While financial analysts and policymakers were drooling over the natural gas potential of the Barnett Shale field in North Texas in 2008, Pioneer Natural Resources Co., led by chairman and chief executive Scott Sheffield, was drilling its first horizontal well in South Texas’ Eagle Ford Shale field. Pioneer was looking beyond the gas, for the field’s oil and “rich” hydrocarbon liquids potential. Later, when the Bakken Shale in North Dakota became the hot shale oil play, Sheffield and his team were already analyzing the Permian Basin’s Spraberry/Wolfcamp shale in West Texas and beginning to recognize its massive potential. 

Pioneer began focusing on the Permian in 2009, says Sheffield, a second-generation petroleum engineer. “We had a legacy 900,000 acres already, which we’d purchased from the ‘majors’ in the 1980s and ‘90s,” he says. “Historically we had been drilling 100 wells per year there, and using the extra cash to fund our international operations and deep-water opportunities. It took our geologists about two to three years to analyze the data of thousands of wells before we realized how big the prize was.” 

Big, indeed. Irving-based Pioneer is one of the largest acreage holders in the Permian Basin, which is potentially the second-largest oil field in the world, behind only the Ghawar field in Saudi Arabia. The Ghawar is said to contain nearly 160 billion barrels of oil equivalent, while estimates by Pioneer and others place the Spraberry/Wolfcamp field, where traces of oil were first discovered on Abner Spraberry’s farm in 1943, at 50 billion to upwards of 100 billion barrels over time. 

Pioneer’s Permian experience hasn’t occurred in isolation. While the trend has happened quietly, and some may not even realize it yet, America’s natural gas revolution has spurred a new oil boom as well. This energy revival is generating widespread economic and employment growth, and soon may help the U.S. become the world’s top oil producer, overtaking Saudi Arabia. The trend especially has benefited Texas, where oil production has more than doubled in less than three years, reversing a gradual, 28-year decline. Few firms have done more than Sheffield’s to lead, and capitalize, on this new American energy revolution. 

What began in North Texas with the Barnett’s gas riches morphed into extracting oil using the identical, cutting-edge drilling technologies. 

Sheffield himself is low-key and down to earth, an “everyman” sort who just happens to oversee an E&P (exploration and production) company with 4,000 employees and 2012 revenue of $3.2 billion. Along with a razor-sharp memory and a keen grasp of the energy business, Sheffield’s also able to make easy small talk with Pioneer workers in the company cafeteria; one new hire at the table didn’t realize Sheffield was the boss until later. “If you walked up to him on the street, you’d never know he’s the CEO of a multibillion-dollar company,” says Chris Cheatwood, Pioneer’s executive vice president and head geologist. Sheffield has been CEO of Pioneer and its predecessor firm for more than 30 years, Cheatwood points out, something that’s unusual for any chief executive these days—especially one with a public company. 

An engineering graduate of The University of Texas, Sheffield, 60, says his sights were never set on outsized growth. “I never expected to have 4,000 employees, or to be as big as we are today,” he says. “I focused on our company’s culture, the people, and at being successful. I then let it happen.”

So, how did it happen for Pioneer? And how did this new oil boom it helped shape come about? 

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42-53349196 RIGGED FOR SUCCESS: Fracking and horizontal drilling in the Permian's Wolfcamp shale may help the United States become the world's top oil producer.

GROUND ZERO IN NORTH TEXAS

Part of the answer to the second question is: persistently low natural gas prices. Simply put, those prices made it less economic in recent years for producers to drill for and make money off gas. (Natural gas prices reached $13.28 million British thermal units in July 2008, but were continuing to hover under $4 as this issue went to press.) Another big reason for the new boom was the Barnett Shale, which led in turn to the rapid exploitation of other huge shale plays like the Marcellus, in Appalachia. The oversupply of gas, and the resultant low prices, caused E&P firms to look toward oil and “rich” hydrocarbon liquids to improve profitability. 

