This article is the third in a series of articles discussing the most neglected and ignored factors that can have significant impacts on long-term oil prices (NYSEARCA:USO) (See Part 1 here) (See Part 2 here). The title ("The Unstated Case For Long-Term Low Oil Prices") was chosen because the majority of the neglected factors, with few exceptions, exert downward pressure on long-term oil prices. The exceptions, however, will also be covered.
I will be taking a "big picture" perspective, and will consequently be leaving out many details and making some inexact--though roughly accurate--simplifications along the way. This series is not intended to be an encyclopedia on the dynamics of oil pricing. (As one of my former law professors used to say, "A one-to-one [1:1] scale map isn't very useful.") Nor is it intended to be a definitive statement as to what exactly oil prices are going to do. The goal in writing these articles is simply to bring to the attention of investors and analysts those factors having the two characteristics of being both grossly neglected and significantly impactful.
So far, we've covered the "enlightenment" characteristics of the shale revolution, the rise of trial-and-error experimentation, the roles of full-cycle costs versus operating costs, and how the resources themselves will change hands, moving from one financial context to another, until they are best positioned to produce at low oil prices. Today we'll be covering refracking, a potential secret weapon for keeping production sustained and growing even at low oil prices.
Today's Topic: Refracture Treatments ("Refracking")
Throughout this article, keep in mind that these quotes and excerpts are all from articles written before the recent fall in oil prices. As I'll argue later, the fall in oil prices will most likely only accelerate the development of this secret weapon.
Let's begin with a provocative excerpt from an article on the website run by the Society of Petroleum Engineers (SPE):
In what may become Act Two for the North American "shale revolution," some operators are returning to their mature shale wells to refracture, or restimulate, the rock to accelerate the rate of production and enhance the ultimate recovery of trapped hydrocarbons. . . . [P]roducers want to apply refracturing to a large inventory of unconventional wells suffering from low production because of ineffective initial completions. . . . [L]arge volumes of oil and gas remain in the rock that could be produced through refracturing.
Those involved expect shale well refracturing activity in the United States and Canada to increase steadily as companies figure out how to optimize the mechanics of the operation. Their optimism is based on some early success stories, and the sheer number of possible refracturing opportunities that exist. "Over these next 2 years, the industry will be sharpening their pencils on how and where they are going to (refracture), and then they are going to do it because the potential is tremendous," said Ibrahim Abou-Sayed, founder of a Houston-based company called i-Stimulation Solutions that offers upstream engineering and consulting services. (emphasis added) (Source: Renewing Mature Shale Wells Through Refracturing)
The potential to refrack existing shale wells has been given relatively little attention, but as a low-cost alternative for boosting production, it could become, as the article says, "Act Two" of the shale revolution. Here's the key point: Because refracturing can be done at half the cost of the original well and generate between 80% and 100% of the original production volumes, it may become the secret weapon that allows many shale oil producers to keep production flowing--and growing--at low oil prices.
"Why," you ask, "can refracturing be done for half the original cost?" Because there's no need to redrill the well, reinstall pipelines and other infrastructure, or reset casing and cement. Half the work is already done.
Here's another key point: More and more data suggests that refracking can be more than just a way to fix underperforming "dud" wells: It can even be a way to bring the most productive wells back online with full force. Further on, the same article discusses the results from BP's pilot program in the Woodford Shale finding similar results:
Going forward, BP will focus on refracturing those wells with a higher 30-day initial production (IP) rate because the quality of the rock appears to directly correlate with gains made through refracturing. "From what we are seeing, not unsurprisingly, you appear to achieve an enhanced benefit from your better wells," [Sam] French[, a senior reservoir engineer at BP's North American gas business unit,] said. "Now that we have treated quite a few wells, we are fairly comfortable with refracturing higher rate wells and that will be the next set of wells we are going to address." (emphasis added with italics)
The idea of going back and refracking wells where there were either mistakes made the first time around or where the optimal fracking techniques were not known is, I think, relatively easy to grasp. What's more difficult to understand is why on earth a company would want to go back and refrack the wells that were perfectly fracked the first time.
Why Refrack The Perfect Well?
Currently, the industry thinks it is getting somewhere in the ballpark of 10% of the actual oil and gas in the rock formation out of shale wells. This shouldn't be too surprising when we consider that even conventional wells typically get somewhere between 20-40% of the original oil in place out of a conventional formation. Shale formations have much, much lower permeability, so a lower "recovery factor" makes sense.
Nonetheless, you might still wonder, even if 90% of the oil and gas is being left in place, how could refracking the exact same well in the exact same way "unlock" some of that remaining 90%? Wouldn't the frac fluids from the refracking operation just flow back into the same fractures created the first time around?
This is where things get interesting: Research, going back roughy a decade, has begun to show that after a well has been produced for a few years, the decreased pressures in the pore spaces that were "unlocked" the first time can actually cause a reorientation of the existing stresses in the rock formation. This "stress reorientation" can make it so that a second fracture treatment will actually not retrace the steps of the first set of fractures but will actually create new fractures.
