The Fuse

Refracking: Shale Revolution 2.0?

by Nick Cunningham | July 09, 2015

Innovations in hydraulic fracturing and horizontal drilling have allowed the U.S. to become one of the world’s largest oil producers in recent years. However, the abruptness of the production surge has raised many questions about its longevity. Meanwhile, the collapse in oil prices is testing the resilience and staying power of the U.S. shale industry.

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Fracturing a shale well allows for an initial burst of oil and gas production, but flow rates drop off precipitously almost as soon as a well is fracked. That means that shale drillers have to keep up a brisk pace of drilling, fracturing new wells to offset the decline of old ones. Maintaining the pace of drilling is possible, but in the past it has required high oil prices and loose credit. Markets are watching to see if drillers can continue to produce oil at elevated levels now that prices have tanked.

Low oil prices could be temporary, however. Over the longer-term, there are even bigger questions surrounding the U.S. shale industry’s ability to survive. After the “sweet spots” in the most promising plays are depleted, will anything be left? According to the International Energy Agency (IEA), U.S. shale output is expected to begin declining as soon as the early 2020s.

Fracking 2.0

Just as the shale industry upended global markets and shocked observers when it unleashed a torrent of new oil and gas production over the past decade, there could another revolution brewing.

We have heard a lot about the efficiency gains that shale drillers are achieving now that oil prices are low—more wells per well pad, more sand used in the fracking process, cost reductions from oil field service companies—but these innovations are just nipping around the edges. Sure, some marginal wells could become profitable with a more prudent approach to drilling, but nothing substantial is taking place in the oil patch that will upend the prognosis of long-term decline.

That’s with the exception of one phenomenon, however, that is generating buzz and raising speculation that it could dramatically alter long-term projections and kick off a new shale frenzy: Refracking.

The attraction of refracking is obvious: Only around eight percent of a reservoir’s oil is recovered after the initial frack job, so refracking allows drillers to unlock another burst of oil and gas.

The process is as straightforward as it sounds—fracking a well again after it has already been fracked, targeting the portion that may have been “unstimulated” or “understimulated” the first time around. The attraction is obvious: Only around eight percent of a reservoir’s oil is recovered after the initial frack job, so refracking allows drillers to unlock another burst of oil and gas.

Usually, companies simply drill a fresh well after one is fracked, even if the next well occurs on the same well pad. Once the drilling operation is completed, the company moves on to another site and drills more wells. The industry has become rather efficient at setting up new well pads, fracking them, and proceeding to the next job. That has allowed for cost reductions as drilling has started to resemble a manufacturing process, with standardization and assembly not dissimilar to a factory line. Nevertheless, more efficient drilling may have achieved cost reductions, but companies still need to develop “greenfield” projects over and over.

Early results show that refracked wells could produce as much as 30 percent more oil than they did the first time around, at 25 percent of the original drilling cost.

Refracking could allow drillers to return to old wells and just frack them all over again. Better yet, early results show that refracked wells could produce as much as 30 percent more oil than they did the first time around, according to Bloomberg. And since the wells have already been drilled, the refrack can be done on the cheap, perhaps as low as $1.8 to $2.2 million, or about 25 percent of the original drilling cost. That sounds pretty alluring as companies have seen cash flows dry up amid the oil price downturn.

Schlumberger CEO Paal Kibsgaard talked up the opportunity earlier this year when the company reported its first quarter earnings. “In terms of the market potential, I think you’re talking billions, in terms of revenue opportunities, over an extended period of time,” Kibsgaard said. He even suggested that his company is so confident in refracking that it would take on all of the risk, paying the costs of the refracking operation upfront and only receive compensation from the operator after production.

Looking past the hype

Refracking is still in its early stages. Wells that have been refracked number only in the hundreds—a drop in the bucket when you consider the fact that over 35,000 wells were drilled in the U.S. in 2014 alone, according to Baker Hughes. Right now, a strained oil industry is eager for a breakthrough, but despite the excitement around refracking the technology still has a lot to prove.

Due to these challenges, the practice has been nicknamed “pump and pray” by operators.

Refracking also carries substantial risk. Unlike fracking a new well, refracking targets only parts of the well that have not been fractured. That sort of precision is technically challenging and depending on the specifics, can result in higher costs. Moreover, if not done properly, it can ruin a reservoir. Even without errors, refracking could merely drain off oil from an adjacent well. Due to these challenges, the practice has been nicknamed “pump and pray” by operators.

So far, the industry’s take is mixed, with some executives choosing to steer clear for now. “We have not tried any refracks. Our outlook on that is that it is really technical,” Bill Thomas, CEO of EOG Resources, told Reuters. “We believe that just drilling a new well, and kind of starting fresh… is probably the preferred way to go,” he added.

EOG is not the only company that remains unconvinced. “I personally have a lot of experience with refracks, most of which was not that good,” the COO of Range Resources, Ray Walker, said on a first quarter conference call, according to Natural Gas Intelligence.

Analysts at Bernstein called refracking “trivial,” and overly hyped because of the success of a few specific examples.

Analysts at Bernstein called refracking “trivial,” and overly hyped because of the success of a few specific examples. “Much of the literature is from service providers or E&P operators that achieved some success,” a Bernstein report concluded. “In addition, much of the market talk around refracks is similarly skewed positive.”

Another shale revolution

Refracking could have pitfalls, but the fact that the technology is in its early stages means there is plenty of time for the industry to refine and improve its methods.

The original shale revolution had no shortage of naysayers. Refracking could have pitfalls, but the fact that the technology is in its early stages means there is plenty of time for the industry to refine and improve its methods. Halliburton estimates that there could be as many as 50,000 wells that are “candidates” for refracking. Furthermore, with the industry eager for breakthroughs that will enable it to draw more oil from favored reserves while slashing costs, expect innovators to pour money into making this technology work.

Of course, the true extent of the opportunity will only become clear as the industry moves forward. The number of refracked wells is expected to rise from hundreds to thousands in the next few years. “The most important factor to get this off the ground is for E&Ps, particularly service companies, to make large investments to test this,” James Coan, a senior analyst with IHS Energy, said in during a May 20 webinar. “Who is going to be the George Mitchell of refrack?” George Mitchell is credited with pioneering fracking and horizontal drilling, two techniques principally responsible for the shale revolution.

Refracking could allow drillers to gain access to enough reserves to last another 50 years, according to Bloomberg estimates. For an industry expected to see peak production within the next five to ten years, refracking could be revolutionary.

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