The oil patch needs more brain for its brawn.
The reason is enough to give pause to anyone enjoying the benefits of cheap, abundant energy produced in the U.S. New wells are fizzling out in their first year, threatening the 3-year-old oil boom.
The challenge is forging alliances between two groups who previously rarely needed to work eyeball to eyeball -- the people who know rocks and the people who poke holes in rocks.
Halliburton Co. (HAL:US) engineer Ron Dusterhoft, who was charged with marshaling a SWAT team of experts to tackle the problem, can now see a solution using artificial intelligence software dubbed Cypher. One Texas well that the team studied for months should have been drilled deeper, at a different slope, to really hit the sweet spot for oil.
“A lot of these wells aren’t performing well because they just haven’t been put in the right place,” he said.
Just when the nation is hastening its march toward energy independence, the industry is concerned about crummy rock causing shale wells to sputter, some dropping as much as three-quarters of their output in the first year. That forces drillers onto a hamster wheel: They have to drill more wells, faster, to keep production up and satisfy investors, who in turn see costs rising and profits suffering.
Oil and gas producers use hydraulic fracturing -- fracking -- to shatter the dense shale formations so that oil and gas can flow through the cracks and into the well. In the early days, fracking was a matter of “brute force and ignorance,” Andrew Gould, then chief executive officer at Schlumberger Ltd. (SLB:US), observed in 2010.
Muscle has taken the industry pretty far. Freshly fracked wells sent U.S. oil production soaring 39 percent since 2011. That’s the steepest climb in history, and if production continues apace, the U.S. would become the world’s biggest source of oil by 2015, according to the U.S. Energy Information Administration.
Rapid well declines threaten to spoil that promise. The average flow from a shale gas well drops by about 50 percent to 75 percent in the first year, and by as much as 78 percent for oil, said Pete Stark, senior research director at IHS Inc.
“The decline rate is a potential show stopper after a while,” said Stark, a geologist with almost six decades in the oil patch. “You just can’t keep up with it.”
The industry has so far been able to live with the decline curve problem because operators have been able to scratch out better initial production in wells, Stark said. “If you don’t have that improvement, then you get stuck after a while and have to drill more and more wells just to stay even,” Stark said.
Now, energy companies including Halliburton and Schlumberger are realizing they need to buttress their efforts with brains before brawn.
Dusterhoft was charged with assembling a SWAT team of engineers and geologists at Halliburton -- something new in shale drilling where the two disciplines traditionally minded their own tasks: geologists found the oil, and engineers figured out how to drill the well.
Understanding the peculiarities of shale rock requires bringing both into the same room for the first time.
Ideally, fracking is supposed to create a spider web of cracks in shale that oil or gas can flow through. If the rock is too “squishy” or pliable, Dusterhoft explains, the large network of cracks may not form, or may collapse, cutting off the flow. Grains of sand that are forced into the cracks to prop them open may not penetrate deeply enough to keep the path clear.
Roughly four out of every 10 clusters of fractures in an average horizontal well are duds, said Mo Cordes, vice president of integration at Schlumberger.
“We’ve got to be able to do better,” said Cordes, who leads a similar effort to integrate experts at Schlumberger. “Everybody’s really starting to realize you have to work together.”
The geologists are helping engineers improve their understanding of underground rocks so they can guide their wells into the sweet spots and fracture the shale more effectively. Technology such as fiber-optic lines and 3D seismic imaging are helping scientists see and hear what’s going on two miles underground.
Geologists are also helping engineers understand the value of letting rocks “rest” after the brutal pounding of fracking, allowing more oil and gas to seep into the new cracks before pumping begins.
Before the advent of better science and technology, the industry was essentially drilling wells blindly, said Peter Duncan, a former geophysicist at Royal Dutch Shell Plc (RDSA) who founded Microseismic Inc. Operators originally viewed shale rock in the “layer cake” model, thinking all of the rock was the same. Real-world experience showed that’s not the case, he said.
Last year Exxon Mobil Corp.’s Chief Executive Officer Rex Tillerson promised to devote the company’s massive research and technology capabilities to understanding shale reservoirs better than anyone else.
“We can’t take forever, but we can be deliberate about it,” Tillerson told investors last March.
Commingling the expertise of their scientists through a software program Schlumberger calls “U-ROC” has led to an almost 30 percent increase in production in some wells in the Eagle Ford, Cordes said.
Halliburton believes it can match or exceed that improvement with Cypher, its similar package of technology and software, said Stephen Ingram, Halliburton’s technology and marketing manager for North America. The system, which has been used so far on hundreds of wells, can tell a producer exactly where to drill and the best way to frack for maximum production.
They’re starting to figure it out. Laredo Petroleum Inc. shares doubled in the five months after it talked on a call with investors in May about working with Halliburton on well-spacing and by using a “science-based approach” in West Texas’ Permian basin. (PBT:US)
By August, Laredo said it had its best-ever results in the Permian and that it was “among the best” of all peers working there. The well’s success was attributed partly to Laredo’s own internal efforts to pump more time and money into the science of drilling and production, said Ron Hagood, a company spokesman.
Ultimately, Dave Dunlap, chief executive officer at Superior Energy Services Inc., which helps drill and frack wells, doesn’t ever see the decline curve challenge going away entirely.
“We’ve drilled all the good stuff,” he said. “These are very poor quality formations that I don’t believe God intended for us to produce.”
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