innovation and
returns over rapid growth.

When Mr. Papa in 2007 realized gas prices were headed for a drop, he said the company started
shifting to oil. At the time, few in the industry thought oil could be economically extracted from
shale formations.

A bespectacled EOG geologist named Bill Thomas, then the head of the company’s Fort Worth
office, was among those who did.

He became CEO in 2013, and now can often be found in his 35th-floor office at EOG’s
headquarters in Houston scrutinizing data about well productivity. Instead of a secretary, the
assistant outside his office is one of the company’s top geo-technicians, responsible for analyzing
information.
Mr. Thomas shows some of EOG’s proprietary apps on his iPhone. Photo: Matthew Busch for The Wall
Street Journal

The company’s market cap is now $56 billion. Shares closed at $97.17 Thursday, down 18%
from their price at oil’s mid-2014 peak, beating the SPDR S&P Oil and Gas Exploration and
Production ETF, a common industry benchmark, which dropped 56% in that time.

EOG regularly solves problems in-house. When, in the early days of drilling for crude in North
Dakota’s Bakken Shale, the company hit logistical problems getting its oil to market, it built a
rail terminal and pipeline to help move it from North Dakota to the trading hub near Cushing,
Okla.

These days, it designs its own motors to power drill bits, allowing its engineers to constantly
incorporate fixes that improve performance. Oil is pumped into olive-green storage tanks made
to EOG’s specifications, cutting down costs and the number of tanks it needs in the field.

It often works with smaller services contractors, instead of giants such as Schlumberger Ltd. and
Halliburton Co. , so it can negotiate costs and find expertise tailored to its needs. The
partnerships save it money and give it more control over the logistics and supplies needed for
any given project, EOG said.

For example, a larger services company might ask EOG to use a particular sand supplier or
employ a standard mix of sand, water and chemicals when fracking a well. With a smaller
services company, EOG can potentially use sand from a company-owned mine—it bought one in
2008 when the specialized grains started becoming hard to find—and design fracks to meet
specific needs.

Heath Work, an EOG drilling manager in Midland, compared the way the company operates to a
championship Nascar driver and crew, who make small adjustments that add up over time.
“Jimmie Johnson has won seven times and he does it with the same engine as his competitors; he
just figures out how to change tires faster,” Mr. Work said.

Floor hand Adrian Avalos worked on the EOG oil rig in Gillett. Photo: Matthew Busch for The Wall Street
Journal

Competitors are innovating too, as producing oil for less becomes more important than merely
finding and pumping new supplies.

Chesapeake Energy recently used a record 50 million pounds of sand to frack a megawell in
Louisiana, reaping cost savings via economies of scale. Chesapeake, which some believed was
close to bankruptcy in early 2016, said the giant wells are part of its turnaround strategy.
Pioneer Natural Resources said it saves money by mining some of its own sand and has been
building its own system to transport the water it needs. Chief Executive Tim Dove said those
operations are integral to the company’s goal of producing one million barrels of oil equivalent a
day by 2026 while still having cash to cover expenditures.

Critics have questioned EOG’s habit of quickly ramping up production from individual wells,
arguing that can cause wells to peter out prematurely. The company used the strategy to
supercharge returns in the Eagle Ford, an oil-rich region of South Texas where it was ahead of
the pack in leasing more than 500,000 acres for a tiny percentage of what others would pay later.

Mr. Thomas, the CEO, said trial and error has proven its Eagle Ford wells aren’t damaged when
allowed to flow aggressively. “You increase your returns because the wells pay out so much
quicker,” he said. “If you get a higher return and it doesn’t damage the well, then why not do it?”

EOG expanded in the Permian region by 310,000 acres in October when it acquired Yates
Petroleum Corp. for $2.4 billion. Swallowing an entire company was an uncharacteristic move
for EOG that will test whether it can export its corporate culture.

A day after the deal closed, EOG was already using its apps and data to steer a Yates well.

“The whole industry has gotten better, but we’ve gotten better a bit faster,” Mr. Thomas said.