The Barnett was ground zero for the “unconventional” energy revolution (unconventional refers to energy extracted from the likes of tar sands and shale rock, plus wind and solar power). What began in North Texas with the Barnett’s gas riches morphed into extracting oil using the identical, cutting-edge drilling technologies—hydraulic fracturing and horizontal drilling—to free up energy from shale formations. Pioneer began ramping up its oil production with horizontal drilling in the so-called Edwards Trend, one of the most productive parts of the Eagle Ford Shale, in late 2008. The company now believes Eagle Ford is the second-largest U.S. oil field, behind the Permian’s Spraberry/Wolfcamp play, based on cumulative production plus estimated recoverable reserves. Says Barry Smitherman, chairman of the Texas Railroad Commission, of such developments: “What has happened in our state over the last five to six years is nothing short of a technological miracle.”

Ironically, the oil and gas majors, such as ExxonMobil, British Petroleum, and Shell, were not leaders in this unconventional energy “miracle,” though they have participated since. The “indies,” on the other hand, have been richly rewarded for their foresight in this arena. Since 2009, for example, Pioneer has been the top-performing energy stock in the S&P 500 oil and gas index, even ranking No. 6 in the overall S&P during this period.

Sheffield, who spent his high school days in Tehran, Iran, because his father, a petroleum engineer, was stationed there, credits living overseas with helping him understand other cultures, which is increasingly important in the energy field. “Pioneer used to be 40 percent global, but now Chinese and Indian firms are investing in the U.S.,” he says. In fact, government-supported national oil companies around the globe are forming more joint ventures with independent U.S. firms like Pioneer to explore unconventional resources here. For example, Pioneer recently formed a joint venture with China’s Sinochem Petroleum USA LLC, a Sinochem subsidiary based in the U.S. The JV is a $1.7 billion deal, with Sinochem snagging a 40 percent interest in a highly promising part of the Spraberry/Wolfcamp play. 

The U.S. energy revival, analysts say, is due largely to the nimbleness of independents like Pioneer. “Even at UT, they taught us that these [shale] source rocks don’t produce,” Sheffield recalls. “Thus in the ‘80s and ‘90s, the majors began divesting in the U.S., and investing internationally again.” As a result, the acquisition of acreage and assets from the majors was a first step in the indies’ rise. 

“The rise of the Apaches, Devons, Nobles, Pioneers, and Anadarkos, which resulted from buying the assets of the majors, then allowed the indies to develop their own strategies,” Sheffield goes on. “Firms began finding shale—source rock—while the majors were busy competing [globally] with Chinese and Indian firms.” Now, however, the majors are returning to the U.S. market. Irving-based ExxonMobil, for example, bought the large, Fort Worth-based gas producer XTO Energy. BHP followed suit with the purchase of Houston-based Petrohawk Energy. Chevron snapped up Pennsylvania-based Atlas Energy. 

From 1997 to 2005, Pioneer had been acquiring international assets in countries like Argentina, South Africa, and Tunisia. But Sheffield saw how the political climate shifted dramatically following 9/11 and the Iraq war. “It has become riskier around the world,” he says. “We stopped sending employees and families internationally about six or seven years ago. Now the Devons and Apaches are selling off international assets, and re-focusing on this great shale resource that we have.” 

PIONEER RESTRUCTURES

Sheffield has led Pioneer from its earliest days as a firm called Parker & Parsley Petroleum Co., based in Midland, through its merger with the T. Boone Pickens-founded Mesa Inc. in 1997, and its subsequent rebranding as Pioneer Natural Resources Co. According to 2012 figures from the Texas Railroad Commission, Pioneer is now the third-largest oil producer in Texas, behind Occidental Permian and EOG Resources. Pioneer began its renewed domestic focus in 2006-’07, just before the Great Recession hit. World oil prices then plunged from a high of around $140 in the summer of 2008 to $35 by year’s-end.

