Fracking 2.0 Was a Financial Disaster, Will Fracking 3.0 Be Different?

By Justin Mikulka, a freelance writer, audio and video producer living in Trumansburg, NY. Originally published at DeSmog Blog

Two years ago, the U.S.fracking industry was trying to recover from the crash in the price of oil. Shale companies were promoting the idea that fracking was viable even at low oil prices (despite losing money when oil prices were high). At the time, no one was making money fracking with the business-as-usual approach, but then the Wall Street Journal published a story claiming all of this was about to change because the industry had a trump card — and that was technology.

Today, frackers are again relying on technology as a financial savior, but this time, they are looking to Microsoft.

As ExxonMobil embarks on an ambitious move into fracking in the Permian oil fields of West Texas, it has announced a partnership with Microsoft to use cloud technology to analyze oil field data and optimize operations. Exxon claims the move could generate “billions in net cash flow.”

Time will tell if the Microsoft cloud will make Exxon rain profits in the Permian.

Fracking 2.0

In March 2017, the Wall Street Journal ran an article with the headline, “Fracking 2.0: Shale Drillers Pioneer New Ways to Profit in Era of Cheap Oil,” which detailed the ways the shale industry expected technology could help it finally deliver profits. The article mentioned “longer, supersize wells” and said, “The promise of this new phase is potentially as significant as the original revolution.”

The article highlighted EOG Resources (as in, Enron Oil and Gas), a company often touted as the “Apple of oil,” and quoted the company’s chief information officer saying that technology advances allowed its employees to work at the “speed of thought.”

It also reported that Chesapeake Energy was betting on these new supersize wells as part of its “turnaround strategy.” Chesapeake needed to “turnaround” from losing money and move in the direction of profits.

In June 2017, investment website Seeking Alpha trumpeted “The Arrival of Super-Laterals” as a technological accomplishment for the shale oil industry. (“Laterals” are the industry term for the horizontal wells used in the fracking of shale oil and gas). That article featured Chesapeake Energy’s new achievements in drilling longer lateral wells.

But supersized wells weren’t the only solution for keeping shale drillers from losing more money. Another was more wells per drilling pad. A year ago shale company Encana announced plans for “cube development,” in which it would drill 64 wells on one gargantuan drilling site in the Permian oil fields of West Texas.

The same thing was happening in the Marcellus Shale in Pennsylvania, where top natural gas producer EQTCorporation had plans for drilling 40 wells per pad. The company recalled the early days of fracking when drilling three wells per pad was seen as a significant breakthrough. As the Pittsburgh Post-Gazette reported at the time, the higher number of wells per pad required “creative geometry,” which “ensures that the wells don’t crowd each other underground.”

Oil and gas fracked well sites in Wyoming. Credit: Ecoflight

The Post-Gazette also quoted Dave Elkin, a senior vice president of asset optimization at EQT, touting the ever-increasing lengths of horizontal wells, as saying the “economic and technological limit” for those in the Marcellus Shale was 21,000 feet, or just shy of 4 miles.

With more advanced technology delivering longer horizontal wells and creative geometry packing them into smaller areas, profits seem like the next logical step.

But Fracking 2.0 was a financial disaster, and shale drillers’ desperate attempts to make money any way they can is coming back to haunt them in a big way.

Frac Hits and Technological Limits

EQT did indeed drill the longest wells but also lost a lot of money in the process. According to the Wall Street Journal, “The decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions of dollars.”

EQT started 2019 with a round of layoffs. Chesapeake’s supersized wells meant that in 2018 the company spent $600 million more than it made to produce oil and gas.

But that wasn’t the really bad news for the fracking industry, which was learning that its “creative geometry” was mostly creating losses. Encana — the company with the super pad of 64 wells — also announced layoffs. In a letter to the Texas Workforce Commission, Encana said, “The company intends to gradually separate employees between now and May 31, 2019,” moving from creative geometry to creative ways of describing layoffs.

And while those are just three companies that tried to push the limits of fracking technology, the issue of packing too many wells on the same pad could greatly alter the economics of the fracking industry. As I wrote in August 2018, when oil and gas wells are too close to each other, the fracking process can damage nearby wells — a process known as “frac hits.” The result can cost drillers money and greatly reduce the amount of oil they can pump from these wells.

Two years after its Fracking 2.0 story, the Wall Street Journal published one titled, “Shale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom.”  The article details how packing too many wells on a drilling pad is “turning out to be a bust.”

According to the Journal, this reality could lead to an “industrywide write-down if they are forced to downsize the estimates of drill sites they have touted to investors.” For a highly leveraged industry on a decade-long money losing streak, that isn’t good news.

