At a time when Shell and other companies have downplayed their investment in northern Oklahoma and western Kansas, Oklahoma City-based SandRidge Energy Inc. is confident efforts in the area will pay off.
“This is the No. 1 project for us. This is the entire focus of the company, our capital and our intellectual capital. So this is what we do very well,” CEO James Bennett said during the company’s analyst day last week.
One challenge companies face in the region is what to do with the large volumes of high-salinity water produced along with the oil.
The rock layers that contain oil typically also hold large amounts of saltwater. The average well in Oklahoma produces 10 times as much water as oil, but in the Mississippian, that ratio can climb as high as 20 to 1. The water also tends to be three to five times saltier than the ocean.
Since 2010, SandRidge has spent nearly $500 million to build a network of 160 saltwater disposal wells and 900 miles of pipeline along the Oklahoma-Kansas border. The system is pumping underground about 41 million gallons of saltwater every day and has a capacity of more than twice that amount.
“This system is very important in supporting our growth in the Mid-Continent,” Bennett told The Oklahoman on Friday. “We were a first-mover in terms of installing a robust pipeline-based produced water system in the Mid-Continent.”
The system all but eliminates the need for trucking water from the well sites at a cost of about $2 per barrel.
The Oklahoma Geological Survey, the U.S. Geological Survey and others have been studying whether the state’s swarm of quakes over the past few years could be connected with water disposal wells like what SandRidge has built along the Oklahoma-Kansas border.
One report co-authored by a former University of Oklahoma professor and a U.S. Geological Survey researcher connected the state record 5.7 magnitude quake in 2011 to an injection well near Luther, but the Oklahoma Geological survey has said the incident appears “consistent with a natural earthquake.”
Injection and disposal wells have been used for much of the state’s history. While oil and natural gas activity has picked up in Oklahoma in recent years, oil and water production still pale compared to levels seen in the 1980s and 1920s.
The Oklahoma Corporation Commissioner this month unanimously approved rules requiring water injection well operators throughout the state to collect daily information on injection volume and pressure.
If approved by the Legislature, operators would have to provide the information if the commission asks for it.
SandRidge has supported the rule changes and has been meeting the proposed requirements since the system was built three years ago, Bennett said.
“We’re more than happy to comply,” he said. “We think it makes a lot of sense.”
Bennett pointed out, however, that it is still unclear whether industry activity has played any role in the quakes.
“We can’t make the mistake of confusing correlation with causation. The organizations studying this haven’t found evidence that explains the relationship between natural and induced seismic activity,” he said.
“We do know the nature of our business gives us a lot of access to geologic data. The best thing we can do is support the work of those taking this data. When it comes to understanding activity, our most important role is to facilitate that science. We will continue to work with OCC (Oklahoma Corporation Commission), OGS (Oklahoma Geological Survey), OIPA (Oklahoma Independent Petroleum Association) and similar groups in Kansas and Texas to make sure we’re responsible corporate citizens and community partners.”
While the saltwater disposal system has been essential for SandRidge’s growth in northern Oklahoma and western Kansas, the company is studying whether it could benefit even more from separating out the system into a master limited partnership or some other arrangement.
“We’re looking at several options for that business,” Bennett said. “There’s likely a better way to capture that value for our shareholders. But we don’t expect anything to happen in 2014. Those things take time.”
The Mississippian formation poses significant challenges to operators in the area. Some companies have backed off their initial enthusiasm for the area in part because of the high water content and lack of pipeline and electrical infrastructure in the area.
SandRidge, however, has invested heavily in that infrastructure, significantly reducing its drilling costs.
The company has dropped its costs per well to less than $3 million, down more than $1 million a well over the past two years.
Craig Johnson, senior vice president of SandRidge’s Oklahoma division, was asked during the company’s analyst day last week whether the area is working economically.
“At $2.6 million (per well), it works phenomenally,” he said. “At $4.2 million, it does get a little bit challenged.”
The saltwater disposal system is a big part of reducing costs, but it is only one part of the process.
“Over the summer, there was a group of about 20 of us that met in a hotel for about six hours,” Chief Operating Officer David Lawler said. “We looked at every aspect of our location building for all of our drilling pads, and that six hours generated an $8 million savings. And those kind of meetings happen all the time.”
One simple, yet significant, cost savings has come from paint.
“We have a really nice pretty tank battery painted white with the nice SandRidge logo. And just wanted to point out that that looks awfully nice, but we’re no longer doing that anymore,” said Craig Johnson, senior vice president of SandRidge’s Oklahoma division. “That’s about $15,000 cost in the paint.”
Instead, SandRidge is now sticking with the green or gray from the manufacturer.
“It doesn’t sound like a big deal, but that’s $15,000 per well,” Bennett said. “With 460 wells, that’s a $7 million-a-year savings. It may not sound like a big deal, but it is.”
Another savings has come from the company’s investment in electric infrastructure.
Alfalfa Electric Co. provides the power to the area. Three years ago, the company had a total capacity in the area of about 35 megawatts. SandRidge has since built or paid for infrastructure to expand that capacity to about 100 megawatts. Additional upgrades will expand that capacity to 250 megawatts later this year.
The electrical upgrades have allowed the company to use electric pumps on its wells instead of more expensive diesel-powered models.
SandRidge has installed five company-owned substations and built 750 miles of three-phase power line in the area.
“That’s more power line than the utility had built in the last 60 years, and we’ve done it in just three years,” said Jason Niven, vice president of SandRidge’s power systems.