COLUMN-Why shale plays really are different: Kemp

Reuters

By John Kemp

LONDON, Oct 16 (Reuters) - North Dakota's rapidly rising oiloutput continues to defy the sceptics, who have predicted thatproduction would stop growing as declining output from existingwells offsets extra production from new drilling.

Oil production soared to 911,000 barrels per day in August,up more than 200,000 bpd compared with the same month last year,the state's Department of Mineral Resources (DMR) said thisweek.

Production is on course to hit 1 million bpd by the end ofthe year or early 2014, according to the DMR.

By the end of August, 9,452 wells were in production. Butanother 450 had been drilled and were awaiting fracturing andcompletion.

Completions are running at about 1.5 times the thresholdneeded to maintain production, the DMR wrote in its monthlystatement, which implies output will continue rising in the nextfew months as crews work through the backlog (Charts 1 and 2).

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Shale sceptics have been confidently predicting since atleast 2010, when output was below 300,000 bpd, that productionwould peak.

Only the DMR has struck a defiant and lonely optimisticnote. In 2012 DMR projected output would plateau somewherebetween 700,000 and 1.2 million bpd between 2015 and 2025, basedon a total of up to 40,000 wells in the thermally mature part ofthe shale play.

Many out-of-state analysts, including leading energyconsultancies, criticised those projections as overly positive.Now they appear conservative. So why did the sceptics get it sowrong?

OUTRUNNING THE RED QUEEN

Sceptics based their argument on the unusually rapid outputdecline from wells bored into shale formations compared withmore conventional oil fields.

More and more holes would have to be drilled just to offsetdwindling production from the existing stock of wells. Morewells would require more drilling rigs and fracturing crews,which could not be increased indefinitely.

Eventually, production would reach an equilibrium based onsome maximum feasible number of drilling rigs and crews.

"Yearly output must inevitably decline because themaintenance of a given output each year necessitates thedrilling of an increasing number of wells," U.S. governmentgeologist Carl Beal wrote in 1919, during an earlier panic aboutpeaking domestic oil production.

More recently, The Oil Drum blog likened shale production tothe Red Queen's Race in Lewis Carroll's book "Through theLooking-Glass".

"Here, you see, it takes all the running you can do, to keepin the same place," the Red Queen told Alice. "If you want toget somewhere else, you must run twice as fast."

Shale sceptics pointed to the tremendous variability inoutput from wells drilled into the most productive core areas ofthe Bakken compared with the less-prodigious outlying areas.

The core would be fully exploited quite quickly, theysuggested, leaving only the less productive periphery,necessitating drilling even more wells with lower output.

WHY SCEPTICS WERE WRONG

In practice, the shale sceptics have proved wrong on everypoint, revealing a fundamental lack of understanding about thegeology, economics and technology of shale production.

With more experience of horizontal drilling and fracturingand more knowledge about the play, drilling and pumping crewshave been able to drill deeper wells and longer laterals,reaching total depth more quickly and applying more fracturingtreatments per well as well as learning to target only the mostproductive parts of the formation.

"In 2007, the average treatment number, or stage count, inBakken wells was three. By the end of 2011, that number wasnearly 30, and some wells had more than 40 stages in a singlelateral," according to oilfield-services specialistSchlumberger. ("Multistage Stimulation in Liquid-RichUnconventional Formations" 2013)

Rather than increasing relentlessly, the number of drillingrigs operating in the Bakken has fallen from over 200 in early2012 to just over 180 in October 2013.

Bakken accounts for just 10 percent of the rigs drilling foroil and gas in the United States, according to basin-by-basindata published by another oilfield services company, BakerHughes. Rising Bakken output is not putting pressure on thedomestic rig market. Rig rates remain soft.

More output with fewer rigs is a classic application of thelearning curve effect, something shale sceptics overlooked.

Sceptics also drew the wrong conclusions about high declinerates. All oil and gas wells exhibit a sharp drop in outputafter the initial high rate of production in the first fewmonths, as the natural pressure in the oil or gas field drops.

In general, the higher the initial output, the faster itwill subsequently decline. Rapid decline rates are associatedwith unusually productive wells. Rapid declines also tend to beassociated with high ultimate production over the lifetime ofthe well, as Beal demonstrated nearly a century ago. ("Declineand ultimate production of oil wells" 1919)

Sceptics often imply rapid decline rates are an unattractivefeature of shale wells, ignoring the fact that production isdeclining from an unusually high initial rate.

The big upfront yield is what makes shale wells soeconomically attractive, resulting in a fast payback oninvestment and high rates of return. While sceptics worry abouthow much wells will be producing after 10 or 15 years, producersare more interested in how much they will produce within thefirst year or two.

The rates of return on shale wells are phenomenal.Continental Resources, the leading Bakken oil producer,claims it can achieve a 20 to 25 percent rate of return on shalewells even at oil prices as low as $60 per barrel, rising to 50to 65 percent returns when oil prices are $100.

MANUFACTURING OIL AND GAS

It is easy to overstate differences between conventional andunconventional production. Environmentalists hostile to shaleoil and gas production highlight fears about groundwatercontamination, seismicity, fugitive methane emissions and thechemicals used in fracking, without realising the same issuesapply to oil and gas produced from conventional fields as well.

How many realise that many conventional wells are alsofracked, sometimes with acid rather than water, or that wellswere being fractured in the 1950s and 1960s with diesel fuel andnapalm?

In many ways, the differences between conventional andunconventional production are matters of degree rather thankind. But in one respect, the difference is profound and oftenunderappreciated.

Conventional producers focus on finding highly concentratedaccumulations of oil and gas and drilling a small number ofhighly productive holes. The process is akin to finding a needlein a haystack. It requires enormous investment in seismic andother surveys to try to improve the odds of drilling asuccessful hole, "de-risking" the process.

Producing shale oil and gas is much more like amanufacturing process. While some parts of the play will be moreproductive than others, the outcomes are far more predictableand less variable. The focus is on improving returns by reducingcosts.

Standardisation, assembly line techniques, reducing drillingand fracking time, and cutting the number of skilled workersneeded while boosting the number of wells drilled and stagesfracked lie at the heart of the business.

The differences between shale and conventional oil and gasplays help explain why shale specialists such as Continental andoilfield services companies such as Schlumberger,Halliburton and Baker Hughes have big winners inthe Bakken and other shales, while oil majors such as Shell have struggled.

The manufacturing approach needed to succeed in shale isfundamentally different from the advanced engineering needed indeepwater exploration and on other complex megaprojects.

Shale's doubters failed to understand these differences. Asa result, they treated shale plays as just another oilfield,rather than understanding the distinctive characteristics of theindustry.

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