energy

Power Play


by: Stacy Tillilie



Distinguished Baylor alumni who have helped shape the energy business in Texas share their insights on successfully navigating the ever-changing challenges of their industry.

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In 1859, Col. Edwin Drake drilled the world's first commercial oil well in the small town of Titusville, Pa., today known as the birthplace of the oil industry. This historic event marked a turning point in how energy could be harnessed and altered the course of world history in dramatic ways.

Drake found oil 69-and-a-half feet below ground level, a key depth according to Dr. M. Ray Perryman, BS '74, founder and president of Waco-based economic and financial analysis firm The Perryman Group. Perryman served as moderator during the energy portion of the 2015 Leadership and Innovation Summit.

"If they had to go to 75 [feet], I don't think we'd ever have had an oil industry in Texas given their technology," Perryman said. "Until very recently, what we were trying to do is find the oil that seeped out of these rocks and pooled up in places."

According to Perryman, that thought process changed in the late 20th century when Texas businessman and real estate developer George P. Mitchell pioneered the extraction of shale gas. The aim shifted from finding pooled oil and gas to actually extracting it from inside the rocks.

"That's basically what hydraulic fracturing, horizontal drilling and all the modern technologies are all about--getting inside those rocks and getting that oil out," Perryman said.

While technological innovation has always played a crucial role in the energy industry, advances often take time, talent and major resources, whereas swings in the market can happen much more quickly. In 1973, oil production fell in Texas for the first time, and it fell every year from 1973 to 2008, Perryman noted.

"Whether the price of oil was high like the oil boom or low like the oil bust, it doesn't matter," he said.

"No matter if there were 1,100 rigs running or 200 rigs running, it didn't matter. The production of oil fell every year simply because the fields were old, and no matter how much we tried, we couldn't get out what geology was taking away."

Texas has recouped nearly all the 35-year production drop since 2008, according to Perryman. Oil production rose 350 percent from 2010 to 2014.

"Major companies were looking at spending billions of dollars to build facilities on the coast to import natural gas," Perryman said. "They are now spending billions of dollars on the same plots of dirt to build facilities to export natural gas. The whole dynamic of the world industry has changed in that short period of time."

Providing Steadfast Leadership

Three distinguished Baylor alumni have not only witnessed these significant and sometimes volatile shifts in the industry but also have played vital roles in several of the industry's major operations and innovations.

Paul L. Foster, BBA '79, whose generous gift paved the way for the 275,000-square-foot facility that houses the Hankamer School of Business, founded Western Refining in El Paso to administer the assets of a bankrupt refinery in the same city. Three years later, Foster purchased that refinery, bringing to fruition his vision of owning a company in the oil and gas industry. Today, Foster is chairman of the board and executive chairman of Western Refining, Inc., a publicly held company that owns and operates refineries, pipelines, terminals, petroleum product wholesale outlets, fleet fueling stations, storage and transportation assets, and convenience stores in the Western and Midwestern U.S.

"I'm in the oil refinery business, and so we're the guys that buy the oil from the producers and manufacture gasoline and diesel and lots of other things," Foster said. "We're sort of at the right end of the business right now. We're actually making a lot of money, and our margins are good. That's not always the case. The reason I was able to start my company was because of a bankruptcy of a refinery, and then I ended up buying that refinery and kind of putting it all back together."

Foster called it a cyclical business, saying his company is heavily dependent upon technology. He said the number of refineries nationwide has dropped from more than 300 to 143 over the past 35 years. However, Foster noted that the refining capacity of the current facilities is greater than those from four decades ago, and the current refineries continue to become more technologically advanced and more efficient.

"Our challenge is to be the best operator that we can be--because we're competing with some big guys--and to manage our commodities and our finances responsibly and try to survive the tough times, just like the producers are doing right now, and to be there to make money when there's money to be made," Foster said.

Mark McCollum, BBA '80, is a member of the Baylor University Board of Regents. He serves as executive vice president and chief integration officer for Halliburton, founded in 1919 and today a global leader in the energy industry. McCollum leads the joint integration team that Halliburton and Baker Hughes have assembled in connection to their pending merger. He has also provided steadfast leadership and an unwavering commitment to innovation in an ever-changing industry over the past several decades.

"We talk about these technologies that we're using--hydraulic fracturing and directional drilling," McCollum said. "It's the combination of those two that really opened up the shales. But they're not new technologies. Halliburton did the first hydraulic fracturing job in 1949. We started directional drilling...in the '80s when we opened up the Austin Chalk [an upper Cretaceous geologic formation]. It was the innovation of using them in combination that really drove the shale boom that we’ve seen today."

McCollum said more innovations are forthcoming, calling today's environment "ugly." He said the reduced number of rigs and lower prices predicates more innovation.

"We, have to think differently about what we do and how we do it to shave costs out of the drilling process, but we will," McCollum said, calling the U.S. a swing producer worldwide. "The industry always innovates. We can bring on shale faster. We can drill wells in five days and complete them very fast. We can bring it on faster. We can bring it on cheaper than any other place in the world, and that's huge. We're going to have to change all of our thinking around this area if we’re going to be the leader in the energy space in the future."