Industry analysts at Wood MacKenzie started to warn about the limits of technology‘s ability to deliver more oil in the Permian in 2017. In the Wall Street Journal, Robert Clarke, research director at Wood Mackenzie, said, “Unless there is a massive technological breakthrough, those child wells are going to be smaller.” Child well is the industry term for the multiple wells drilled on a pad around the first “parent” well.

Once again, unless technology can change the financial equation, the fracking industry is in trouble.

Which brings us to Fracking 3.0 …

Fracking 3.0: Exxon Bets on Microsoft to Solve the Problem

Despite the past financial disasters and failure of new technology to deliver profits for frackers, the oil industry’s biggest players are now getting in on the game in the prolific Permian oil fields. And the solution to fracking’s profits problem — according to the likes of ExxonMobil — is Microsoft. Apparently cloud technology has been the missing ingredient in the Permian.

In the past week, Exxon and Chevron have both announced plans for major investments in the Permian Shale, which they promise will deliver large increases in both oil production and profits.

Much like in 2017, current headlines have been touting Exxon’s plans and its partnership with Microsoft to use technology to finally figure out how to make money fracking in the Permian.

It appears to be an effective public relations push by Exxon — which was much needed. A year ago Exxon’s poor financial performance was linked to its failure to make a big move into fracking shale for oil. At the time, CNN wrote, “ExxonMobil missed the invitation to America’s big oil party.”

While this latest promise of profits from fracking now has some of the world’s largest companies behind it, these plans are nothing more than a press release at this point. Which makes this a good time to revisit when Exxon made a big move into natural gas in 2010. Exxon bought natural gas producer XTO for $40 billion, and while the U.S. is producing record amounts of natural gas in 2019, this deal is viewed as one of the worst in the history of the energy industry.

“That was one of the worst acquisitions in the history of the energy business. It was exquisitely poorly timed,” Pavel Molchanov, an energy analyst at Raymond James, told CNN in 2018.  “…It was essentially $40 billion down the drain.”

Perhaps Exxon’s big move into shale oil won’t repeat history, and the oil giant will finally unlock the secret to profits while fracking for shale oil with improved technology.

For some perspective, however, it helps to look at how EOG — the “Apple of oil” — is doing these days.

For that, let’s turn to Art Berman, a leading industry analyst with a strong track record on many aspects of fracking for oil and gas. In February he published an analysis showing that 2015 was the best year for EOG’s well performance for its Eagle Ford wells in Texas and that 2018 might be the worst.

Technology apparently isn’t delivering great results for the “Apple of oil” — but perhaps Microsoft has the answers.

Main image: Original photo Marcellus Shale Gas Well – Jackson Township/Butler County, PA by WCN 24/7 under license CC BY-NC 2.0 adapted by Justin Mikulka,  CC BY-NC 2.0

Print Friendly, PDF & Email

26 comments

  1. PlutoniumKun

    Its hard not to believe that this isn’t the fracking industries version of the self driving car – just an excuse to boost share values and keep the money flowing for another couple of years. There are fundamental physical limits to what you can do with geology. I find it hard to see a fancy software approach doing much more than allowing them to wring out marginal extra amounts of oil per well. Its not as if the oil industry isn’t highly technically advanced right now, they’ve consistently spent billions in research every year for decades to improve well efficiency.

    Reply
    1. Very

      It’s not only geology.
      There are fundamental physical limits.
      That aspect is missing in so many ongoing discussions. It’s just crazy

      Reply
  2. Peter

    There are fundamental physical limits to what you can do with geology.

    For one reason or other – in finding the new “bonanza” worldwide – that seems to be forgotten. The extend of the layers is vast, but the thickness is often only meters, and even thicker layers do not correlate with increased deposits.
    The problem with unconventional oil is the way that is is formed and the properties of the matrix it is found in.

    https://www.sciencedirect.com/topics/earth-and-planetary-sciences/shale-oil

    Instead, wells drilled for shale oil (in the oil window) may have some initial production, but most often, rates fall off rapidly after a few days or weeks. And if the formation pressure drops below the bubble point, the gas coming out of solution will result in a decrease in GOR of the liquid phase and an increase in its viscosity, making it even more difficult for the liquid to move out of the pore spaces.

    https://energypost.eu/us-shale-oil-the-limits-to-growth/

    Over the coming years (mostly from 2020 onwards), an increasing number of Permian wells will be infill wells at half the original spacing. A recent study by Wood Mackenzie (based on a number of technical papers at industry conferences) estimates that recovery factors for these infill wells will be 20-40% lower (due to e.g., frac hits, lower pressures and resulting higher Gas Oil ratios). Operators will face a choice whether to drill infill wells in the sweet spots or to drill wells with larger spacing outside the sweet spots.

