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 When oil prices began falling a year and a half ago in the deepest
rout in a generation, many analysts expected U.S. crude production,
especially from fracking in the new shale plays that contributed to
a global supply glut, to follow quickly.
Producers, such as Continental Resources Inc <CLR.N> and Whiting
Petroleum Corp <WLL.N>, have slashed spending on almost everything,
in some cases even leaving drilled wells unfinished to conserve cash
and wait for a sustained turnaround in prices.
With oilfield activity suddenly contracting, production from a
dwindling number of freshly fracked wells would be unable to
compensate for the rapid depletion of older wells. Yet that
long-anticipated turning point has only just begun to emerge -
partly because producers had a couple more tricks in store.
Some drillers are spending a little bit more on measures that are
subtly flattening the so-called "production curve" of shale wells,
either by limiting the initial surge in output or by squeezing a few
additional barrels out of older wells, according to industry
executives and analysts.
The measures offer differing benefits.
Choking output at newly fracked wells curtails immediate supply and
revenue in hopes that prices will be stronger later, whereas
maximizing output at old wells with things like "artificial lift" is
a relatively cheap way to increase volume and immediate revenues.
Baker Hughes Inc <BHI.N>, the third-largest services company in the
U.S. shale patch, cited its artificial lift business as the "one
notable exception" to a sector-wide slump in its latest quarter,
growing by 4 percent even as other shale-related revenues fell 10
percent.
"Companies still want to grow production, they want to generate
cash," said Wade Welborn, vice president of artificial lift at Baker
Hughes. His business offers "a means to increase that cash flow."
For oil markets, they amount to the same thing: the long-anticipated
fall-off in U.S. shale oil output is still proving slower and more
tempered than anticipated, impeding the process of correcting the
global glut that has walloped prices.
"Production optimization is going to be the next phase of the shale
revolution," said Andrew Slaughter, director for the Deloitte Center
for Energy Solutions. "The low price environment will give companies
and operators a chance to take stock of the techniques that work."
LATE PHASE LIFT
The volume of daily production from a new shale well typically
declines by 70 percent in the first nine months, according to
estimates provided by SunTrust Robinson-Humphrey analyst Neal
Dingmann.
Yet, that sharp decline rate has been shockingly slow to translate
into lower production across the United States.
While the number of oil rigs collapsed by some 75 percent since the
end of 2014, U.S. production has only barely begun to ebb, a
disconnect generally attributed to the increasing productivity of
the hydraulic fracturing process, with each new well yielding more
barrels than the one before.
But other measures are also in play by companies keen to maximize
immediate revenues to cover interest and other payments, and avoid
the cost and hassle of shutting in wells.
For instance, rather than forking out $3 million to $6 million to
drill and frack a new well, a producer can spend just
$250,000-$500,000 to reinvigorate an older well with artificial lift
- which may involve injecting chemicals or gas into perforations, or
using an electrically driven pumping system.
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With lift, a well can begin to flow again at 50-75 percent of its
initial production rate in most instances, said Evercore ISI analyst
James West. That may help extend the life of a well that would
otherwise be slated for abandonment.
"Demand is strong because it is not directly correlated to new wells
and drilling," said Kyle Chapman, president of Weatherford
International Plc production and completion line.
Devon Energy Corp says it is using workovers, refracking, artificial
lift and other techniques to make its wells more productive, even as
it cuts spending for the year by 75 percent. It expects 2016 output
to fall about 10 percent.
Older wells, in production, help companies cover costs and it would
cost more to shut them down, said Julius Walker, a senior consultant
at JBC Energy in Vienna, noting this was contributing to "production
resilience" and causing output to outperform the firm's forecasts
based on historical models.
For example, in the Bakken - heart of the shale revolution -
official data showed production in the fourth quarter was 60,000 bpd
- or about 5 percent - higher than what JBC had estimated based on
well data and historical decline rates.
CHOKING ON OIL
Other producers are taking a different, and cheaper, approach, by
throttling back the initial production (IP) from newly fracked
wells, pumping less now but more later and preserving pressure
within the underground reservoir.
Most, if not all, recently drilled wells include a choke, a piece of
steel placed in the flow path of oil coming out of a producing well,
and more companies are now using them to curb early production in
ways that can boost overall output from a well by as much as 10
percent, experts say.
"It's like if you take a coke bottle and shake it up and all the
drink fizzles up. But if you don't shake it up, you end up getting
more to drink - choking has the same effect," said Mike Breard, an
analyst at Hodges Capital Management in Dallas.
Continental Resources - an industry pioneer that essentially stopped
finishing new wells in North Dakota's Bakken shale field - is also
applying chokes to manage production from three news wells in
Oklahoma's STACK play.
For example, its Compton oil well, which has been producing for 51
days, pumped 80,000 barrels of oil equivalent in its first 41 days
online, but has since been restricted to flow at 1,670 barrels of
oil equivalent per day.
(Reporting by Amrutha Gayathri and Swetha Gopinath in Bengaluru;
Editing by Jonathan Leff and Marguerita Choy)
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