Capstar Drilling

Source: Energy Digital

Date :11/21/2007 8:37:59 AM

Beyond the Midwest

With decades of experience in one of the most essential and basic of oilfield operations, Capstar continues to concentrate on what the customers really need

Written by John O'Hanlon and Produced by Nick Ledue

The Permian basin, every American schoolchild should know, is the large oil and gas producing region covering part of West Texas and part of New Mexico. Oil production in these regions is centered in the towns of Odessa and Midland, and it is in the former of these that Capstar Drilling has been headquartered since its foundation by two entrepreneurs who bought themselves a drilling rig in 1984 and hired it out as a service to the oil production companies. Capstar grew organically, and by 1997 it had ten rigs and enough critical mass to make it an attractive proposition for the private equity firm SCF Partners.

SCF was busy putting together an oil and gas services group, of which Capstar formed an important if relatively small part, and in 2001 it took Oil States International public and floated it on the New York Stock Exchange.

Oil States is a global player, whereas Capstar operates within the United States, explains Mike Roghair, General Manager of Capstar’s three divisions. “Oil States International is a $2.5 billion group, and we contribute around $150 million to that, which tells you what a small piece of the pie we are!” says Mike modestly. But $150 million is not such a small contribution either, and the company is of great strategic importance in the continuing struggle to maintain an independent energy supply to the United States.

Capstar is the land drilling subsidiary of Oil States: it has stuck to the market envisaged by its founders and intends to continue to do that, says Mike Roghair, who joined the company back in 1988. Though it has made two acquisitions since SCF Partners came on the scene, they were chosen to increase capacity and geographic footprint rather than broaden the company’s range of services.

In June 1998, Capstar acquired Peek and Rowan, based in Ohio, for $5.7 million, and in February 2005 it spent $22 million in purchasing Elenburg Exploration of Caspar, Wyoming, which deployed its seven-rig fleet (now grown to ten) in the oil assets of Montana, Wyoming, Colorado and Utah.

So today Capstar has a total of 34 rigs. But it didn’t go out and buy or commission them from the limited number of manufacturers that exist. Instead, it started to build its own. I asked Mike Roghair to explain that, and his answer is a model of Texan self sufficiency: “We liked the design of the rigs we had, which were from the Texas manufacturer Walker-Neer.” In 2002, when Mike Roghair wanted to increase the number of highly mobile, efficient rigs with small to medium depth capability in the fleet, he found that Walker-Neer was no longer able to supply them, so he determined to build them himself.

It was a particularly versatile design, he says. The rigs have different capacities, but they are all semi-automatic land drilling rigs that provide customers with a fit-for-purpose alternative to the traditional box rigs. They are well-suited for development drilling where achieving an efficient operation measured from spud to spud (‘spud’ being the term for breaking the ground with the drill bit) is essential. They are capable of drilling vertical, directional and horizontal wells up to 12,000 feet in total measurable depth.

The key point about this design is that they are highly mobile, have a small footprint and a small crew complement. In fact they can be operated safely by just two people, though “we give them what they want,” says Mike, “They have no rotary table, and no spinning chain – the swivel itself drives the pipe. The driller can work the tongs and break the pipe using hydraulic tongs. We can run them with two men but customers like more so we have been putting three men on them, and if they want more, we can put four men on.”

The first Odessa-constructed rig was completed in 2003, and since then nine have been built and a further two are under construction – these will cost an estimated $13.4 million to build as compared with $20 million that it would cost to buy new or refurbished rigs, so it makes sense. “Originally, we couldn’t find anyone to build our design so we just went out and measured an existing rig, and built our own.” Though Mike admits the idea was a little unconventional (his word is “crazy”) at the time, Oil States gave him the go ahead.

He makes it sound more straightforward than it probably is. “It’s mainly welding. I have about 50 welders on site, and they build the rig itself, the derrick and the unit it sits on. We can’t build everything of course. There is a certain amount of machining work that we have to buy in, and there are the engines and pumps and hydraulics to be installed, but basically we just order a set of axles and build a rig!”

I’m not sure he is doing himself justice. The finished equipment is examined and tested by a local firm, International Derrick Service of Odessa, but the real test is the longevity of the rigs in the field. Additionally, there is a continuous improvement programme in place, though it may not be called that. With engaging Texan directness, he says: “Every time we build a rig they seem to get better somehow.”

This does not happen by accident. “Over the years you find the weak links in these rigs: we have been running them so long that we know how to put them right, like the running equipment and drives for example.” The derricks had to be extended to take the longer pipes that are being used these days, he explains. But this meant that the lifting cylinders had to be changed to cope with the additional loads. Air brakes were exchanged for waterbrakes: The swivels favored by Walker-Neer were changed to King swivels, because “… they hold up better and don’t leak as much oil, and we prefer them.”

It was in fact 15 years ago when the Capstar engineers realized that the right angle drives on the original Walker-Neer equipment were not strong enough. So they went to a drilling equipment auction and bought a 1,000 horsepower replacement. “It did the job. In fact it is still on that rig and has never given us a moment’s trouble. So that is now standard on the new rigs we build.”

With this experience there would be no difficulty in going into the manufacture of rigs and selling them to third parties, but that is not the company’s strategy. It is a cost effective way of supplying Capstar’s own needs, and Mike is happy to stick at that. “We are starting to get some competition from local firms now, who seem to find it commercially viable to build top drive rigs again, but we are really only interested in providing a service to our major customers, people like Chevron, Conoco, EOG, Apache or Energen, who appreciate the flexibility and speed with which we can meet their drilling needs.”

Capstar’s market is generally buoyant, though locally varied. It is winning both short and long term contracts in the Rocky Mountains region, and Mike Roghair is sending two rigs into Oklahoma for the first time.

This is driven partly by the rising cost of oil and the increasing viability of marginal onshore assets, though for some reason the local market in Texas is somewhat flat. This seems to be attributable to over capacity in the Permian Basin. “In order to get a job that you can actually make money on you have to move further afield,” says Mike. “You can keep a rig busy here if you drill for nothing! But there are still a lot of opportunities out there.”