Innovation Will Drive Shale Survival

The petroleum industry has seen up and down cycles. In the past, they have been driven by politics, such as in the case of the Arab oil embargo, or supply and demand imbalances, driven primarily by unrest and recessions. The creation of OPEC dampened the latter. But this time it is different. Shale, a new, abundant source of oil and gas has more than halved oil prices. It has kept prices low for nearly 3 years, and threatens to do so for many more. This threat will be realized if the industry can be profitable at sustained prices below $40/bbl.

History informs us that this is likely. The last long-lived drop in activity roughly spanned the decade from the mid-1980s to the mid-1990s. The rig count was more than halved from 1984 levels for well over a decade. This trailed the oil price drop, which nearly halved from 1980 to 1985, and stayed that low for over a decade. For the industry to survive, oil companies needed lower production costs and the service companies still needed to make a profit at low activity levels. This is precisely the situation today in shale oil and gas. On that occasion, the industry responded with innovation in technology and, to a lesser degree, in business models. This too will happen today.

Horizontal Wells and More

Horizontal wells, possibly the single greatest productivity improvement innovation in the business, came into their own during that earlier downturn. They had been known for decades, but this period produced additional key enablers for economic construction. Desktop 3-D seismic interpretation allowed for placement in the most productive portions of reservoirs. Polycrystalline diamond composite (PDC) bits improved drilling rates. Measurement while drilling (MWD) gave crucial position information on the fly. Later, MWD systems allowed formation evaluation, which was prohibitive with conventional logging methods in hole angles greater than 60 degrees. At this point, drillers knew where to be, and where they were, in 3-D and geologic space.

The final piece to the puzzle was the steerable system. The state of the art at the time required different drilling assemblies for the vertical portion, the turn to horizontal, and the horizontal section. The turn was accomplished with a bend in the motor assembly. The bend was taken out for the straight horizontal section. Then, a maverick drilling engineer in Alaska experimented with drilling ahead with the bend, by rotating the string. The string flopped in the hole, and made it off-round. But time was saved, and sliding friction was much less a limitation on the length of the lateral. This was hard on the motor bearings, and motor survival became an issue. The compelling value proposition of horizontal wells in the Austin Chalk tolerated motor unreliability. Soon, designs were improved, and the industry had an efficient system. During this period, the combination of the innovations noted above dropped the cost per barrel by over half. 

A key enabler was the industry shifting to the asset unit business model. Prior to this, individual departmental silos governed the introduction of new technology. Cost-per-foot thinking was dominant. Many of the innovations cost more per foot, but delivered more production. This cost- per-barrel mentality was enabled by the formation of asset units. Accordingly, the service companies were able to be profitable, while at the same time enabling greater profits for the operator. In fact, this was the period in which the company for which I worked, Sperry Sun, an innovator in the space, really took off, in revenue and earnings, in a down market.

The last time around, the advances were primarily in drilling, in one form or another, with an assist from formation evaluation. Even completions lagged. Today, in a classic combination with hydraulic fracturing, horizontal wells have opened the door to previously untouchable low permeability supplies of gas and oil. In response to the plummet in oil prices, two factors lowered the break-even cost of production: deep discounts from services companies and improved operational efficiency. Pad drilling, where multiple wells can be drilled separated by just tens of feet using a single rig on rails, was a major contributor. Pad drilling also allowed more efficient delivery, centralized storage, and dispensing of materials such as water and proppant, and economies of scale for operations such as water treatment and recycling. The efficiency improvements are here to stay. But many service company bankruptcies later, a firming of service prices is in the cards. Sustaining, and continuing, break-even cost reduction will take innovation that benefits both the service companies and the operators. Just like the last time.

Illuminating the Reservoir

This time, it will be mostly about illuminating the reservoir: much better reservoir characterization than currently available. In large measure because the wells have intrinsically high drilling and completion costs, and because the wells are horizontal, sophisticated logs are seldom run. Furthermore, conventional logging methods are not as informative in such tight rock as in conventional reservoirs. Accordingly, reservoir information in the laterals is relatively sparse. A paper published in 2011 demonstrated significant reservoir heterogeneity. The authors showed that up to 30% of frac clusters were nonproductive. And yet, to this day, by and large, the lateral is simply divided up in equally spaced zones, with two to six frac clusters distributed in each zone in geometric fashion. Hydraulic fracturing accounts for the majority of the well cost. Consequently, targeted fracturing would reduce costs substantially if innovative techniques could achieve sufficient reservoir understanding to allow targeting the specific flow units and sweet spots within the source rocks.

Refracturing may be a potentially rewarding avenue. This entails going back into a producing well and fracturing in new spots or improving the fracture connections in producing flow units. Refracs often regain near original flows for a short time, demonstrating that fracture-to-reservoir connection is the issue, not just depletion. Identification of sweet spots has obvious benefits, as does any dedicated delivery service that makes this operation more efficient. In the last few years, strides have been made in polymeric diverting agents that dissolve over time. The diversion may be needed to temporarily close existing fracture entry points in the formation, to direct the frac fluid solely to the refrac points.

In principle, the objective is to address either the numerator or the denominator in the cost per barrel variable. While more improvement may be feasible, drilling optimization likely takes a back seat, except for more completion-friendly wellbores. The greater potential lies in the denominator: improving net recoveries, with higher production rates, if possible. Better reservoir characterization, especially if obtained with minimal intrusiveness to the operation, ought to energize many avenues. Miniaturization, advanced imaging, and new analytical techniques are likely means. Example targets, certainly not exhaustive, nor in any order, with many already being pursued, are:

• Identify sweet spots for targeting frac zones in primary production and/or refracturing
• Optimally space laterals to improve drainage while also minimizing negative impacts of fracture-driven, well-to-well communications (frac hits)
• Enhanced recovery methods to improve production; could even be huff and puff 
• Improve and stabilize conductivity in frac channels through better understanding of surface energies and fracturing techniques specific to unconventional formations
• Measures to reduce decline rates

The technology leaps required may be less “disruptive” (in the sense of Christensen’s disruptive technologies) than the last time. Also, the industry has been investigating many of these avenues for years. Expect much of the heavy lifting to be by the major service companies and startups in the service space. The stakes are higher than mere survival. Success equates to North American energy independence, and an innovation-based foundation under a profitable industry, at consumer-friendly low oil prices.

Rao’s latest book is Sustainable Shale Oil and Gas: Analytical Chemistry, Geochemistry and Biochemistry Methods, published in 2016 by Elsevier Press. He holds a bachelor’s degree in engineering from the Indian Institute of Technology in Madras, India, along with a master’s degree and a doctorate in materials science and engineering from Stanford University. He is the author of more than 30 publications and has been awarded 40 US patents and foreign analogs.