Low-cost fracking offers boon to oil producers, headaches for suppliers
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[September 12, 2019] By
Liz Hampton
SMILEY, Texas (Reuters) - At a dusty
drilling site east of San Antonio, shale producer EOG Resources Inc
recently completed its latest well using a new technology developed by a
small services firm that promises to slash the cost of each by $200,000.
The technology, called electric fracking and powered by natural gas from
EOG's own wells instead of costly diesel fuel, shows how shale producers
keep finding new ways to cut costs in the face of pressures to improve
their returns.
E-frac, as the new technology is called, is being adopted by EOG, Royal
Dutch Shell Plc, Exxon Mobil Corp and others because of its potential to
lower costs, reduce air pollution and operate much quieter than
conventional diesel-powered frac fleets. Investment bank Tudor,
Pickering Holt & Co analyst George O'Leary estimates e-fracs could lop
off up to $350,000 from the cost of shale wells that run $6 million to
$8 million apiece.
But these systems can cost oilfield service companies up to twice as
much to build compared to conventional frac fleets. A rapid uptake could
worsen the economics for a sector already cutting staff and idling
equipment as oil producers pare their spending. That leaves this
potentially breakthrough technology to small providers without the means
to fully exploit it.
ONE-SIDED SAVINGS Jeff Miller, chief executive of Halliburton Co, the
top U.S. provider of fracking services, said his firm has tested the
technology but has no desire to promote it.
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"Halliburton will be really slow around frac," Miller said, referring to
the costs of updating diesel systems to electric. Converting the
industry's 500 frac fleets would cost $30 billion, he estimated, too
steep a price for oilfield firms, he said.
He recently advised an oil producer interested in the technology that
the benefits of deploying e-fracs "work for you, they don't work for
us," he said at Barclays energy conference this month.
Halliburton, Schlumberger NV and others have idled scores of
diesel-powered fleets this year as producers cut spending due to flat to
lower oil and gas prices. Consultancy Primary Vision estimates the
number of active fleets in the U.S. fell 19% since April to around 390.
Halliburton cut 8% of its North American workforce and reported
second-quarter profit fell 85% over the year-ago period in part because
of equipment writedowns and severance costs due to weak demand for its
frac service.
"Every week that goes by I get more and more negative about e-frac due
to the harsh imbalance between the benefits achieved by the oil company
and the costs incurred by the service company," said Richard Spears, a
consultant to top oilfield services suppliers.
Schlumberger paid $430 million in late 2017 to acquire a diesel-powered
frac fleet from rival Weatherford International, hoping to expand shale
services. A spokesperson declined to comment on e-frac.
This month newly-named CEO Olivier Le Peuch disclosed plans to write
down investments that were "based on a much higher activity outlook with
the ambition of achieving economies of scale."
"HARD TO JUSTIFY"
E-frac supplier Evolution Well Services, which supplied the equipment
and crew for EOG's Eagle Ford shale operation, is one of a handful of
smaller oilfield firms pioneering the systems.
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![](../images/091219pics/busine33.jpg)
Pump jacks operate at sunset in Midland, Texas, U.S.,
February 11, 2019. Picture taken February 11, 2019.
REUTERS/Nick Oxford
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Evolution operates six e-frac fleets - mobile collections of high-pressure pumps
powered by gas turbine generators - and plans to roll out a seventh next year.
U.S. Well Services, another e-frac provider, has agreements with Apache Corp and
Shell. Conventional pressure pumper ProPetro Holding Corp also announced plans
to bring a handful of e-frac fleets to the market.
"We'd kind of would like to" build more systems without firm customer contracts,
said Ben Bodishbaugh, CEO of Evolution, the only purely e-frac provider in North
America. "But in this market it's hard to justify," he said.
The reason: e-frac fleets can cost up to $60 million apiece because they rely on
pricey gas turbines similar to those that run utilities to generate electricity,
compared with as little as $30 million for a diesel-motor powered fleet.
Evolution would not say how much its fleets cost, but noted it is below $60
million.
"It's a bad time for service companies to be ramping up very capital intensive
service offerings," said Josh Young, chief investment officer with energy
investor Bison Interests. "People always feel pressure to invest in the next new
things, but sometimes you shouldn't be investing in any of the things."
Companies like Evolution and U.S. Well Services that already have e-frac fleets
would be winners if the technology takes off, analysts from investment banker
Tudor Pickering Holt & Co predict. E-frac accounts for about 3% of active
fleets, and could reach between 25% and 33% in the next five years, Tudor
estimated.
EOG began testing Evolution's gear in late 2016, and signed a multi-year
agreement about six months later. The shale company, well known for its use of
cutting edge technology, runs four of Evolution's fleets and plans to add a
fifth next year.
The agreement with Evolution "is an example of how we continue to find
innovative solutions to both reduce our environmental footprint and improve the
profitability of our business," said Billy Helms, EOG's chief operating officer.
EOG is among the handful of top shale producers that generate more cash than
they consume in drilling and shareholder dividends.
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NO SOOT, LESS NOISE
At its Smiley, Texas, oil and gas well site, EOG's crew carried on casual
conversations despite the whir of e-frac pumps. No one wears ear protection,
which is common at conventional diesel fleets, and the towering white silos
holding frac sand were gleaming during a visit in August. At a conventional frac
site just up the road, the towers were black from diesel exhaust.
Evolution's Bodishbaugh said some oil and gas firms see less polluting e-frac as
improving their standing with investors who rate environmental, social and
governance (ESG) attributes in their investments.
"I’d say this year we’ve probably had more inbounds calls on the emissions
profile than the economic savings," he said.
Paul Mecray III, a managing director for investment firm Tower Bridge Advisors
who follows major service companies, said e-frac will only catch on if overall
demand for oilfield services recovers.
"While it may be a good thing longer term, I think it will take a lot longer to
catch on than people think," he said.
(Reporting by Liz Hampton; editing by Gary McWilliams and Edward Tobin)
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