Fracking 2.0 Was a Financial Disaster, Will Fracking 3.0 Be Different?

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Two years ago, the U.S. fracking industry was trying to recover from the crash in the price of oil. Shale companies wereย promotingย the idea that fracking was viable even at low oil prices (despite losing money when oil prices were high). At the time, no one was making money fracking with the business-as-usual approach,ย but then the Wall Street Journal published a storyย claiming all of this was about to change because the industry had a trump card โ€” and that wasย technology.

Today, frackers are again relying on technology as a financial savior, but this time, they are looking toย Microsoft.

As ExxonMobil embarks on an ambitious move into fracking in the Permian oil fields of West Texas, itย has announced a partnership with Microsoft to use cloud technology to analyze oil field data and optimize operations.ย Exxon claims the move could generate โ€œbillions in net cashย flow.โ€

Time will tell if the Microsoft cloud will makeย Exxonย rain profits in theย Permian.ย 

Frackingย 2.0

In March 2017, the Wall Street Journalย ran an article with the headline,ย โ€œFracking 2.0: Shale Drillers Pioneer New Ways to Profit in Era of Cheap Oil,โ€ which detailed the ways the shale industry expectedย technology could help itย finally deliver profits. The article mentionedย โ€œlonger, supersize wellsโ€ and said, โ€œThe promise of this new phase is potentially as significant as the originalย revolution.โ€

The article highlighted EOG Resourcesย (as in, Enron Oil and Gas), a company often touted as the โ€œApple of oil,โ€ and quoted the companyโ€™s chief information officer saying that technology advances allowed its employees to work at the โ€œspeed ofย thought.โ€

It also reported thatย Chesapeake Energy was betting on these new supersize wells as part of its โ€œturnaround strategy.โ€ Chesapeake needed to โ€œturnaroundโ€ from losing money and move in the direction ofย profits.

In June 2017, investment website Seeking Alpha trumpeted โ€œThe Arrival of Super-Lateralsโ€ as a technological accomplishment for the shale oil industry. (โ€œLateralsโ€ are the industry term for the horizontal wells used in the fracking of shale oil and gas). That article featured Chesapeake Energyโ€™s new achievements in drilling longer lateralย wells.

But supersized wells weren’t the only solution for keepingย shale drillers from losing more money. Another wasย more wells per drilling pad. A year ago shale company Encana announced plans forย โ€œcube development,โ€ in which it would drill 64 wells on one gargantuan drilling site in the Permian oil fieldsย of Westย Texas.

The same thing was happening in the Marcellus Shale in Pennsylvania,ย where top natural gas producer EQT Corporationย had plans for drilling 40 wells per pad. The companyย recalled the early days of fracking when drilling threeย wells per pad was seen as a significant breakthrough. As the Pittsburgh Post-Gazette reported at the time, the higher number of wells per pad required โ€œcreative geometry,โ€ which โ€œensures that the wells donโ€™t crowd each otherย underground.โ€


Oil and gas fracked well sites in Wyoming.ย Credit: Ecoflight

The Post-Gazette also quoted Dave Elkin, a senior vice president of asset optimization at EQT, touting the ever-increasing lengths of horizontal wells, as saying the โ€œeconomic and technological limitโ€ for those in the Marcellus Shaleย was 21,000 feet, or just shy ofย 4ย miles.

With more advanced technology delivering longer horizontal wellsย and creative geometry packing them into smaller areas,ย profits seem likeย the next logicalย step.

Butย Fracking 2.0 was a financial disaster, and shale drillers’ย desperate attempts to make money any way they canย is coming back to haunt them in a bigย way.

Frac Hits and Technologicalย Limits

EQT did indeed drill the longest wells but alsoย lost a lot of money in the process. According to the Wall Street Journal, โ€œThe decision to drill some of the longest horizontal wells ever in shale rocks turned into a costly misstep costing hundreds of millions ofย dollars.โ€

EQT started 2019 with a round of layoffs. Chesapeakeโ€™s supersized wells meant that in 2018 the company spent $600 million more than it made to produce oil andย gas.

