BY JAY F. MARKS jmarks@opubco.com

Published: August 14, 2011

Sunday marks 10 years since Devon Energy Corp. announced a $3.5 billion acquisition that transformed the company and sparked a revolution in the oil and gas industry.

Devon's plan to acquire Mitchell Energy and Development Corp. was not warmly received by analysts, especially after the Sept. 11, 2001, terror attacks shook the economy.

Devon co-founder Larry Nichols said he believed the technology Mitchell Energy CEO George Mitchell had developed in North Texas' Barnett Shale could be a boon to his company.

“We thought we could take that technology and combine it with horizontal drilling and be able to significantly improve the economics of the wells and drill in a lot more places,” Nichols said. “There was some doubt in the investment community and Wall Street at the time whether or not we'd be able to do that, but obviously we have.”

By the end of 2011, Devon expects to have produced about 3.3 trillion cubic feet of natural gas equivalent in the Barnett Shale, with reserves believed to be more than five times that amount remaining.

History has made a believer of Oppenheimer analyst Fadel Gheit.

“George Mitchell is the father of the shale gas revolution with the discovery of the Barnett Shale. Devon's acquisition of Mitchell made it the largest player in the largest shale gas play at the time,” he said. “The Barnett is where companies got their basic training and gained knowledge and experience, which opened a whole new era that is only beginning.

“I hope there is enough vision and will left in the country to take gas to the next logical level, which is power generation and transportation.”

The lessons Mitchell Energy and Devon learned in the Barnett have spread nationwide, allowing producers to unlock unprecedented amounts of oil and gas.

Domestic oil production has increased for the first time since the 1970s thanks to those new techniques, Devon spokesman Chip Minty said.

On the market

Devon wasn't the only company with a chance to capitalize on Mitchell Energy's methods.

The company had hired Goldman Sachs in 1999 to find a buyer for it, but no one made an offer.

Nichols said Devon took a look at the hydraulic fracturing technology Mitchell Energy was using in its core area in the Barnett Shale, but didn't think it worked.

Brad Foster, executive vice president of Devon's central division, said George Mitchell had recognized the presence of natural gas in the Barnett as far back as 1981.

“The only problem was nobody knew how to get to it,” he said.

Eventually Mitchell tried slick-water frac technology that had been used in East Texas.

“Basically that's just an awful lot of fresh water, a little bit of sand and some friction reducer, which is kind of like soap,” Foster said.

Devon drilling engineer David Fortenberry was at Mitchell Energy before it was acquired by Devon. He said standard fracturing was not economical for wells in the Barnett, but the slick-water method cut costs while significantly improving production for Mitchell Energy in 1999.

“That set the stage to start focusing on the Barnett,” Fortenberry said. “In 2000, Mitchell did about 120 wells and set the plan to drill 280 in 2001. “That's what brought Devon back.”

Keeping watch

Nichols said Devon had been monitoring Mitchell Energy's work in the Barnett even though it opted not to buy the company in 1999.

Devon approached Mitchell about a potential acquisition in 2001, Nichols said, because officials thought George Mitchell's company was onto something new.

He said Mitchell Energy figured out how to fracture dense shale in vertical wells. Devon improved on the technique with horizontal drilling.

That formula turned out to be a boost for the entire industry.

“As Devon and other companies have taken it around the country, we have been able to dramatically increase the reserves of natural gas that the country has,” Nichols said. “That obviously has very significant economic impact and very significant environmental impact on the U.S.

“Natural gas, of course, is the cleanest burning fuel that we have. So being able to replace coal-fired plants with natural gas will have a significantly improved effect on the air that we breathe.”

Culture change

Once the Mitchell Energy acquisition was completed in January 2002, Devon officials quickly realized horizontal drilling was the way to go.

Foster said they learned horizontal wells cost about 2.5 times more than traditional wells, but the resulting production and reserves was 3.5 times more.

“That was the real aha moment for us,” he said.

Foster said those involved in the Barnett project discovered that approach would work throughout the play, but it was not easy to change to a new way of operating.

Devon had to change the culture of its people and its equipment.

He said Devon drilled its first few horizontal wells in the Barnett with undersized, underpowered rigs before working with Tulsa-based Helmerich & Payne to develop the first “modern-day” rigs in 2004.

H&P CEO Hans Helmerich credited Devon officials for their willingness to collaborate on innovative technology.

“They had a vision for doing what they have so successfully done, which is use the best tech available ... and drive performance in the field,” he said. “It's been a great partnership for us.”

Helmerich said the 92-year old company had about 80 rigs when it started working with Devon to develop a new rig suitable to the company's needs. It will have 300 rigs by the end of 2011.

Devon's Fortenberry said the first rig H&P developed for Devon is still working for the company in western Oklahoma's Cana play.

“That was the first application of the high-efficiency rig to an unconventional horizontal play,” he said. “We really feel like we set the standard. “That's the model that most companies are following now.”

In addition to breaking in new technology, Fortenberry said Devon has to learn the nuances of operating horizontal wells. Many of their intricacies are the opposite of vertical wells.

He said input from H&P and other consultants helped to cut its well completion time from 33 days in 2004 down to 12 days.

Foster said wells in some shallower areas of the Barnett can be completed in about seven days.

Devon currently has more than 4,200 producing wells in the Barnett.

“It's been amazing. Our purpose was to find a way to make hundreds of thousands of Barnett acreage economic, make it viable and make it work,” Fortenberry said. “Now it's being replicated across the planet.

That's pretty cool."