Shale’s Next Trick… “Re-Fracking”

Dear Resource Hunter,

Less than 10%.

No, that isn’t the current poll support for Donald Trump’s closest pursuer (that is 12% versus Trump’s 36%). I’m referring to the amount of oil or natural gas in the ground that a typical shale well recovers.

That means that more than 90% of the hydrocarbons that are trapped in the rocks are left behind.

That isn’t a problem. That is an opportunity.

Small percentage increases in the amount of oil or gas that can be recovered can make huge differences to the reserve value of E&P companies.

All of that oil and gas left in the ground is on the minds of the companies that control the rights to it each and every day. These minds are coming up with ideas that will lead to the ability to recover progressively more of that oil and gas profitably in the coming decades.

Giving Old Wells a New Life

The shale revolution has been up and running for about 10 years. The advancements that the industry has made over that time have been incredible.

If you compare a shale well that is being drilled today with one that was drilled a decade ago, you might think that an entire generation had passed, not a decade.

There is a huge opportunity for the E&P companies to go back into those early wells and create a significant boost in production and recovery rates (the amount of oil or gas ultimately produced by a well) with a relatively modest capital investment.

What I’m talking about is the re-fracturing of already-producing shale wells — “re-fracking,” for short — which might offer a higher return on invested capital than drilling an entirely new well.

The all-in cost of drilling a new well, putting in place the necessary infrastructure and then fracking it might cost $8 million. On the other hand, the cost of going into an existing well with all the necessary infrastructure in place and re-fracturing it with today’s best practices is closer to $2 million.

When you spend 75% less on re-fracturing, you don’t need nearly as much of a production increase to generate acceptable economics.

In the slide below, Chesapeake Energy details some re-fracturing success that it has been having in the Haynesville Shale gas play in Louisiana.

Pre and Post Refrac Rates

The slide shows a 700% improvement in Chesapeake’s rate of production on this group of wells in the 30 days post re-fracture relative to the 30 days prior to the re-fracture.

That is a big jump, to be sure, but we do need to take this with a grain of salt. I’ve looked at thousands of presentations from oil and gas producers over the last decade and these guys aren’t afraid to stretch the truth.

The more important takeaway from this in my mind is that there is big potential for the industry to get a significant production and reserve bump from re-fracturing. More importantly, these production and reserve boosts can be gained profitably… perhaps more profitably than by drilling entirely new wells.

Additionally, we need to consider that re-fracturing these already-producing wells is relatively new (like this entire revolution was a decade ago) and that the industry is going to get a lot better at it.

Like Chesapeake, Comstock Resources has been experimenting with re-fracturing in the Haynesville. Comstock’s most recent investor presentation shows (see below) that the rate of returns on Haynesville re-fractures exceeds that of new wells by a considerable margin.

Source: Comstock Resources investor presentation

Of course, to attain the rates of return in Comstock’s slide, the first thing that we need is for natural gas to get back to $3.00.

How Big Is This Re-Fracking Opportunity?

The practice of re-fracturing wells is not new. Conventional vertical wells have been re-fractured for many years to try to gain a boost in production, with a wide range of success.

The benefits of re-fracturing have historically been so unpredictable that it became commonly referred to as “pump and pray.” Not exactly a term that a board of directors wants to hear come out of the mouth of its CEO when discussing strategy.

Since those early days, fracturing technology has evolved many times over, which makes re-fracturing a much more appealing opportunity today. I’ve read estimates that suggest that more than 75,000 wells in the United States today are good candidates for a re-fracture.

The oldest generations of wells that were drilled with the earliest versions of technology are the best candidates for re-fracturing. Those wells used far fewer fracture stages and considerably less proppant (frack sand) than what is common in wells drilled and fracked today. According to service company giant Halliburton (HAL: NYSE), since 2010, the number of fracture stages per well has jumped by 30% and the proppant/sand cranked down the wells has doubled.

Re-fracturing these old wells is going to become common for the shale producers. It just might not happen in a big way in the very near future. With oil and natural gas prices both depressed, these companies can’t spend money without knowing exactly what they are getting in return.

Re-fracturing has advanced many times over since the days of “pump and pray,” but drilling new wells is still a lower-risk proposition. If companies drill 10 new wells on average, they basically know what they are getting. At this point, companies don’t yet have the same confidence with re-fracturing.

For re-fracturing to move to the next level, the energy patch simply needs more repetitions. The industry needs to repeat and refine. With balance sheets stretched, now is not the time for experimentation.

A potential catalyst for moving re-fracturing forward may come from the big service companies like Halliburton and Schlumberger (SLB: NYSE). Both of these companies have expressed interest in actually performing the re-fracture jobs for their customers (the producers) and accepting payment out of future production, instead of an upfront payment.

The Oil and Gas Business Is a Real Estate Game

I’m on the front lines of the shale business. My local YMCA is packed with out-of-work rig workers who have no idea when they are going to get the call to go back to work. There is real pain out here, and if oil prices stay where they are, it is going to hurt more.

Make no mistake, though: Shale oil and gas aren’t going away. In fact, I think the amount of oil and gas produced from these shale reservoirs over the next few decades will exceed everyone’s expectations.

These companies sit on land that contains billions and billions of barrels of oil. Current reserve bookings for these companies assume that only 10% or less of this oil gets recovered. If these companies increase the amount of oil (or gas) that they can recover by just 5%, reserves will increase by 50%.

Things look gloomy for the industry today, but oil and gas prices aren’t going to stay depressed forever. In the coming decades, companies are going to increase production rates and drive down costs from these shale plays. The big winners from this are going to be the companies that control the best acreage and have the balance sheets to live through the current mess.

Re-fracturing is just another way the industry is going to improve these shale plays, and it will certainly not be the last big technological rollout for this innovative industry.

Keep looking through the windshield,

Jody Chudley