The oil & gas industry is among the largest industries in the world. The sector generates large revenues and employs a large number of people in order to meet the worldwide demand for energy. However, this has been a very complicated industry to operate in. Oil is very valuable and the world economy depends entirely on it today. This industry has gone through many challenges in history that began as early as the 15th century.
The US holds about 2.1% of the world’s oil reserves, placing it in the 11th rank and this industry is being handled by various organizations. Surge Energy is one such organization that is involved in the acquisition and development of onshore oil & gas properties in the USA. CEO Views team had Linhua Guan, CEO with us to brief us on how Surge Energy was established, the reason for their success, and what they have planned for the future. Mr. Guan has been the CEO of Surge Energy since May 2019.
Surge Energy is an independent oil and natural gas company focused on the development, exploitation, and acquisition of oil and natural gas reserves in the Midland Basin of West Texas, one of the three primary sub-basins of the Permian Basin. The Company is headquartered in Houston, Texas, with field offices in Ackerly, Texas, and Lorenzo, Texas. Surge operates two oil fields, both in the northern Midland Basin with a combined leasehold position of 114,000 acres.
Surge’s Inception and Early Leadership
Surge Energy America (“Surge”) was formed in early 2015 as a U.S. subsidiary of China-based Shandong Xinchao Energy Corporation Limited (“Shandong”), a publicly-traded company on the Shanghai Stock Exchange, with a strategy to build a sustainable U.S. oil & gas company. Surge’s early leadership in the U.S. consisted of three seasoned executives comprising combined expertise of over 75 years in the oil & gas industry. Dexter Burleigh (CEO), Phil Webb (COO), and James Welch (CFO) came to Surge with the goal of building a company on the values of safety, integrity, transparency, excellence and teamwork and with a focus on innovation. These values are known inside Surge Energy as “Simply Who We Are”.
Surge Energy’s goal since the founding of the company has been to build a long-term, sustainable oil company.
Innovation Within Surge Energy
When Surge established itself in the Permian Basin as a developer and operator of onshore oil & gas properties, its leaders were focused on building a company with a focus on innovation. Since 2017, Surge has embarked upon two initiatives allowing its team to flex their innovation muscle while creating a significant benefit for the surrounding environment.
The first initiative, which began in mid-2017, was tied to water usage and the challenges created when drilling and completing wells in Surge’s primary operating area, the Northern Midland Basin. The well-completion process known as hydraulic fracturing (“frac” or “fracking”) creates a large need for water. However, once a well is online, it can produce three to five barrels of water for every one barrel of oil that is produced, creating a surplus of water that is saline versus fresh. Recognizing an opportunity for improvement, Surge began focusing on efforts to mitigate the financial and environmental cost of fracking wells with fresh water while simultaneously disposing of excess produced water for each well completed. Since the start of Surge’s produced water recycling program, the cumulative volume of fresh water conserved is approximately 80 million barrels, enough to provide ten gallons of fresh water to every American. This conservation effort is especially important to the dryer regions of west Texas where Surge operates. Additionally, Surge’s water pipeline system eliminated approximately 500,000 truck trips on local roads and saved over 5 million truck miles in 2020 which eliminates emissions associated with diesel trucks.
Following the water management initiative, in late 2018 Surge looked to the next opportunity – oilfield electrification through powering operations with utility power instead of diesel and natural gas running generators. After vast amounts of planning, Surge solved its problem by constructing a company-owned electrical distribution system strategically located and sized to service 100% of Surge’s Moss Creek oilfield electrical demand at the time.
This transition from on-site generator power to electric grid power created an operational and financial upside for Surge, but the environmental impact cannot be ignored. Removing the on site generators resulted in a reduction of about 150,000 tons of CO2 emissions in 2020 alone. Also in 2020, in addition to reducing on site generators, Surge reduced its flaring percentage relative to produced gas by 73% relative to 2019, which substantially reduced the company’s GHG emissions. This was achieved despite the fact that gas production volumes increased year-over-year.
Surge’s Display of Resilience
During 2020, a truly unprecedented year due to the COVID-19 pandemic and a market dip creating the lowest oil prices in recorded history, Surge demonstrated resilience operationally and financially. An effective reduction in drilling activity and temporary curtailment of production, coupled with a strong balance sheet and hedging strategy, allowed Surge to sustain through the perilous year. Surge not only maintained its existing $850 million credit line but also finished the fiscal year with positive cash flow and its best safety record to date in the history of the company.
In 2021 Surge emerged with the closing of two acquisitions during the first half of the year, adding a combined 22,000 net acres. Also during this time, Winter Storm Uri produced record cold temperatures for the state, side-tracking Surge’s employees for a week to manage a completely shut-in oil field and their personal homes which were rendered, in many cases, with no power or water. Yet, the Surge team persevered and successfully closed on the $420 million deal, as planned, at the end of the first quarter of 2021. Shortly after, the team used the same processes, talents and skills to close on the second deal in July 2021 for $37.5 million USD.
Roadmap for the future
Surge Energy’s goal since the founding of the company has been to build a long-term, sustainable oil company. This goal is achieved by acquiring assets with substantial drilling inventory and then developing the acreage. In 2021, Surge executed two acquisitions which increased its leasehold position by 22,000 acres (20% increase). Coupling existing production with the addition of two acquisitions in 2021 helped Surge grow the scale of its business, resulting in greater purchasing power and lower costs going forward. With the increased inventory life, Surge will continue growing revenues, resulting in more tax benefit to the state of Texas, greater wealth creation for its partners and royalty owners, and further job security for its employees. Since inception, the Company has paid over $1 billion in royalty and working interest payments to mineral owners while the State of Texas and several counties within Texas have received over $190 million of production and value related taxes.
In pursuit of its standing goal, Surge will continue to look for opportunities to grow the portfolio as well as grow the business organically by finding new opportunities within the portfolio to power the nation and create wealth for its society.