Recent developments in horizontal drilling technology have revolutionized an already revolutionized and unconventional way of drilling. I’m not exactly sure which company founded the technology, but it doesn’t matter because they’re all starting to use it in one form or other. So what is this new technology? It’s time to fill you in.
Now, without turning into an engineer on you guys, let me explain current fracture technology and the new technology as simplistically as I can. Essentially, using the old method, stimulation of the rock was made in linear fashion away from the wellbore, almost completely vertical. The new method attempts to get a better stimulation closer to the wellbore by making many connections and therefore more entry points into the wellbore. Is it hard to imagine what that looks like? A picture is worth 1,000 words so directly from Whiting Petroleum’s technical presentation two weeks ago, here’s a picture of the new evolution of hydraulic fracturing.
Source: WLL JP Morgan Technical Presentation (Oct. 3, 2013)
To give you an idea of the kinds of results this has brought to hydraulic fracturing, Whiting Petroleum did a study comparing 8 wells using the new technology and 31 wells using the old vertical completion method (extending far out from the wellbore). They compared drilling and completion costs, total proppant used, and the average initial production (IP). Here were their results:
Source: WLL JP Morgan Technical Presentation (Oct. 3, 2013)
More proppant was used, but fewer wells were drilled. Essentially, the costs were the same for the two groups, but the results were staggering how much could be recovered so quickly using the new, denser stimulation process.
Conditions have improved as well, as natural gas prices have stabilized this year, and oil thus far remains above 0/barrel in the US. If China continues to stabilize its manufacturing and the Fed continues to print, print, and print then oil prices should stay firm.
Another catalyst that has helped the performance of E&P companies has been the passing of California Senate Bill 4, which has formalized the permitting process for companies to begin hydraulic fracturing. Yet another catalyst has been the conditional approval from the U.S. Department of Energy to export liquefied natural gas for a fourth company (Dominion Resources), pending approval from the Federal Energy Regulatory Committee. The conditional approval came in September.
As I said before, many exploration and production (E&P) companies have started using this methodology or some variation of it to increase production in 2012 and 2013. I’ll leave the names of these companies up to you for homework. The energy sector still looks like one of the best values in the market right now to me, judging by performance over the last two years and recent developments. If you haven’t done your fracturing homework, it’s time to get to work.