(I have to admit that this whole idea is still baffling to me. It's so counter-intuitive: Why on earth wouldn't the new fractures just follow the path of least resistance carved out by the first set of fractures? I have not yet taken the time to read through the technical papers and convince myself 100% that this is what's going on. But the development has the potential to be so impactful that I wanted to plant the seed of this idea in the heads of readers before waiting too long. For anyone who's interested, here's a link to a lengthy paper that might be a good place to start. Based on other materials on the web, it looks like this particular team has been working on this issue for quite some time, which is why I would start with them. Other technical papers can be found on the research database website used by the Society of Petroleum Engineers. Papers can be bought by non-members for $25-30. Be sure to search for "refracture treatments" and not "refracking" to match the more professional vernacular used in these kinds of research papers.)
But what signs are there that this is actually happening? Or that it will be successful?
So far, refracking has been concentrated in shale gas plays like the Marcellus and the Barnett. The most common explanation is that these plays were developed earlier than the liquids-rich plays like the Bakken and the Eagle Ford, and so these earlier plays have a greater inventory of wells that have been producing for a number of years where it now makes sense to go back and refrack them. Companies are less willing to interfere with current production when it is still doing relatively well during the first few years. Additionally, if the impressive production gains from refracking are due to stress reorientation--if that is indeed what's happening--then a certain amount of time must elapse to allow the pressures to decline and the stresses to reorient. That all makes sense.
However, I also suspect a large motivating factor has been the fact that natural gas prices have been at record lows for a much longer period of time than oil prices, which have only just recently fallen. The companies heavily exposed to natural gas prices quickly realized that refracking could become a "secret weapon" for them if they were forced to sustain a prolonged period of low natural gas prices. Whoever could master the art of refracking--and thereby cut their costs in half--would be the last one standing once the low-price "shakeout" was over. Those with foresight, then realized it was worth their while to initial some trial-and-error experimentation with the process, even if there would be a few setbacks and additional costs along the way.
BP has already completed a successful pilot program in the Woodford Shale. Devon Energy (NYSE:DVN) has initiated its own program in the Barnett. EQT Corp. (NYSE:EQT) and Consol Energy (NYSE:CNX) have both conducted refracking operations in the Marcellus. The results are still pending from the EQT refracks, but Consol has already reported success. Here's a description of their pilot program:
In 2009, Consol Energy Inc. drilled half a dozen natural gas wells in Center Township, Greene County, that weren't its best producers.
The Cecil-based energy company was a novice in the Marcellus Shale at the time, as were most companies tapping the largest and then newest shale play in the United States.
With five years of experience and leaps in data and technology under its belt, Consol decided to give those old wells another go this year. It hired oil and gas services company Halliburton, which re-entered the horizontal wells, shot more holes through them, fracked those holes and forced out far more gas than the wells ever produced before.
When Consol revealed its success to investors last month, it said 200 other wells have refracking potential and it is evaluating starting a program to move those forward.
Note, too, that this is only what we know from the companies that are publicly open about their refracking programs, but others appear to be doing it, too. According to the SPE article, "[BP] launched the [Woodford] pilot program after learning that operators in the same play were netting similar increases in production through refracturing."
With oil prices now on the decline, there's a good chance that whatever is learned from the shale gas refracking operations will be quickly transferred to the more liquids-rich shale plays, such as the Bakken and the Eagle Ford. Indeed, this transition appears to be already happening. Again, according to the SPE article, "One of the next steps for [BP] is to begin a refracturing pilot program in the Eagle Ford shale."
Another powerful force that will drive the transfer of best practices and ideas will be the service companies that provide pressure-pumping equipment for frac-jobs. If low oil prices cause E&P companies to begin scaling back their operations, the service companies that focus on fracking will be intensely motivated to sell the idea of "refracking" to the E&P companies. There has been a large increase in the pressure-pumping equipment used in fracking, and those service companies which have invested heavily in this capital-intensive equipment won't want their equipment to sit idle. They'll likely be willing to offer their services at cost, just to cover related interest expenses and avoid booking losses on these investments.
Some of the service companies are even developing technologies specifically designed to aid in refracking operations. Halliburton has started a line of products designed to plug existing fractures and then biodegrade over time, thus allowing companies to refrack without interfering with the production coming from the existing fracture network. Baker Hughes has begun to design new wells with refracking in mind for later on down the road.
This last point brings us to the major challenge that refracking faces: The costs of re-entering a well and refracking will depend to a large extent on how the well was fracked the first time and what kind of materials were left behind in the well. However, the combination of powerful incentives from a low oil price environment and the industry's new-found embrace of trial-and-error experimentation suggests there is a good chance that these initial obstacles will be quickly surmounted.
This would be a great article to get some lively discussion going, so please chime with thoughts, comments, and questions. And if you know anyone who you think should at least have this issue on their radar, please share. I'm genuinely concerned by how little coverage these issues and developments receive from the investment community.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.