Two Texas oil towns, 38 miles apart: One still booms, one’s dead

Drilling rig

HOUSTON — They are separated by just 38 miles on the remote plains of South Texas, really no more than a quick spin down old Highway 80.

And yet Karnes City and Smiley provide polar-opposite glimpses into what life in a U.S. oil boom town looks like in the wake of last year’s price collapse.

For the townspeople of Karnes City, it’s like nothing ever changed: Roughnecks pack into Stripes gasoline station by the dozens to load up on Doritos and Slim Jims at the end of their shift; giant drilling rigs dominate the horizon in all directions; and the roar of tanker trucks and industrial machinery is never-ending.

Up the road in Smiley, there’s nothing now. No workers in the fields, no rigs, no noise. On a recent weekday morning, a small herd of cattle lazily grazed in the shade by the road as an occasional truck rattled by.

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These two tiny towns, when blended together into a single portrait, illustrate the full landscape of the shale oil industry across not just Texas but also North Dakota, Oklahoma and every other major producing state in the country. The reason: Drillers, desperate to cut costs after the 50 percent plunge in prices, are abandoning fringe fields and focusing their rigs on the sweet spots that produce the most crude. The oil fields in Karnes City are gushers. Smiley’s are not.

“They were drilling the heck out of those wells,” Smiley’s mayor, a retired oil-field worker named Ellis Villasana, said in an interview from his cramped City Hall quarters. “Now we’re at 50 percent what we were a year ago.”

Even that assessment, truthfully, feels a bit optimistic. The tapping of new wells in and around Smiley has almost come to a total halt, according to data compiled by Bloomberg Intelligence analyst William Foiles. In November, the area had accounted for 13 percent of all new wells in Texas’s massive Eagle Ford shale patch. By March, it was down to just 1 percent. In Karnes City, meanwhile, the percentage soared to 19 percent in the first four months of the year from 13 percent in 2014.

It is called high-grading.

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Or as Greg Hill, Hess Corp.’s chief operating officer, put it recently: going to the “core of the core.” In North Dakota’s Bakken region, Hess managed to boost its output by 6 percent to 108,000 barrels a day in the first quarter by ramping up drilling in the best spots at the same time it idled five rigs in costlier sections.

“We’ve collapsed to our core and said things outside the core, we’ll save for a later day,” Hill said on a conference call with investors last month.

In all, drillers have taken down 941 oil rigs across America since the peak in October. That’s 58 percent of the total. And yet U.S. output is forecast by the government to rise for a seventh straight year in 2015, underscoring the powerful effect of high-grading.

In Karnes City, you’ll find some of the country’s top energy producers in action — names like Marathon Oil, Encana and EOG Resources. Workers from Schlumberger, decked out in blue jumpsuits, man the rigs and handle the hydraulic fracturing that opens new wells.

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What makes Karnes City’s shale so valuable is how densely saturated with oil it is, according to Thomas Tunstall, director of the Center for Community and Business Research at the University of Texas at San Antonio. Other fields elsewhere can contain bigger pockets of natural gas or take on a more swiss- cheese-like formation that makes pulling the oil out a less reliable, and much more expensive, operation.

“Karnes City is probably the last place the energy companies will leave and the first place they’ll reoccupy when they come back,” Tunstall said. “The shale there is probably the richest.”

Not so for Smiley. While its shale was plenty attractive to drillers when crude traded at over $100 a barrel last year, there’s little interest at today’s sub-$60 prices. West Texas Intermediate for June delivery lost 10 cents to $59.78 a barrel in electronic trading on the New York Mercantile Exchange at 12:54 p.m. Singapore time.

Villasana, the mayor, was holding court outside City Hall earlier this week, leaning up against his pickup truck as some of the town’s 549 residents strolled by. Next door, the Smiley Grocery Store, home to the “Best Burgers Around,” was empty just a few minutes before noon.

The boom years were good to the town, Villasana said, so good that he’s not panicking yet — rental properties are still mostly filled and the new elementary school is packed after younger families moved into the area.

But he is starting to get anxious.

“If it dips a little more,” he said, “we might start losing ground.”