Shale Technology Investing

Brian Hicks

Written By Brian Hicks

Posted June 17, 2013

The American shale gas and oil revolution is booming now more than ever, but it is also shifting its gears as focus on the reduction of drilling time and limiting costs is becoming increasingly important.

super frackFor the most part, it looks like all the nation’s shale plays from Pennsylvania to Wyoming and down to Texas have been established. There’s little left to find. It’s time now to turn efforts and all of the promises into profit to meet shareholder demands.

There is new hope that by employing new technology here in the States, domestic explorers will catch up to international giants like Exxon Mobil Corp. (NYSE: XOM), who currently sees as much as six times the amount of profit on each barrel of its oil.

U.S. exploration companies spent $53 billion dollars in the past decade to realize the full potential of the nation’s shale resources, incorporating new technologies in horizontal drilling and hydraulic fracturing practices to exploit areas that before were impenetrable.

Production began to soar from that moment on. Wells in North Dakota, Oklahoma, and Texas have spurred a 3.2 percent increase in output this year alone, adding to a 19 percent spike in production since last year – the biggest annual leap in three decades.

That’s staggering. You could say now that the U.S. is entering its next phase in production: economics.

The Bakken Shale, which lies in North Dakota and Montana and is considered the cornerstone for North American energy production, will leave roughly 90 percent of its full potential in the ground if it continues to employ only the primary oil recovery methods being used today; advanced strategies are needed over the next few decades.

The Next Phase

The money has been invested in the land. The vast reserves are proven. Now, the petroleum industry is turning to advancements in technology – imaging data, horizontal drilling, and hydraulic fracturing. It’s time to turn it all on and improve on every aspect to satisfy the more than 10,000 wells that are drilled in the U.S. every year.

EOG Resources Inc. (NYSE: EOG), the largest owner of drilling rights in Texas’s Eagle Ford shale, is looking at overlapping formations that can be tapped simultaneously to extract more quantities of crude at a given time.

Some companies are refining their techniques and equipment to increase output by drilling sideways through the length of a shale field to put the well in better position to extract more than a traditional vertical well; little tweaks like that are being made to raise output and cut costs.

One company, Newfield Exploration Co. (NYSE: NFX), is drilling lateral wells that are two miles long – ten times the length of the directional bores used in the last decade. By incorporating this method, the company has cut costs by more than half to about $1,000 a foot.

The payoff of using this approach is still unproven as major explorers like Chesapeake Energy Corp. (NYSE: CHK), Devon Energy Corp. (NYSE: DVN), QEP Resources Inc. (NYSE: QEP), and Southwestern Energy Co (NYSE: SWN) are all beginning to employ new methods of going deeper-farther-faster.

The goal of today’s drillers and the job of the manufacturer is to find a technique that can be used repeatedly.

If you take a look at the exploration and production index, the best performers were Denbury Resources Inc. (NYSE: DNR) and Range Resources Corp. (NYSE: RRC), the second largest holder in the Marcellus Shale. Both of these companies have been using carbon dioxide to coax more oil from wells. It is injected underground to increase the subsurface pressure and force more oil through dense rock layers and into the oil wells.

Each of those two recorded better ratings than both Chevron Corp. (NYSE: CVX) and BP plc (NYSE: BP).

Still, this technique may prove difficult in regions like the Bakken, which is made of many fractured horizontal seams. Where it does prove successful, though, Denbury has made a business of capturing carbon and shipping it to different oil fields.

If enhanced recovery methods can add just 5 percent to what is already produced, that would double the amount of output.

Chesapeake, according to Bloomberg, has reduced the time it takes to drill in the Eagle Ford from 25 days a year ago to just 18 today. It’s done this by going farther horizontal. Chesapeake hopes to eventually get that number to 13 days. In Ohio’s Utica shale, the company has lowered its cost of a new well from $8.5 million to $5.9 million – a 30 percent drop.

Halliburton Co. (NYSE: HAL), the world’s largest provider of hydraulic fracturing, is finding ways to cut costs and bolster efficiency before the drill ever touches the ground.

Three-dimensional modeling of subterranean formations help producers analyze the terrain they are working with, where they can predict possible outcomes, and the permeability of the reserves. Knowing certain factors can show drillers precisely where to aim their drill bits.

These 3-D imaging innovations have the industry light years ahead of where it was ten years ago.

Technology Progress

Laboratory testing has proven advanced techniques to be promising, but only time can prove their effectiveness and if they will be affordable. The lab is like a playground where amazing things are possible, but translating that kind of success to real world situations doesn’t always work. It takes time and a lot of good field testing before it can be proven.

But if advancements prove even mildly successful – even a relatively small improvement in the Bakken, for example – they would have a big impact on U.S. oil production.

It’s more than worth the time and effort.


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