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The Next Shale Revolution: The Rise Of The Oil ‘Factory’

Russell Gold, The Wall Street Journal

The future of the U.S. oil industry may well be taking shape north of this town on 15 square miles of windswept prairie above the Bakken Shale. Liberty Resources’ oil ‘factory’ focuses on lower costs, more flexibility and better community relations.

Much development in the Bakken Shale has been chaotic. Liberty is aiming for a more methodical approach.

Much development in the Bakken Shale has been chaotic. Liberty is aiming for a more methodical approach. PHOTO: KAREN BLEIER/AFP/GETTY IMAGES

“Our idea was to build the world’s greatest oil factory,” says Chris Wright, the chief executive of Liberty Resources LLC. And if the U.S. oil industry is going to overcome several significant challenges, it may have to follow the lead of this small Denver-based company.

The U.S. oil industry boomed when crude oil prices were high, but has entered a world where low oil prices may be the norm for a while. Saudi Arabia says it won’t cut production to reduce supply, leaving U.S. companies vulnerable. After years of pell-mell development, these producers also face rising pressure from communities and regulators to be better neighbors.

“The correct focus in a price downturn is to focus on efficiency and cost mitigation, but it is much easier said than done,” says Cody Rice, a Houston-based senior research analyst for energy consultant Wood Mackenzie. “There are so many moving pieces that it is very difficult to do these things well.”

Mr. Wright’s oil factory is well-suited for this new world. It is focused on cutting operating costs and boosting output. And it is flexible, allowing oil output to be started and stopped—something that could be a big plus as volatile global crude prices require U.S. companies to adjust production levels.

Reducing truck traffic

On a frigid February evening, the project was beginning to take shape. The first three operational wells were flowing into a giant battery of storage tanks that will separate the oil from water. Nearby, a small drilling rig was putting the final touches on a $3.7 million saltwater disposal well, where wastewater will be piped for injection underground. A large earthmover was preparing the ground for a new pad where more than a dozen wells were to be drilled.

Notably absent were tanker trucks. Liberty Resources has spent $16.2 million building pipelines to deliver fresh water and send out natural gas and oil, greatly reducing the need for trucks. Another pipeline sends gas from its wells to drilling rigs and other machinery, cutting diesel consumption in half and reducing the number of fuel trucks required.

“Getting trucks off the road is one of the main drivers in controlling the costs,” says Chris Clark, the production manager. Trucking water for disposal, for example, can cost $1.75 a barrel, about 50 cents more than shipping water via pipeline, he says. Overall, pipeline usage helps Liberty make an additional $3 a barrel for oil, mostly from reduced costs but also because the company can more easily get its oil to locations where it brings in higher prices, he says. “We are spending more to make more,” Mr. Clark says.

Reducing truck traffic is about more than just cutting costs, however. It also helps with community relations. “The No. 1 objection to industry’s presence is always trucks,” saysGeorge King, a consultant at Houston-based oil and natural-gas producer Apache Corp.

Liberty Resources, backed by private-equity firm Riverstone Holdings LLC, calls the project Stomping Horse. It is developing the nearly 10,000 acres as a unified project, rather than a collection of individual wells. When it’s done, the project likely will have cost more than $800 million and there will be 96 wells.

Building centralized infrastructure—pipelines, a disposal well, a tank battery—is expected to drive down operating expenses, Mr. Clark says. Because fewer workers are needed to operate the wells, field-personnel costs are down 34% this year, he says. “We’ll still make money at $50 a barrel,” he says. Even so, the company plans to take a break from producing oil until August, when it hopes prices will have rebounded and costs from oil-field-services companies will have fallen.

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