Bob Simpson, BBA '70, MBA '71, has also shaped innovation and best business practices in the industry. Before becoming part of the Texas Rangers ownership group, for which he currently serves as co-chairman of the board, he cofounded Fort Worth-based Cross Timbers Oil Company, which in 1991 became XTO Energy, Inc., and in 2010, joined with ExxonMobil in a $41 billion merger. During his tenure as chairman of the board and chief executive officer of XTO Energy, the company became the largest producer of natural gas in Texas and the eighth-largest producer in the country. Simpson said the oil and gas business has been reinvented.

"Most of the last 100 years, oil and gas were hard to find," Simpson said. "The wildcatters got famous, and so it's like finding chimneys in the pasture as opposed to a blanket. Now the blanket is the source rock. Some of these fields are 50 to 100 miles across, and so it doesn't take particular expertise to find it anymore. It's more of a manufacturing process, where those that will survive are the ones that are most efficient at drilling and completion and driving those costs down.

"But the beneficiaries are all of us in terms of the consumer side. America has the cheapest energy in the world, and so the reindustrialization of America is real. It's founded on cheap energy. You're having all kinds of manufacturing start back up: fertilizer plants, ammonia, chemicals. The cheapest source of fuel in the world is America."

America's largest energy source is oil, which supplies about 35 percent of all energy needs, Simpson noted, adding that Americans consume about 20 million barrels of oil per day, slightly more than 21 percent of the world's consumption with about 5 percent of the world's population.

"We are by far the largest consumer [of oil] in the world," he said. "If China had the per-capita consumption of oil that we do, they'd need all the oil in the world for just that one country."

Forging the Future

Behind oil, America's second-largest source of energy is natural gas at about 28 percent. Together, oil and natural gas feed nearly two-thirds of the country's energy needs. But the energy source that was first to increase supply in America significantly was natural gas, and in the last decade, the country's natural gas production is up by 40 percent, according to Simpson.

"The amazing thing is that demand has pretty well kept up with it by growth in electricity--manufacturing electricity from it and also displacing coal," Simpson said. "It has about half of the emissions of coal in all, and so it's by far the cleanest-burning fuel in the world that's basically anything of size. As we built the natural gas industry up 40 percent, that was led by manufacturing through hydraulic process, finding large fields."

While technological innovation has always served as the catalyst for increased efficiencies in the energy business, the costs of those developments also weigh heavily on how the industry moves forward, of course.

"One aspect of technology obviously with the shale is because you're breaking up very dense rock in a very expensive way," Perryman said. "It's expensive energy to get out of the ground relative to a lot of other energy. The cost is anywhere from $65 to $70 a barrel. That's where people start doing a lot of activity historically. The technology's been improving. There are other technologies coming online. There's more technology coming online in refining."

McCollum added that a considerable part of streamlining costs relates to reducing uncertainty and increasing automation.

"When you talk about reducing uncertainty, that really means using technology," McCollum said. "Today, we've got all across the U.S. pretty good pictures of the rocks down there, a lot of seismic data that's been captured."

McCollum said translating that data--much of which is not in usable formats--and using three-dimensional modeling is key. He said the technology exists to know exactly where and how to drill as well as where and how to fracture.

"We can actually design how the fractures move using that three-dimensional technology, sort of the picture of the rock underneath," he said. "It helps to try to drive out uncertainty."

Another area of focus within the industry is labor cost. McCollum believes automated rigs with two-member crews rather than 20-member crews are the future. Beyond costs, simply getting in front of the technology curve is always a challenge.

"That's one of our big challenges, to always stay ahead of the technology, both the chemistry and all the catalytic processes in the various processing units, but also the automation in the refinery," Foster said. "We used to have people all over the refinery. Now we just have people in a control room watching screens and hopefully paying attention to what they're doing."

Foster said an additional challenge is all the new oil being produced.

"But it's a different kind of oil," he said. "We're producing a lighter, sweeter crude, and it's a challenge for us as a refiner to figure out what to do with it and creating some logistics opportunities for us as well."

With all of these moving pieces and the increasing need for innovation in the industry, opportunities abound for Baylor graduates who aspire to follow similar paths or blaze new trails in the energy business.

"For us chemical engineers--there aren't a lot of them, and beyond that, there aren't a lot of really good ones," Foster said. "But we need a lot of chemical engineers in our industry. And the age of the workforce is way up there. Then always on the business side--finance, accounting and IT--and cybersecurity is a huge, huge issue for anybody in the energy industry. And so there are a lot of career opportunities, and Baylor has a big part to play in filling that role."

McCollum also emphasized the pivotal roles to be performed in finance and accounting.

"As I look at business from integration or others, I'm always amazed at how in this day and age, we've got more automation, we've got more information coming, and we need people who know how to maneuver through that information and turn it into knowledge and help [decision-makers] make business decisions," he said. "I think a combination of kids who maybe have engineering and some business acumen--that's a homerun career path for them."

Simpson said an engineering degree combined with an MBA is an ideal combination.

"If you want to go into [finance], again there are other ways. And the most important thing is to apply yourself and to do what you do, do it well every day, even though you may not be in your dream job yet," Simpson said. "That's the way to get out: Excel where you are and do it now and not say, 'I would do a better job if I was doing what I wanted to do.' Do what you do now, and do it great."

To view the summit, visit www.baylor.edu/fosterdedication.