    Reply
    1. Off The Street

      Book an aisle seat next time you fly over west Texas. The Wyoming pad-pocked landscape looks lush by comparison, and is in a much smaller area.

      Reply
    2. Michael C.

      I saw something like that picture from my plane window a few years back when flying out west. It was depressing I could only think how it scars both the visible and the invisible beneath.

      Reply
  3. c_heale

    After finding out my bank was directly involved in investing in the Bakken Pipeline. I sent them this.

    I am a long time customer of your bank. A few months ago I received a message from (bank name) asking me to move to electronic statements instead of paper statements.
    I turned this request down since there have been many IT related problems with UK banks in recent years, and I have to have a paper record to ensure my account is being looked after correctly.

    However, what I find completely hypocritical is that your bank said the reason for this is to reduce damage to our environment. This is because I now know that (bank name) directly invested in the Bakken pipeline. As you may or may not know the Bakken is a pipeline carrying fracked oil. Fracking causes enormous direct environmental damage as well as indirect environmental damage due to global warming. Yet (bank name) with all it’s money and power decided as a matter of policy to invest in this.

    You can be part of the problem or part of the solution regarding global warming. It won’t be you that suffers, but all of our children and grandchildren, as well as all other life on Earth (on which we are completely dependent). At the moment you certainly seem to be part of the problem.

    Never again ask me to do anything for the environment, without using all that money and power to do something positive for this world. I already what I can, but unfortunately it can’t compensate for the damage (bank name) is doing.

    Reply
  4. doug

    ‘Software will save us’.
    Oh I wish I had a nickel for every time I heard that in a corporate meeting….
    And picking the big brand name will never get the BOD in trouble….
    ‘But we chose Microsoft…’

    Reply
    1. Arizona Slim

      And, before that, there was a saying that went like this:

      “No one ever got fired for choosing IBM.”

      Reply
  5. Sparky Once

    Sometime, when you’re sitting in an airplane seat, heading to your destination, try to imagine this country without oil. How long will it take for the environment to recover ? Will it ever recover ? What about all those holes, everywhere ? Electric cars will do nicely but will there be fewer of them ? Trucks, at some point, carry almost everything you use, consume, or purchase. Buy local ? Vegetables in Vegas ? How much would have to change without oil ? Would we lose or gain jobs ?
    I did this all the way to Chicago from the West Coast. The question is, do those people involved in the production of oil ever ponder this question ? The Europeans have always done more without oil because price. What about us ? Yes, I’d like another beer please…….

    Reply
    1. Jon Cloke

      I’m 57 and I’ve never owned a car. Many of these ‘challenges’ look daunting because you’ve grown up in a pyschic environment which takes to today’s infrastructure as essential to modernity instead of, as it is, a support mechanism for mass consumption…

      Reply
    2. Skf

      I love all these comments about fracking and damage to the environment while encouraging one to look out the window of their flight over fracking land on a plane next time…. airline travel is horrifically damaging to the environment. Ah minor details.

      Reply
  6. John B

    The appalling thing about this is that extraction cost should set a ceiling on the amount of carbon that humans will remove from the ground and transfer from the atmosphere. Energy economists assume that if fossil fuel costs more to extract than it can sell for, we will leave it underground. That’s the theory behind a carbon tax. But huge amounts of ingenuity are being devoted to devising ways to reduce extraction costs — and investors are willing to sink huge amounts into drilling that actually loses money!

    That’s one reason I don’t think a carbon tax can be adequate by itself. We also need regulations, tax structures, threats of litigation, protests, and whatever else can be done to make investment in fracking (not to mention coal mining) look too risky to undertake, and research in it too disreputable. Boycott geology departments? Pre-emptive patents on drilling techniques?

    Reply
  7. Steven

    File this under ‘Too Stupid to Live’. As Sparky Once suggests, it is not about money or power. But try to tell that to the amoeba-brain money hungry business persons and power mad politicians who run the United States. It is about access to enough oil to sustain industrial civilization while the global economy transitions to sustainable sources of energy (IF it still can??). It is about using wisely what remains of the oil – AKA “nature’s capital” or “ancient sunlight” – still within the geographical boundaries of the US.

    Geology (and history) is destiny. There is no way American producers can compete with Middle Eastern or even Russian producers of oil and natural gas. They know it and so do their European customers. Nor should they try. Oil producers KNOW they are dealing with a finite resource. Ever since the beginning of the oil age, they have been living in fear of running out of ‘product’. Read Yergin’s The Prize. Or better yet read Matthieu Auzanneau’s more current Oil, Power, and War: A Dark History. (Yergin has been accused of being the oil industry’s PR man but at least he tells it pretty much like it was up to 1980.)

