2009 to 2014: A Shale Retrospective

By Mike Mueller
VP, Technology & Development

As we come to the close of another year, let’s consider the trends in shale technology and business, with a special look at the microseismic market.

At year-end 2014, we see the continued rapid expansion of the ‘shale gale’ plays threatened by the first significant oil price correction since the Great Recession of 2008-9. During the preceding 5 years, the American oil business witnessed an unprecedented expansion of shale oil and gas drilling and production. This led to the astonishing addition of almost one million barrels per day per year, taking the country from around 5.5 million barrels per day to over 9, and from around 50 billion cubic feet gas production per day, to almost 80. This rapid increase in oil and gas production was the most significant in American history.

The first consequence of shale drilling on such a large scale was the collapse of gas prices at the beginning of this period due to the relatively isolated position of the North American gas market. The market became over supplied by 2011 and the gas price collapsed from over $11/mcf to under $2/mcf, before recovering to today’s $4/mcf. The gas supply revolution inspired a complete rethinking of the role of American gas-derived industrial feedstock manufacturing and the rapid conversion of coal fired electricity generation to gas fired. Capital investment in gas-supplied industries has soared. The coal to gas electrical generation conversion allowed the US to reduce carbon emissions growth by more than 10% and put America close to Kyoto Protocol compliance.

Until the third quarter of 2014, oil prices remained relatively stable above $90/barrel despite the rapid growth in American production. Since oil (vs. natural gas) is a worldwide commodity US production at first had a marginal impact on the global market.  At the same time, economic growth outside of China was sluggish following the Great Recession, and the dollar remained stable against the basket of developed country currencies. However, in Q3 2014 the strength of American economic growth, in combination with sluggish growth elsewhere, fueled a rapid rise in the strength of the US dollar against the tradable currencies and a fear in the market that oil supplies may be too high. The result has been a very rapid bear market in which oil prices have fallen over 30%. It’s not clear that the bear market in oil price has hit bottom. It is also not clear that US oil production is the cause of the bear market as too many other factors influence world oil prices. This is in contrast to the clear relationship between US gas production and the gas price collapse in 2010-11. Perhaps 2/3 of the oil price correction is due to currency effects and lowered demand, and 1/3 due to supply effects.

The US shale revolution was enabled by horizontal drilling and high-volume hydraulic fracturing in combination with the market incentives that private mineral ownership brings. Despite societal concerns about carbon emissions and water consumption, the “shale gale” has sustained itself over the past 5 years. The big trends are: the evolution of the various shale plays from exploration and appraisal into full-bore development, the rapid adoption of pad drilling as the fundamental unit of shale play development, and the pads hosting increasing number of wells. Lateral lengths are routinely at 5,000 feet and greater, and stage counts in these laterals are routinely now at 40 and counting. Testing of fluid chemistry and proppant type has been accompanied by sophisticated multi-lateral stage sequencing at pre-drilled pads.

A key challenge with all the shale plays is the rapid decline of production after the wells are put online. First year decline curves are routinely more than 50% and can approach 90%. This is due to the tight nature of the shales accessed through stimulation and the highly variable amounts of stimulated fracture area and volumes of stimulated reservoir rock accessed by the treatment. A key to understanding this is provided by large footprint microseismic monitoring enabled by surface and near-surface acquisition systems that are larger than the pads being drilled and completed. By seeing, in an unbiased way, the entire pad-wide response to the drilling and completion activity, it is possible to directly observe the fracture area and volume of reservoir rock accessed by the completions. Microseismic monitoring had begun before the shale revolution as a downhole observation well based method with great detail over a small footprint, but the trend over the last 5 years towards large area monitoring from surface methods means a holistic understanding of the development programs’ effectiveness at producing the operator’s acreage. We now have the big picture in hand.

So, where do we go from here? With the bear market in oil price hinting at the first downward trend in shale activity in 5+ years, the impact of poorly producing pads will become a key to each shale play’s ability to deliver positive development program cash flows. The ability to see how effectively an operator has accessed the shale volumes under each pad will allow data-driven determination of low vs high producers at the time of completion. Perhaps it is time to rethink the statistics based, factory mindset development of 100s of pad drilling units - accepting the low producers that don’t return planned cash flow - and implement data-driven, deterministic production prediction and mitigation at the time of completion. It’s time to make all that drilling and completions activity smarter, and the production consistently higher.

Mike