To keep Pioneer’s workplace intact, Sheffield had to make some tough decisions, defying the likes of Wall Street. When the financial crisis dug in, for example, Pioneer had 44 operating rigs drilling new wells in the Permian Basin. “When commodity prices fell, oilfield service costs don’t go down [with them], because of long-term contracts,” Cheatwood recalls. “As a group, with Scott leading, we decided to shut down every rig. It made no sense to pay high prices for services based on $100 oil prices when [the actual price] was around $35.”

One reason Pioneer has thrived is because Sheffield has been able to identify risks to the company, and to the industry generally, early on. 

Pioneer executives knew they would be in the “penalty box” with financial savants, but they believed it was the right thing for the company to do. Then, “as things got worse and worse, people [began thinking] it was smart,” Cheatwood says. “Other firms stopped drilling new wells and making new investments,” too. Fortunately, Pioneer still had 7,000 “legacy” wells with continuing production in other parts of the Basin. The 44 rigs remained idle for nine months to a year, and Sheffield’s bold decision spared the company from having to lay off employees. 

Pioneer’s big onshore “liquids” push, focusing on the more lucrative natural gas liquids and oil, came in late ‘09-‘10. Sheffield raised $8 billion of capital to accelerate development in these positions. Some three years earlier, he had already reorganized Pioneer’s structure from mostly “functional” to a “team” concept, with different functions such as land, geosciences, and engineering working together to develop common goals and strategies. 

Sheffield also began pursuing vertical integration in earnest in 2009. For example, Pioneer acquired an oilfield services pumping division in Colorado to assist with fracking jobs. This services division was built up in West Texas and expanded to the Eagle Ford and the so-called Barnett Combo Play, an area of the Barnett known for yielding rich liquids. “It’s 300,000 horsepower—the 13th-largest service companies in terms of horsepower,” Sheffield says, referring to the power of Pioneer’s fracking equipment. “Then we realized, if you are in the pumping services business, you [also] need to be in the sand business.” Because sand is required to stimulate fractures in horizontal wells, Pioneer purchased one of the largest industrial sand mines in the U.S. last year, in Brady, Texas, for a reported $297 million. “We are now the largest employer in Brady,” Sheffield says.

Along the way, observers say, the company has maintained a sharp focus on its employees. “It’s so important to treat everybody equally, and with respect, throughout the organization,” Sheffield says. For example, Pioneer doesn’t have an “executive floor” at its headquarters on Irving’s O’Connor Boulevard. Instead, top executives there are scattered throughout Pioneer’s 20 or so floors (up from three in 1997). Sheffield maintains an open-door policy, and the company stresses culture so successfully, it’s been ranked among the Top 100 Places to Work by The Dallas Morning News for the last five years—and among the top three in the large-company category for the last four. 

UNDERSTANDING RISK

One reason Pioneer and its employees have thrived is because Sheffield has been able to identify risks to the company, and to the industry generally, early on, as though he had a sixth sense. Indeed, understanding the shift from geologic risk from conventional exploration to the economic risk inherent in unconventional exploration has underpinned Pioneer’s successful approach. 

For example, Pioneer uses traditional 3-D seismic, geo-steering software that streams real-time geology data, plus micro-seismic technology, using sound to understand the dynamics underground. “Using geo-steering, we have geologists working 24 hours a day, monitoring where that drill bit is on every place we drill horizontally to perform the best fracking jobs,” Sheffield says. 

Adds Cheatwood: “In the past, when pursuing conventional exploration projects, say in deep water in the Gulf of Mexico, we mainly quantified geologic risk, and drilled vertically to test. Now we concentrate on the source and the reservoir, because they are one and the same. It comes down to where the most oil-in-place is located.” Unconventional reservoirs like the Bakken, Eagle Ford, and especially the Permian, with its so-called stacked zones, have the right recipe, Cheatwood says.

