'Fracing' Technique Creates Great Opportunity in Exploration of Oil and Gas

One of the two most important technologies in the development of the natural gas market in the last few years is “multi-stage fracing” (pronounced “fracking”), which is short for fracturing, as in fracturing the rock in which the oil and gas is held. (The other technology is Liquid Natural Gas, or LNG).

Fracing is sending a specially designed fluid down the oil or gas well at high pressure and blowing it out into the reservoir rock to create cracks and channels through which the hydrocarbons can get to the well. How big an impact has multi-stage fracing [MSF] had? Once the industry figured out how to frac the shale rock formations to get at all the natural gas they hold, it opened up huge new reservoirs across North America, and is the leading reason on the supply side as to why the price of natural gas has plummeted.

It’s exciting for the industry and investors because improvements to MSF are still being made - the industry is continually getting more production, more fracs, or stages, per well. Initial fracing was done in 4 stages over 500 meters. Now you can see 16 stages over a 1600 metre horizontal length. (One active fracing company said this week that the average Montney well has 7-12 fracs).

The industry hasn’t hit the end of what MSF can do; innovation is still happening. And they’re fracing tighter and narrower reservoirs or payzones. One of the largest oil discoveries in North America is the Bakken play, which straddles the Dakotas and Saskatchewan (the U.S. Geological Society estimates over billion barrels are there) - but the zone can often be as narrow as 3 metres, or 9.5 feet. And a properly fraced horizontal well greatly improves economics. A frac can create kilometers of contact area for the oil or gas to flow into the well. Even though it costs twice as much as a vertical well, production can increase 400-700% and give payback to the operator in only a few months.

But a picture says 1000 words. To really understand visually what multi stage fracing is, see this video.

When I’m doing my research for the stocks in my portfolio, one of my key questions for any management team is - how large an undeveloped land package do you have in oil or gas formations that would use MSF? It’s also why, at any given time, the many oil and gas analysts and fund managers across North America, are studying how successfully energy producers are using MSF. Most analysts rate companies that use MSF as their top stock picks.They are writing entire research reports on the topic. Whenever an oil/gas producer reports their quarterlies, analysts ask how many horizontal wells, how many fracs, or stages, per well.

Fracing is so specialized that there are entire public companies dedicated to just that, such as Calfrac Well Services (CFWFF.PK), Canyon Services Group (FRC-TSX; $2.30) and Trican Well Services (TOLWF.PK). This brief article is meant to give retail investors just a quick look into a technology that is changing the industry and stock valuations.

“The changes in fracing in the last four years is mind boggling,” one industry executive told me. It used to be two to four trucks and a water tank, on one acre. Now it’s at least 10 trucks, multiple tanks holding various fluids, all on about eight acres.

While completing the frac itself is now done in a single day, he says… “The logistics and planning a frac job are now unbelievable. It’s now a two month job, getting the water setup, sand and equipment into location and recycling all the water.”

“And the geology of the rock now being drilled has changed. It used to be high porosity and permeability. Not anymore.”

Porosity is the volume of spaces within rock that might contain oil and gas. Permeability is how easily the oil or gas can flow through the rock.

For permeability, think of it this way - when a wave washes over beach sand the water flows through the sand this is - highly permeable. Most of the “easy” oil and gas has come from rocks like that; it’s the low hanging fruit. And in North America anyway, almost all of that is gone.

Now think of a solid granite countertop. That is not so permeable. That rock is “tight”, hence the name “tight gas”. The big exciting shale gas plays that have huge reserves and produce big boomer wells come from this type of tight rock.

The permeability of the shale gas host rock is 1/1000ths or less of what the type of reservoirs that were drilled only a decade ago. There are a few new reservoirs being found in the world with porosities of 30%. But all the new shale gas is in the order of 1%.

The key to getting that oil and gas out is knowing how to frac it. Fracing is an art as much as a science. Now if you if you drop a granite countertop, it shatters into 1000 pieces. If you could put every piece back together, you could still see the cracks around each piece. Those cracks are where the oil & gas would flow.

This is what fracing is doing the shale. It is exploiting natural cracks that exist in the rocks by reopening them and allowing flow.

One of the big differences in fracing from years ago is the fluids. A “cube” is 1000 litres of fluid which is pumped over time, and fracing companies used to send 2.5 cubes per minute of highly viscous (gooey, Jello like) fluid down a normal vertical well bore.

Now the rate they send fluid down a hole is more than 5x that, at 16 cubes. Companies have to be careful not to interfere the surrounding layers of rock (formations), which may have different characteristics than the reservoir they were drilling for. Say, for example, the neighboring formation had a lot of water in it. If the frac is not controlled (too strong) it can break into the adjacent zone and all that formation water could flow into the well and ruin it.

The water used for the new tight gas is not viscous - it is treated to be slippery-slick so it can be pumped so quickly. The slick water is brought back up to surface after the frac and recycled.

The geology or size and type of the formation are key in determining how long a horizontal well will get and how many fracs, or stages, along the length of the horizontal well. The initial wells into a new formation, such as the ones that were drilled into the Haynesville Shale in Louisiana or the Horn River shale in Canada - can be expensive; over $10 million each.

The design is tweaked and the treatments altered to get the maximum amount of contact area in the rock for the oil and gas to flow out. As companies gain experience and build a database of knowledge, costs come down quickly.

Different fracing techniques do come out into the public domain, but slowly. If a company can figure out how to correctly frac a big play, it has a huge competitive advantage.

So what can investors take away from all this detail?

MSF has opened up huge new reservoirs of gas in North America. And it really hasn’t even been used that much outside of North America - so it has potential to create many trillion cubic feet of more economic gas around the globe.

The much larger wells that MSF creates is lowering the cost of production. And MSF is still improving - management teams are still getting more and more production out of tighter and narrower formations.

When investing in an oil and gas producer, ask them how much they use MSF, because the economics of these wells, when they hit, are much better than conventional vertical wells. Producers who are drilling formations that can’t use MSF will most likely be high cost producers in the future.

Comments

[Roger Knights:]

"Sneak Oil"?

May 20 06:11 AM

[Tom Armistead:]

The oil field services industry is under considerable pressure due to the reduction in rig counts and low natural gas prices. At low points in the cycle, the larger players look to acquire the weaker players for the cost of their equipment.

Unless you can demonstrate that these pink sheet cases you are recommending are well financed and profitable, or possess unique technology, I don't understand why you would buy them instead of companies such as BJS or SLB.

May 20 06:16 AM

[Bruce Vande...:]

Thanks for the great article explaining the fracing technology. Suddenly we now have lots of gas and the price shows the overabundance of supply. I'm wondering, however, how successful is fracing increasing oil recovery. At this point we need oil more than gas.

Long term you can see gas more and more replacing oil as an energy source (vehicles when?).

May 20 09:24 AM

[bobbobwhite:]

A big concern should be about what the pumped fluids are doing to degrade underground water and the overall environment. When fracing gel is put down those pipes, isn't it going to get into the underground water resources at some point? What is the gel made of? Is it a harmful polutant, or what? What has the public been told about it? And, if fracing works for oil and gas, it sure will work for water too at the same time, maybe inadvertantly, but still possibly allowing polluted water to combine with other water that could make it into someone's well or even a city municipal supply.

My questions are concerning the potential long term public consequences of water supply pollution due to the pumping of fracing "solutions" into bedrock. Anyone here have any real info that is not tainted by self interest?

May 20 11:02 AM

[Steve Ward:]

I and my father have 50 years experience in the oil business (Amoco) and one thing I have learned is that the industry can be its own worst enemy at times. Here are two examples: The Marcellus Shale in Pennsylbania. Several explorcos have failed to cement the well casing at the water table depth and the result is a disaster for the property owner and his water supply. The explorco's answer: "Gee whiz, the land owner should have specified that cement casing in the land and royalty agreement"
Dumb, damn dumb.

Second example: the Baaken. A major lawsuit on the pollution of streams, here primarily high concentratuions of salt where the cattle still will not drink even though the explorco said they cleaned it up.

a third example, Pinedale Wyoming: wells so filled with aromatic hydrocarbons that the state had to seal them off due to their explosive nature. The explorco answer: "Gee whiz, a truck filled with benzyne must have turned over."

I love the oil business and the new technology could save this country's butt, but as long as the industry has yahoos like the above the industry will suffer from more land that is off limits.
Obama is different: he bekieves NG is a pollutant. The industry needs to police their own with serious consequences for those who thumb their noses at the obvious problems.
At the rate we are going, I'm investing in Canadian gas. The gas industry is on a course to kill itself off.
Dumb, damn dumb.
But darn good article.

May 20 11:51 AM

[Keith Schaefer:]

I'm sorry I don't understand - I don't mention any pink sheet companies - I do see two symbols there at the end of the article which I did not insert and have never heard of...maybe the Seeking Apha guys put them there...??? I don't look at a stock that has more than 3 letters in its symbol.


On May 20 06:16 AM Tom Armistead wrote:

> The oil field services industry is under considerable pressure due
> to the reduction in rig counts and low natural gas prices. At low
> points in the cycle, the larger players look to acquire the weaker
> players for the cost of their equipment.
>
> Unless you can demonstrate that these pink sheet cases you are recommending
> are well financed and profitable, or possess unique technology, I
> don't understand why you would buy them instead of companies such
> as BJS or SLB.

May 20 11:53 AM

[Joe Bruin:]

Thanks for the great article. It was very educational.

May 20 11:56 AM

[True North_:]

Re: Tom's comments: The two "pink sheet" companies are TSX-listed entities. They trade as pink sheets in the US because they aren't prepared to undertake the cost/trouble of setting up as fully inter-listed stocks. Calfrac is rated "outperform 2" by Raymond James, with a C$14.00 target price. It is operating in Canada, the US/Latin America and Russia. Trican is also rated "outperform 2" by RJ, with a recently increased target price of C$11.50. They operate in Canada, the US & Russia.

This is not a recommendation of either stock - merely an indication that certain of the stocks which are traded as "pink sheets" down in the US may bear looking as they are fully listed on the TSX (a classic example is Canadian Oilsands Trust, which owns about 37% of the Syncrude project (about 125,000 bbl / day production to COS.UN) and has about 40 years of reserves).

May 20 12:01 PM

[anarchist:]

If your are recommending these two stocks (no disclosure given)would you publish the TSX symbols for them?
Thanks for the info.


On May 20 11:53 AM Keith Schaefer wrote:

> I'm sorry I don't understand - I don't mention any pink sheet companies
> - I do see two symbols there at the end of the article which I did
> not insert and have never heard of...maybe the Seeking Apha guys
> put them there...??? I don't look at a stock that has more than
> 3 letters in its symbol.

May 20 12:43 PM

[pockyclips ...:]

Fracing is economically and enviornmentally expensive. Low population density and a primary fresh water source other than groundwater are required. Investment in other than companies with deep pockets or established lines of credit is tempting fate.


On May 20 11:02 AM bobbobwhite wrote:

> A big concern should be about what the pumped fluids are doing to
> degrade underground water and the overall environment. When fracing
> gel is put down those pipes, isn't it going to get into the underground
> water resources at some point? What is the gel made of? Is it a harmful
> polutant, or what? What has the public been told about it? And, if
> fracing works for oil and gas, it sure will work for water too at
> the same time, maybe inadvertantly, but still possibly allowing polluted
> water to combine with other water that could make it into someone's
> well or even a city municipal supply.
>
> My questions are concerning the potential long term public consequences
> of water supply pollution due to the pumping of fracing "solutions"
> into bedrock. Anyone here have any real info that is not tainted
> by self interest?

May 20 12:58 PM

[maxiedog:]

Hydraulic multi-stage frac-ing is a mature technology in use for decades. There is nothing very special or proprietary in its application and SLB ( and its old JV Dowell Schlumberger ) were originators and masters of the art. I am sure that Halliburton etc. now also have good capabilities.

May 20 01:56 PM

[bricki:]

This technology has been around for a long time. Search Google for enhanced oil recovery, tertiary oil recovery etc. and you will be able to read reams on it.

Some of the more advanced techniques like CO2 injection have pretty low environmental impact.

On May 20 11:02 AM bobbobwhite wrote:

> A big concern should be about what the pumped fluids are doing to
> degrade underground water and the overall environment. When fracing
> gel is put down those pipes, isn't it going to get into the underground
> water resources at some point? What is the gel made of? Is it a harmful
> polutant, or what? What has the public been told about it? And, if
> fracing works for oil and gas, it sure will work for water too at
> the same time, maybe inadvertantly, but still possibly allowing polluted
> water to combine with other water that could make it into someone's
> well or even a city municipal supply.
>
> My questions are concerning the potential long term public consequences
> of water supply pollution due to the pumping of fracing "solutions"
> into bedrock. Anyone here have any real info that is not tainted
> by self interest?

May 20 02:12 PM

[Keith Schaefer:]

No, they are not recommendations. Calfrac is CFW and Trican is TCW.


On May 20 12:43 PM anarchist wrote:

> If your are recommending these two stocks (no disclosure given)would
> you publish the TSX symbols for them?
> Thanks for the info.

May 20 06:15 PM

[Wisdom vs. ...:]

in frac, we write 'fraccing.' what is new is not fraccing, it is multistage fraccing, where we frac multiple zones during one frac (non-stop) instead of wireline (or worse, coil tubing) going down to clean/ set the plug; or, we frac in multiple stages over several days, instead of returning on a later date. either way, this saves a lot of money

stockwise, this is nothing new; i personally did over twenty multistage fracs LAST year. small frac companies generally do not have the capability to complete a multistage frac at this time

no, frac fluids do not enter the groundwater, and no, fraccing does not effect the environment 99.99% of the time. can't you fascists be happy socializing everything on the ground? some idiot in congress was talking about regulating fraccing b/c of non-existent groundwater issues; there is no end to your proud ignorance

May 20 07:56 PM

[been there:]

frac jobs were developed by amoco in the 1950s. they patented it and at one time you paid them a royalty so many dollars per hydraulic horse power used on a frac job. you can refrac a well over and over but each time you have to do a higher hydraulic horsepower job.expensive.

May 20 09:09 PM

[User 260742:]

Groundwater in most areas is 0-1000 feet. Many places more, but most frac jobs are done @ 2-3000 feet, 8000 feet, anywhere down to 25,000 feet. Very rarely does fracing come anywhere near groundwater.

May 20 09:26 PM

[AlphaZedder:]

How can one determine what percentage of a business is "fraccing." I'm looking at Precision Drilling" pd.un/pds, which just got uprated to $8CAD by some author in the financial post... how do I determine how much "fraccing" it does?

May 20 09:35 PM

[Canuck Inve...:]

The Baken is an oil formation, so, yes it has an effect on oil recovery but most fracs are done on natural gas wells. Gas flows far more easily than oil so a frac has a bigger effect on a gas well.


On May 20 09:24 AM Bruce Vanderveen wrote:

> Thanks for the great article explaining the fracing technology. Suddenly
> we now have lots of gas and the price shows the overabundance of
> supply. I'm wondering, however, how successful is fracing increasing
> oil recovery. At this point we need oil more than gas.
>
> Long term you can see gas more and more replacing oil as an energy
> source (vehicles when?).

May 24 01:06 PM

[Shale Gas:]

A study done in the Fayetteville Shale said that it would take more than 800,000 years for frac fluid to vertically migrate from a well drilled at a depth of 4,000 feet to reach an aquifer at a depth of 750 feet.


On May 20 11:02 AM bobbobwhite wrote:

> A big concern should be about what the pumped fluids are doing to
> degrade underground water and the overall environment. When fracing
> gel is put down those pipes, isn't it going to get into the underground
> water resources at some point? What is the gel made of? Is it a harmful
> polutant, or what? What has the public been told about it? And, if
> fracing works for oil and gas, it sure will work for water too at
> the same time, maybe inadvertantly, but still possibly allowing polluted
> water to combine with other water that could make it into someone's
> well or even a city municipal supply.
>
> My questions are concerning the potential long term public consequences
> of water supply pollution due to the pumping of fracing "solutions"
> into bedrock. Anyone here have any real info that is not tainted
> by self interest?

Jun 06 11:32 AM

[Heyreadthis:]

For those of you who have somehow got the idea that modern frac jobs affect water supplies I would like to offer this analogy. In the Barnett shale, site of hundreds and hundreds of high pressure frac jobs, there has never been an instance of groundwater pollution. Imagine a distance of over one mile vertically. Now imagine that there is a mountain that is one mile wide, made of solid rock. On top that mountain is a swimming pool. Between you and an object on the other side (a section of oil and gas bearing rock sandwiched between hundreds of other layers of various rocks including limestone, shale, sandstone, chert, etc. A hole is drilled through that rock and lined with brand new steel, half as thick as a paperback book. Now the entire hole between the steel and the mountain is filled with cement which hardens. Now a high pressure pump is hooked up and fluid is pumped through the hole to the other side of the mountain. Then the process is finished. It is a one time deal. The high pressure does it's job on the pocket of natural gas sandwiched between the rocks on the other side of the mountain. The people in the house on top of the mountain, and their swimming pool are safe from any pressurized water - fluid mixture. About as safe as you can get. While my analogy isn't perfect, people not in the energy industry need to recognize what kind of separation is involved and that there are many, many tests to ensure that the cement and pipe is intact before a frac job occurs.

Aug 20 05:39 PM

[Joseph33:]

Wow! "oil and gas investments" is the search hot trends today in google. If you know where to put your investment safe i’m sure it’s a big success. Good article. Let’s promote clean energy explain all the benefits that you have in your global business investment.
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Nov 18 08:54 AM