Network effects matter, even with water trucks and drilling rigs.
MIDLAND — On a highly traveled stretch of highway heading out of this West Texas city, Tim Greer turned into a lot near a disposal well and pulled open the door to a wooden shed that has been there since he was a kid.
He pointed to a pad of tickets backed with carbon paper, which his company’s truck drivers, after getting rid of wastewater from hydraulic fracturing operations, must fill out to get paid. The tickets are then dropped into a locked mailbox. “Nothing on this well is automated,” said Greer. “Nothing.”
While extremely advanced and innovative in its operations under the ground, the energy industry has devoted far less attention to streamlining the vast networks of service companies that work on the surface, ferrying supplies to and from rigs, hauling wastewater and running tests. Greer, who does sales and operations for his uncle’s firm, Lenorah Operators, said little has changed since his grandfather founded a company on the same site in 1967 — right down to the paper tickets.
Now, dozens of companies are vying to dominate an emerging, multi-billion market by developing online platforms that would connect service companies to drillers, allow them to bid on jobs, and send trucks to their most efficient locations at the lowest possible cost. Think of it as Uber for oil field services.
Creating a tech platform for the oil field, however, is a lot more complicated than taking passengers from point A to point B with a smartphone app. The market is stratified, with multiple layers of operators and contractors. A trucking company that decides to use one program to keep track of all their jobs might be asked to also adopt three other programs that their biggest clients use. The jobs often have special instructions, like dealing with pieces of equipment that might be broken, or different ways to bill, like by the day or by the week.
Oil field business executives had a lot of down time during the oil bust to experiment with new solutions from tech companies — and they had to, as drillers demanded huge discounts on the few jobs they still had. But as drilling and prices rebound, particularly in West Texas’ Permian Basin, the momentum for services companies to join the 21st century is slowing as analog speed takes precedence over digital efficiency.
“I don’t want to say that the window’s closing for these guys, but it’s changing,” said Joseph Triepke, an oil field analyst who runs the website InfillThinking.com. “The conversation from operators and service providers is changing from cutting costs to meeting incremental demand. That is bad for innovators.”
Water, water everywhere
The story of innovation in the oil patch has long been one of increasing fragmentation.
As oil became the world’s leading source of energy, the largest oil companies were vertically integrated behemoths that managed all aspects of their supply chains. After the oil bust of the 1980s, many big oil companies outsourced research and development to giant well servicing operations like Halliburton and Schlumberger, which then delivered new ways of doing things — from “refracking” old wells to deploying sensors to guide operations.
But that makes it difficult for startups to sell to the big oil companies directly. One and a half years ago, Hossein Rokhsari started a consulting firm called Darcy Partners that aims to bypass big oil field services companies by putting the most promising startups in front of oil and gas companies looking for ideas.
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“For every Baker Hughes,” Rokhsari said, “there are hundreds of new small vendors and innovators who are coming up with new solutions in their garage.”
The shale oil and gas boom changed the game again, because of the resources needed to deal with a massive new by-product: water. For every barrel of oil that comes out of the ground on a frack, the well can produce as many as 10 barrels of water. And that water needs to be hauled away and deposited in disposal wells.
For decades, trucking companies used paper tickets and big white boards to keep track of trucks and bill customers doing conventional drilling, manually entering data into spreadsheets and leaving decisions about which wells to use and routes to take to drivers. The much larger volume of water generated by fracking techniques — as well as other supplies, like sand and chemicals – increased the cost of inefficiencies like lost tickets and time spent waiting in line at disposal wells.
That conundrum piqued the interest of David Bateman, who started thinking about creating an oil field logistics platform when he was an engineering student at Texas Tech. After getting an MBA, he started a company called Amplisine, which in 2012 launched a platform that allows operators to remotely control their wells, generate electronic tickets for truckloads picked up and deposited, and see it all from their smartphone. He sold a few systems during the boom, but said business really picked up during the bust, which forced companies to become more efficient.
‘Network effect’
To illustrate how his platform can help operators, Bateman, 31, pulled out his laptop. It showed a map of West Texas, with colored dots in the locations of trucks and disposal wells.
When integrated with monitors on well sites, the person operating the platform can tell which wells need servicing, which trucks are available, how much everything costs. They can make sure drivers generate receipts for completed jobs, avoid bottlenecks at crowded disposal wells and don’t take detours.
If the technology works, the value proposition is pretty clear: You pay for fewer trips, find the lowest prices, and ultimately employ fewer people if you don’t need them shuttling tickets around to get signed by customers.
“Some of the logistical issues of the oilfield are one of the last real places to leverage technology,” Bateman said.
There’s now a long list of data platforms on the market, many of which have done pilots with big oil and gas companies. Chesapeake Energy of Oklahoma City is trying out SitePro, for example, and Occidental is working with a Denver-based company called ShaleApps. None, however, has emerged as a clear leader, and that could create a problem, if service providers are forced to work with a dizzying array of different products required by big clients.
Ultimately, one service might need to become the industry standard. As with tech platforms like Facebook or Google, an oil field-targeted software program becomes more useful the more users it has, in a phenomenon known as the “network effect.”
As much as SitePro or ShaleApps is an advantage over the status quo, they’re not as useful as they would be with more data on costs, volumes, and prices from disposal wells, trucking companies, and suppliers of equipment and fracking materials. Transparent markets drive down prices, and the platform that sucks in the most data could quickly force out the competition.
An online water exchange called Sourcewater has had some success with coaxing operators to post how much water they need to get rid of and disposal wells to post how much they can take, which helps ensure predictable transactions. But companies are often reluctant to post their rates publicly, since transactions are still based on relationships and some customers will be charged more than others.
“We could connect this network and optimize it pretty easily, if we had the data,” said Fred Lummis, a partner at the venture capital firm Houston Ventures, which has backed asset tracking and oil field data companies. “But it’s not shared.”
The price of PBJ
The need for a solution is apparent at a very different disposal well from the plywood shack down the road from Lenorah Operators. This one is bright and comfortable, with the sound of chopping green peppers drifting from a full-size industrial kitchen. The burritos are free, as are the chilled drinks and Smuckers Uncrustables — packaged PBJ sandwiches with the crusts cut off — in the refrigerators.
“Our biggest thing, why people come by, is we have our own cooks,” said Jonathan Flores, an assistant operations manager at the well. “We have snacks for them, we have TVs. All they got to do is come by, we’ll hook up the hoses.”
The problem is, snacks and TV aren’t necessarily good for Tim Greer’s bottom line. He wants his truckers to go to the closest, cheapest well, whether or not it serves lunch.
“My driver wants to come here because he’s got free hamburgers,” said Greer, after grabbing a drink from the fridge. “But if I can pay 20 cents [per barrel] less down the road, I want him to go down the road.”
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Right now, Greer is exploring his own options for creating a software solution. He knows there’s a lot of competition, but figures he’s got a leg up with all the connections he’s built over years in Midland, which might help him get data and information critical to bringing the network effect to the oil patch.
It’s an advantage, he said, that hotshots from Denver and Silicon Valley will never have.
“It’s a redneck, shut down, good old boy town, is what this is,” Greer says. “So if you’re coming in from the outside, if you don’t know people, you’re not getting anything done. You can’t be cocky around here.”