November 2017 /// Vol 238 No. 11

Columns

Energy Issues

Fickle fracturing

William J. Pike, World Oil

Hydraulic fracturing is never far from the news. If it isn’t killing folks and polluting ground water, then delivery of the proppants and pumping equipment is tearing up roads and infrastructure. Now, two questions have been raised that have serious implications for the continuing application of fracturing, particularly to shale formations. The first is, “is it even worth it” and the second, “can we find enough personnel to continue it?”

Decline rate concerns. Under the “is it even worth it” banner is the recently emerging question of the benefits of large, multi-stage frac jobs versus the risk of faster decline rates in tight oil plays. “Although the techniques have raised initial flowrates by up to 30% in some wells, the intensive fracing is depleting the source rocks faster, risking a sharp rise in future decline rates,” according to Bernand Duroc-Danner, the former CEO of Weatherford International. "If you're going to be fracing closer zones like crazy—lots of sand, lots of water, lots of pressure—you drain the hell out of those zones which is why production goes up," Duroc-Danner told the Oil & Money conference in London, according to Robert Perkins and Jeremy Lovell of S&P Global.

Among others concerned about an increasing decline rate in fractured shale wells is Wood Mackenzie, which “recently flagged similar concerns over the production outlook for the Permian basin, the world's top shale play.” The company predicts peak Permian production by 2021, according to S&P Global, “putting more than 1.5 MMbpd of future production at risk.” 

Others, like Rystad Energy’s Per Magnus Nysveen are somewhat more positive. “What we have seen in the data is that there is not a terminal decline after 10 to 15 years,” he said. “The wells seem to stay relatively robust, producing 40-to-50 bpd, when they are getting old.”

Personnel shortages. But potential, increased decline rates, due to fracturing, are not the sole concern in tight plays, especially in the Permian basin. There is also the problem of crew shortages for fracturing operations. Bloomberg said that “Independent U.S. drillers underspent their first-quarter budgets by as much as $2.5 billion collectively, largely because they couldn’t find enough fracing crews to handle all the planned work, according to Infill Thinking LLC,” a research and consulting firm focused on oilfield services and exploration. That is because “oilfield-service companies contributed the largest percentage of more than 441,000 jobs slashed globally, as prices plunged from more than $100/bbl over the last three years,” said Houston-based industry consultant Graves & Co. And workers, who have lost more than one job in recent oil and gas industry downturns, are not exactly rushing to return to this workforce. If the scarcity holds, output increases planned for this summer may get pushed into 2018, creating an unanticipated production bulge with “scary” implications for oil prices, said Joseph Triepke, Infill’s founder. 

Now, with the price of oil settling at around $50/bbl, shale drillers are once again gearing up in areas such as the Permian basin, where break-even costs are as low as $30/bbl. The subsequent demand for fracturing is resulting in increased pressure for higher prices by fracturing providers. Fracturing companies are now charging 60% to 70% more than a year ago, as operators engage in bidding wars to lock up crews, according to Infill data. And, if operators don’t pony up the extra cash, fracturing companies often hit the road (even if they have to pay a penalty to do so), to do more profitable jobs. “Every single pressure pumper is saying their order books are full through the third quarter, and some as far ahead as the first quarter of ’18,” said Bloomberg Analyst Andrew Cosgrove.

Although a bit of the problem concerns equipment shortages, that jump in prices and availability is directly related to the shortage of fracturing personnel. It could get worse. Next month, a shortage of truck drivers could worsen. According to Collin Eaton in the Houston Chronicle, “the Department of Transportation will begin requiring truckers to use electronic logs to keep track of the time they spend on the road and idled—a rule that will make it harder for truckers to work beyond certain driving time limits. Many veteran drivers, who would likely earn less under these new rules, are expected to retire.” According to Chris Welcher, safety director at Horizon Transportation, a frac sand trucking company in Midland, Texas, “we’ll need more truckers, and at some point, it’ll have to affect the oil companies,” through higher fees.

Despite increasing decline rates in newly fractured wells, and despite crew and equipment shortages in the fracturing industry, most independent shale operators are confident enough that they will be able to find fracturing crews and equipment, that they are leaving their double-digit output growth targets intact, says Bloomberg. That’s gutsy, especially if, as some predict, leaving these output targets in place might lead to increased production, which would spur a downturn in activity, as prices slip lower in early-to-mid-2018. 

If you have been in the industry as long as I have (or a much shorter period, for that matter), your head is probably nodding up and down in agreement, soon to be replaced with a side-to-side wag in recognition that this is the umpteenth time that you have seen this happen. Will it happen again?

Without doubt it will. It is not if, it is when. And when it does, will we take a lesson from it? There is a 95% chance we won’t. So, my only recommendation is to grab a big bottle of pain killer and settle in. You will need it next year . . . and the next . . . and the next . . .  wo-box_blue.gif 

 

The Authors ///

William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.

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