    ‘Oil reserves’ are about more than preserving the ability to fight a large scale conventional war without the use of nuclear weapons (probably impossible now for the US anyhow). They are about preserving our way of life. But for oilmen it has ALWAYS been about making as much money as fast as possible in any way they can. In the early days of the industry that included just dumping hundreds of millions of gallons of drilling byproducts they didn’t know how to use (like those used to produce gasoline) and drilling so many wells so close together they damaged the oil fields. It included selling this country’s oil reserves to the rest of the world (including some of its mortal enemies) to and through WWII. Today it includes flaring natural gas from fracking operations that can’t be profitably sold and possibly poisoning the nation’s water supplies (hence the ‘dark’ in Auzanneau’s title).

    Back in the day when politicians cared about more than just lining their own pockets and journalists felt obliged to throw out at least an occasional morsel of truth, selling the nation’s petroleum reserves used to be considered a crime – or at least newsworthy. Now all both professions do is praise the people selling the nation’s future prosperity out from under its people.

    Reply
  8. Chauncey Gardiner

    Other factors might be hidden behind the cloud. Just eyeballing the price charts, West Texas Intermediate Crude is up about 37% % and Gasoline futures prices up about 48% since Dec 24th in the face of weak economic growth, when the financial markets did a dainty pirouette. Wondering if supply and demand are in the rearview mirror now in so far as price discovery through free markets is concerned, and if there’s something/someone else driving the bus? After all, crude oil is a global commodity. Great hype, though. Foppe’s comment above and those of other readers together with the photo of Wyoming drilling sites are the real story here.

    Reply
  9. monday1929

    Some people are saying (I like that construct, thank you little-dick trump) that the Majors are taking on money losing shale acreage simply to hide low oil reserve numbers.
    For the smaller producers, they will keep fracking as long as free/cheap credit is available. Profit is irrelevant,
    just have to make the interest payments, and with weak covenants, may not even need to do that.
    For now.

    Reply
  10. ptb

    Region by region, the financial predictions made at the time the oil/natgas projects were begun were never met.

    But OTOH, though they fail to make money, it’s not necessarily because they fail to produce. Often its because someone else comes along and does it cheaper, and in doing so exhausts the pipeline capacity or floods the market. From an carbon-reduction point of view, this again is not a helpful situation.

    Another way to look at it is the WTI price, which tells a similar story. Although extremely volatile, currently not the indicator of scarcity as it was before 2014. (At which time the US price was being set by more expensive Canadian supply if I remember right. And interestingly that too was in part a transport based story, one of railroad vs pipeline).

    Obviously what happens in 5 years could be wildly different, but I’d hesitate to conclude that.

    And again, I’m not sure what relevance this has to the availability of non-carbon energy sources, and the case to be made to push through policy to make that happen. Without such policy, it won’t happen “naturally”, despite the financial woes of the overly optimistic extraction industry.

    Reply
  11. Synapsid

    Jerri-Lynn and all,

    A couple of thoughts:

    Child wells sound like are what are called infill wells–wells that are drilled between earlier wells to help bring out the targeted oil or gas. What is showing up is (surprise!) that they can cause problems in the parent (earlier) wells by reducing production from them, that is, by swiping crude that the parent would have produced.

    I mention this because infill wells are what are being drilled in the Ghawar play in Saudi Arabia. The Ghawar is not a field, it is five fields and they have been developed and produced from north to south. The northern three are in decline; the southern two are being supported by infill drilling, done in particular by Schlumberger, the largest of the world’s oil-services companies. (Halliburton plus recent acquisitions–Dick Cheney’s company–is number two last I looked).

    Ghawar is what is being referred to when there is talk of Saudi Arabia’s large petroleum reserves–that is, what Saudi Aramco, the national oil company, has available to produce in the future. There hasn’t been much in the way of recent discoveries.

    Two other plays have been retrieved recently from the mothballed state: Khurais and Manifa. They were not being developed because they were not economical but Saudi Aramco is developing them now. Manifa crude, if I recall correctly, contains vanadium which degrades catalysts used in refineries and so requires expensive extra investment–in this case that may have been a new refinery–in order to refine the crude. I don’t know about Khurais. But it is these two which are actually boosting Saudi production, again, as far as I know.

    Saudi Arabia is responding by investing in 1) exploration for natural gas with the aim to produce it for use within the Kingdom and for export; 2) refineries so as to be able to export refined products and not just crude; and 3) acquisitions abroad, in both upstream (areas to be developed for drilling) and downstream–it’s worth keeping in mind that the largest refinery in the US, Motiva, is owned by Saudi Arabia.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *