On December 5, 2013 shares of GasFrac (OTC: OTC:GSFVF) soared 11.67% with trading volume 80% above its three month average. That's what we call a real breakout move. So what happened, and what is GasFrac?
The short answer is that BlackBrush Terrace LP ("BBTLP"), a partnership between BlackBrush Oil and Gas, L.P., and Terrace Energy Corp, announced on December 2, 2013 the successful completion of its first well (the Chittim Heirs 2-H) in the Eagle Ford Shale formation in Maverick County, Texas. That well used GasFrac's patented technologies and came in much better than expected and at a cost savings to the partnership. Previous drillers in that section of the Eagle Ford Shale formation had met with failure because of the formation's shallow depth and lower reservoir pressure.
So, who again is GasFrac? GASFRAC Energy Services, Inc., is an oil and gas technology and service company headquartered in Calgary, Alberta. The company is the sole provider of waterless gelled LPG fracturing technology in North America. Its shares trade on the OTC market . With so many other fracking service companies out there what makes GasFrac different and why should you care?
Within the last few years, the production of natural gas and petroleum in the United States has reversed a 40-year decline and production now stands at an all-time high. That growth is projected to increase into the future and the International Energy Agency has projected that the United States will shortly become the world's number one oil and gas producer, surpassing the current title holder, Saudi Arabia. "The United States will be the largest oil producer in the world in 2017, larger than Saudi Arabia. This year's findings confirm this trend; maybe even in 2015", Fatih Birol, chief economist of the International Energy Agency (IEA).
Much of this success can be traced to the development of a technology known as shale hydro-fracturing or, as those in the industry refer to it, hydro-fracking.
Hydro-fracking consists of drilling holes down into and then horizontally along strata of hydrocarbon-bearing shale rock and then forcefully injecting millions of gallons of pressurized water containing proppants (usually treated sands or ceramic material provided by companies such as Carbo Ceramics (NYS: CRR)). These grains are called proppants because after the shale has been fractured, the tiny grains prevent the shale rock from collapsing back onto itself and sealing off the newly created highways to allow the oil and natural gas to escape the formation and be pumped to the surface. They "prop" open the cracks.
While highly successful, hydro-fracking has some concerns and drawbacks. Foremost are the enormous quantities of water that are needed. The average well takes some 7 to 8 million gallons of water to frack. That alone presents a multitude of problems. First, sources of water need to be fairly close at hand. The water has to be trucked in to the drill site. Then, after the fracking job is completed, the water must be retrieved and disposed of. This last step presents even more problems to overcome.
The water cannot simply be dumped into a river or lake. And if the rock formation under consideration is located in an arid region or an area facing long-term drought conditions, the lack of readily available water can put an end to any thought of drilling. Maverick County, Texas is located in the extreme southwestern corner of Texas a place well-known for its arid climate and has been in severe drought conditions for at least the past three years. The National Oceanic and Atmospheric Agency has forecast that this region will remain in drought, possibly for as long as the next 15 years.
Many chemicals are used in the fracking mixture. Often the mix is not well known because the chemicals used are almost always proprietary and carefully guarded secrets of the service companies. Additionally, when the water is brought back out of the fracture zone, it has picked up other chemicals (often salts) and, occasionally, radioactive material from within the rock strata.
Shales are rocks formed from the long compression of mud deposited on the floor of ancient sea beds. As such, various salts will have been incorporated into the rock and these will dissolve out of the rock from the water injection. These and other chemicals will make their way back to the surface as the hydro-fracking fluids are retrieved.
Lastly there is the problem of incomplete water retrieval. No matter how good the hydro-fracking technology is, some water will always be left in the fracking zone and can do damage to the rock formation. Ordinarily, maybe not such a big deal, except the water that remains can block the escape of the very oil and gas the drilling company was seeking. From an economic standpoint, not the best return on the drilling investment. This was one of the reasons cited by BlackBrush Oil and Gas, L.P. in its decision to sign a long-term agreement with GasFrac in its Texas Eagle Ford holdings.
The northern end of the Eagle Ford formation has a shallow depth and lower reservoir pressure making it difficult to recover and unload the large volumes of water used in hydro-fracking. This fact led to the abandonment of the original drill hole by the previous Maverick County driller. In stepped Terrace Energy Corp. and their partner, BlackBrush Oil and Gas, L.P. BlackBrush elected to go with GasFrac's LPG fracturing technology. The decision proved to be extremely successful.
GasFrac's technology has proven successful all over North America. Used extensively in Canada, mostly by their largest customer, oil and gas company Husky Energy, GasFrac entered the United States in 2011. Jadela Oil Corp., a Canadian exploration and production company, fractured its El Indio No. 1 horizontal well in Maverick County near Eagle Pass using GasFrac's LPG technology.
And it's not just small E&P companies using GasFrac's technology. Major international oil companies have been using their LPG process for years, although keeping a tight lid on this "secret" drilling advantage. Buried on page 17 of Chevron's 2011 annual report, was a reveal that Chevron (NYSE:CVX) was using GasFrac's LPG process in the Piceance Basin of northwestern Colorado. Royal Dutch Shell has reportedly tested GasFrac's LPG process as well.
More recently, GasFrac entered into a Memorandum of Understanding with eCORP International, LLC to provide its LPG technology and expertise in the exploration and drilling of oil and gas in the Marcellus and Utica Shales of New York and Pennsylvania. GasFrac has also signed an MOU with eCorp to introduce the GasFrac technology in Western and Central Europe.
Some in the industry have criticized GasFrac for not providing information on the success of their technology, but that information belongs to the drilling companies that employ GasFrac's service. However, in 2011 a professional paper was published by the Society of Petroleum Engineers regarding the success of LPG fracking in the McCully gas field, located near the town of Sussex in southern New Brunswick, Canada. McCully had previously been hydro-fracked with water, then with GasFrac's LPG technology so a ready comparison could be made. The study reported that both clean up and initial well performance for the tight sands of the McCully field were "significantly enhanced using LPG fracs rather than water fracs". The published paper can be ordered from the SPE for $25.00.
So why should you care about GasFrac? Because GasFrac is the future of fracking. Its LPG process eliminates the environmental problems associated with hydro-fracking. It eliminates the problem of the lack of water in arid or drought-ridden locations. The process enables faster production after fracking. Not being water, the LPG gel vaporizes and returns to the surface with the oil and gas from which it can then be separated and reused. And not being water also means that ancient salts buried within the rock formations remain there. Salts don't dissolve into propane gel the way they do in water. So there's no saltwater for disposal. That means no wells need to be drilled to force the saltwater back into the rock. That saves drillers money and time. And, according to the paper published by the Society of Petroleum Engineers, LPG-based fracking significantly enhances initial well performance. And when shallow or low-pressure shale formations prevent the use of hydro-fracking, LPG gas-fracking can re-open abandoned wells and make them productive. Not a bad combination.
Time Magazine recently named GasFrac's "waterless fracking" one of the 25 Best Inventions of 2013. We won't tell Time that it's been around a bit longer than that.
As more oil and gas extraction takes place in the arid western United States, GasFrac will be there. As the development of the Marcellus and Utica Shales of the eastern United States takes place and environmentalists argue that the drinking water must be protected, GasFrac will be there. As fracking eventually becomes acceptable in Europe, GasFrac will be there. And, most importantly, when the nations of the desert Middle East (in particular, Saudi Arabia) turn to fracking to release their enormous shale gas potentials, GasFrac will be there. It is not a stretch of the imagination that GasFrac may be the focus of acquisition activity by one of the major international oil companies at some time in the future.
Disclosure: I am long OTC:GSFVF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.