Shale Oil: A Trend That Is Redefining The Cost Of Supply

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Includes: CLR, ECA, LPI, QEP
by: Richard Zeits

Summary

“Array fracking” has arrived: operators increasingly use a full-volume approach to stimulating thick or stacked shale formations.

With dozens of wells typically drilled and completed off the same pad simultaneously, operational efficiencies are powerful.

The elimination of “over-capitalization” – drilling less wells to recover the same amount of oil – is the next big saving the industry is likely to realize in full development.

More than four years ago, in March 2013, I posted an article discussing an emerging trend in completions in thick shale formations that was likely to become a big opportunity for the industry. At that time, it was becoming increasingly (and unexpectedly) clear that one could develop unconventional formations, such as the Bakken, on remarkably tight downspacing patterns.

Density pilots with as many as 8 wells per mile were initiated at that time, which at that early stage in the industry’s evolution was a head-turning downspacing election. It was also the time when Continental Resources (CLR) made public its discovery of multiple producing “benches” in the Three Forks formation in the Williston Basin and claimed that each bench likely represented a separate reservoir.

I argued at that time that in thick shale formations “vertical downspacing” would also be possible, with the formation yielding more than one landing zone in full development.

One important observation I made was that the likely partial overlap of fracture systems created by adjacent wells was not necessarily a detriment from a recovery per well standpoint. In fact, one could intuitively imagine how each stimulation enhanced the fracture network around the neighbor wellbores, with such extra “pulverization” of the rock offsetting the negative effect of the draining interference between the wells.

However, it was also intuitively clear that such complex of wells likely needed to begin producing simultaneously. The obvious challenge of the more traditional in-fill development approach, where a set of “parent” wells is drilled first and another set of “child” wells in-filled at a later time, was the risk of compromised child completions due to potential pressure sink through the extensive existing fracture network in the rock.

It was obvious in my view that operators in thick shale formations would very soon begin thinking in terms of stimulating the entire rock volume in the target formation (or even several formations at the same time), rather than reasoning in terms of individual wells or individual landing zones. In my view, fracture stimulation of the rock was on the path to becoming a three-dimensional, full-volume mindset.

Another apparent future challenge for operators was the need to configure an optimal wellbore pattern – taking into consideration the frac design, possible frac barriers, hydrocarbon distribution throughout the formation and other factors – in order to maximize the recovery while using a minimum number of wellbores.

For the lack of a better term, I used a moniker “array fracking” to describe this full-rock-volume approach to development.

Four years later, this approach has become a reality and an increasingly important set of operational practices throughout the shale oil industry.

I must note that the industry is yet to find a generally accepted term to describe this approach. Encana Corp. (ECA) calls this “developing the cube.” QEP Resources (QEP) uses the term “tank-style development.” Laredo Petroleum (LPI) calls its landing zone optimization system the “Earth Model.” However, all operators have the same objective: to produce more oil with less money – and it appears that full-volume stimulation is a must in this regard.

In my prediction, more and more operators in basins such as the Permian over time will migrate towards the practice of full-volume development in those situations where the interference between wellbores is possible. In the process, the industry is likely to discover one additional, largely untapped method of reducing its cost of supply: avoiding drilling too many wells.

Cubes, Tanks And “Array Fracking”

This full-volume development approach can be illustrated by the following slide from a recent presentation by QEP Resources. The slide outlines, with a “gun barrel” schematic, the development plan in the Midland Basin where the company drills and completes all the wells in the drilling unit within the rock volume where interference between wellbores or a communication within the hydrocarbon system itself is expected. In this specific case, the company targets two underground “oil tanks,” the Wolfcamp tank and the Spraberry tank, with 10 and 17 wellbores, respectively.

All wells in the same “tank” are drilled and completed before any well goes on production.

(Source: QEP Resources, June 2017)

Another operator in the Permian, Encana, goes even further. Encana emphasizes the complete development of what the company refers to as the “cube,” where all the target formations are simultaneously drilled out before the development operation moves to the next drilling unit. In the example of the Davidson pad in the Midland Basin, Encana plans to drill a total of ~60-70 wells on a mile-wide unit. One-half of the unit is being developed in Phase 1. The accumulated learnings will be applied when developing the remaining half-unit, the Phase 2, at a later time.

(Source: Encana, July 21, 2017)

Encana is using the same “developing the cube” approach in the stack-pay Montney area in Western Canada. The two “cubes” Encana is currently working on include 20 and 28 wells, respectively.

(Source: Encana, July 21, 2017)

By drilling a very large number of wells off the same pad at one time, Encana targets significant efficiencies of scale, in addition to optimizing the drainage of the subsurface reservoirs.

In fact, it would be safe to say that many operators that have reached development mode (as opposed to pursuing delineation or acreage capture goals) in thick or stacked pay shale formations are moving in the direction of full-volume fracking. In the process, operators are often also looking for optimal landing points in different zones and well configurations maximizing development economics.

(Source: Laredo Petroleum, June 2017)

A Big Value Opportunity Is Still Ahead

The optimal well configuration is a function of two key factors: geology and oil price.

Generally speaking, the recovery factor can be increased by drilling a larger number of wellbores into the same “tank.” If the number of wells is too low, the rock will not be pulverized enough and some oil will remain in the formation unrecovered. However, if the number of wells is too high, the cost per recovered barrel increases.

When oil prices are high, the operator may be better off drilling more wells. On the other hand, when oil prices are low, drilling less wells and leaving some oil in the ground may be the optimal solution.

Given the complexity of the subsurface, the industry has massive opportunity to create value by optimizing the wellbore arrays drilled through the “tanks.” By reducing the number of wells without sacrificing much recovery, the industry as a whole can save billions of dollars for shareholders.

It appears, the industry is on a right track in this regard. Production history, detailed subsurface mapping and petro-physical work on the units being currently developed should provide extensive “big data” to operators that can be used to optimize the development of the next units.

In Conclusion…

In the current stage of evolution of the Permian and several other stack-pay basins, it is natural to expect that operators “over-capitalize” full field development, i.e. drill too many wells.

As more operational experience is accumulated, the industry should be able to reduce the number of wells drilled without significant sacrifice in produced volumes.

At the same time, economies of scale in full development mode in stack-pay plays promise to be very powerful.

The North American shale oil industry will see its cost of supply go further down in the next few years. By the same token, the shale's economic footprint will expand significantly.

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