As a result, geologic risk has shifted to economic risk. Well costs need to align with commodity prices. Experience in the Eagle Ford led Pioneer to realize that extra money had to be spent on science. “We will spend an extra $2 million per well now in the northern Spraberry/Wolfcamp,” Sheffield says. “Our gross spending with Sinochem will be $2.2 billion to $2.3 billion for the whole Spraberry field … When you tell people that you have 100 to 150 years of inventory, which we do, how are you going to accelerate that? Sinochem will be our partner for the next 20 to 25 years. Production will be rising significantly.” 

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WORKING THE MEGA-BASIN

The Permian Basin, located in parts of West Texas and an adjoining area of southeastern New Mexico, covers an expanse 250 miles wide and 300 miles long. Passing through Midland-Odessa on Interstate 20, the Basin’s commercial hub, you see an energy Mecca, bustling for miles on either side of the highway with oil and gas-related businesses. Four of the Permian’s 38 counties are Pioneer’s main drilling targets—Midland, Martin, Upton, and Andrews.

From the 1950s through the 1990s, firms began drilling deeper and deeper into the Wolfcamp Shale, which sits atop the Spraberry Shale, to a depth of nearly 8,000 feet. From 2000 to 2010, firms including Pioneer were drilling to the lower realms of the Wolfcamp Shale, beyond 11,000 feet. “We began drilling deeper vertically and opening up many more zones to make producing more economical,” Sheffield says. Pioneer, the largest producer in the Spraberry/Wolfcamp, currently is operating 27 rigs—12 of which are horizontal—with 7,000 producing wells. Sheffield says there are 18,000 vertical wells in all in the Spraberry/Wolfcamp, and another 70,000 vertical wells in the Permian’s Midland Basin. 

“The Spraberry/Wolfcamp shales are multiple stacked plays, with each zone being about 300-400 feet thick, like the single zone of the Eagle Ford,” Cheatwood says. “... This is a new concept.” 

Cheatwood explains how these unique stacked zones were made possible—how the “recipe” was perfected over time: “We are sitting right in the middle of the [Midland] Basin, a stinking nasty place to be. There were no critters to eat the organic matter. The air is stagnant with low circulation. We have a high kerogen [a mixture of organic chemical compounds] content, which is desirable, and enough brittle minerals in there so we could frack in this simple geologic position.” Pioneer’s Chinese partners call this area the thousand-layer cake. 

The Permian Basin represents nearly 60 percent of Texas’ oil production, and Texas’ oil production represents about 25 percent of all U.S. oil production. More than 29 billion barrels of oil, and 75 trillion cubic feet of gas, have been produced in the Permian so far. The ratings agency Moody’s suggests that “redevelopment” of the Spraberry/Wolfcamp Shale could push production there above 2 million barrels per day. Saudi Arabia, by contrast, produces about 10 million barrels a day. 

Additions to the U.S. oil supply by the Bakken, Eagle Ford, and Permian plays currently stand at about “2.5 million barrels of oil equivalent per day,” Sheffield says. “Were it not for shale oil today, crude prices would be much higher.” Just now, he says, the Spraberry/Wolfcamp is producing nearly 500,000 barrels per day, a figure that will grow to 2.5 million per day in 20 years. Sheffield says 200 independent firms currently are gearing up for a major production run in the Permian Basin.

Even so, some worry about the long-term supply of oil and gas, given the shale plays’ faster depletion rates, and the fact that oil prices have stayed in a range that’s made production profitable for a while now. When firms of any size experience a drop in commodity prices, production inevitably declines. “What causes the price drop—whether a financial crisis or from oversupply—determines how long it will last,” Sheffield says. Energy expert Dr. James Smith, of SMU’s Cox School of Business, expects oil prices to remain near the $100 per barrel level, “with, however, the added volatility that comes from supply disruptions or demand shocks. New U.S. oil supply has taken pressure and tightness off the market.” 

Few firms have contributed to this new supply like Pioneer Resources. And thankfully, in the view of CEO Sheffield, there are enough hydrocarbons around to keep companies such as Pioneer operating—and operating successfully—for a long, long time to come.