But that wasnโ€™t the really bad news for the fracking industry, which was learning that its โ€œcreative geometryโ€ was mostly creating losses. Encana โ€” the company with the super pad of 64 wells โ€” also announced layoffs. In a letter to the Texas Workforce Commission, Encana said, โ€œThe company intends to gradually separate employees between now and May 31, 2019,โ€ moving from creative geometry toย creative ways of describingย layoffs.

And while those are just three companies that tried to push the limits of fracking technology, the issue of packing too many wells on the same pad could greatly alter the economics of the fracking industry. As I wrote in August 2018, when oil and gas wells are too close to each other, the fracking process can damage nearby wells โ€” a process known as โ€œfrac hits.โ€ The result can costย drillersย money and greatly reduceย the amount of oil they can pump from theseย wells.

Two years after its Fracking 2.0 story, the Wall Street Journal published one titled, โ€œShale Companies, Adding Ever More Wells, Threaten Future of U.S. Oil Boom.โ€ย  The article details how packing too many wells on a drilling pad is โ€œturning out to be aย bust.โ€

According to the Journal, this reality could lead to an โ€œindustrywide write-down if they are forced to downsize the estimates of drill sites they have touted to investors.โ€ For a highly leveraged industry on a decade-long money losing streak, that isnโ€™t goodย news.

Industry analysts at Wood MacKenzie started to warn about the limits of technology‘s ability toย deliver more oil in the Permian in 2017. In the Wall Street Journal, Robert Clarke, research director at Wood Mackenzie, said, โ€œUnless there is a massive technological breakthrough, those child wells are going to be smaller.โ€ Child wellย isย the industry term for the multiple wells drilled on a pad around the first โ€œparentโ€ย well.

Once again, unless technology can change the financial equation, theย fracking industry is inย trouble.

Which brings us to Frackingย 3.0ย โ€ฆ

Fracking 3.0: Exxon Bets on Microsoft to Solve theย Problem

Despite the pastย financial disastersย and failure ofย new technology to deliver profits for frackers, the oil industry’s biggest players are now getting in on the game in the prolific Permian oil fields. And the solution to fracking’s profits problem โ€” according to the likes of ExxonMobil โ€” is Microsoft. Apparently cloud technology has been the missing ingredient in theย Permian.

In the past week, Exxon and Chevron have both announced plans for major investments in the Permian Shale, which they promise will deliver large increases in both oil productionย andย profits.

Much likeย in 2017, current headlines have been touting Exxonโ€™s plans and its partnership with Microsoft to use technology to finally figure out how to make money fracking in theย Permian.

It appears to be an effective public relations push by Exxon โ€” which was much needed. A year ago Exxonโ€™s poor financial performance wasย linked to its failure to make a big move into fracking shale for oil. At the time, CNN wrote,ย โ€œExxonMobil missed the invitation to America’s big oilย party.โ€

While this latest promise of profits from fracking now has some of the world’s largest companies behind it,ย these plansย are nothing more than a press release at this point. Which makes thisย a good time to revisit when Exxon made a big move into natural gas in 2010. Exxon bought natural gas producer XTO for $40 billion, and while the U.S. is producing record amounts of natural gas in 2019, this deal is viewed as one of the worst in the history of the energyย industry.

โ€œThat was one of the worst acquisitions in the history of the energy business. It was exquisitely poorly timed,โ€ Pavel Molchanov, an energy analyst at Raymond James, told CNN in 2018.ย  โ€œโ€ฆIt was essentially $40 billion down theย drain.โ€

Perhaps Exxonโ€™s big move into shale oil won’t repeat history, and the oil giant will finally unlock the secret to profits while fracking for shale oil with improvedย technology.

For some perspective, however, it helps to look at how EOG โ€” the โ€œApple of oilโ€ย โ€” is doing theseย days.

For that, let’s turn to Art Berman,ย a leading industry analyst with a strong track record on many aspects of fracking for oil and gas. In February he published an analysisย showing that 2015 was the best year for EOGโ€™s well performance for its Eagle Ford wells in Texas and that 2018 might be theย worst.

Technology apparently isn’t delivering great results for the โ€œApple of oilโ€ โ€” but perhaps Microsoft has theย answers.

Main image: Original photoย Marcellus Shale Gas Well –ย Jackson Township/Butler County, PA by WCN 24/7ย under licenseย CC BYNC 2.0ย adapted by Justin Mikulka,ย CC BYNCย 2.0

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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