backExtracting oil and natural gas from shale is not a new concept; shale drilling traces its origins back to the early 19 th century. However, advances in unconventional drilling technologies have made unconventional resources more accessible than ever before. Whether it is an industry trade magazine discussing a technical change to drilling processes or a front page headline of a newspaper addressing the relationship between fracking and earthquakes, unconventional resource development is unquestionably a major part of the current global energy landscape. This paper provides a general overview of unconventional resource operations; the strategies industry is applying to enhance value when managing unconventional drilling operations, including new approaches to contracting and the supply chain; and the lessons learned so far with respect to environmental, community and infrastructure needs.
Fracking: The Fundamentals
There is an important distinction between unconventional drilling and unconventional resources. Directional (horizontal) drilling is considered unconventional. While directional drilling has existed with varying degrees of success since the 1920s, it has been commonly used since the 1980s for extracting oil and gas from conventional resources. Conventional resources are hydrocarbons that are formed inside of permeable rocks. Through natural pressure, the hydrocarbon molecules travel through the permeable rocks and collect in a common area called a pool or reservoir. Historically, the commercial production of hydrocarbons has been primarily drilledfrom conventional resources (a reservoir of oil and/or gas reserves). Unconventional resources are hydrocarbons that are found inside of the source rock itself. There is no reservoir of hydrocarbons and no discovery in the traditional sense. Instead, source rock in a particular area with favorable geological features and composition constitutes the area of proposed development. Because the source rock ( e.g., shale) is much denser and less permeable, the hydrocarbons have no natural means to escape and are trapped inside of the shale formations. A mechanical process is needed to release the hydrocarbons so that they can be collected and produced.
The most effective means for releasing hydrocarbons from shale rock has been hydraulic fracturing or fracking. In the fracking process, tremendous amounts of water mixed with chemicals are forced into the well. Because of the intense pressure that is created from the injection of water and chemicals, the source rock fractures and the fractures allow the trapped hydrocarbons to be released and captured. Because the rock is still impermeable and under pressure, in order to prevent the newly-created fractures from closing, specialized sand or other materials such as high-strength plastics (called proppants) are forced down into the well and into the cracks. The hydrocarbons can then escape from the source rock and be produced.
New Operational Landscape: Consider Efficiencies
Fracking has changed the fundamental structure of how drilling operations are managed. This has occurred because the true value creation in an unconventional drilling operation has shifted from the mere discovery of hydrocarbons to the implementation of efficient operational practices and contracting strategies that promote the creation of value. Traditionally, in a conventional play, once a reservoir was found and deemed to be commercial, it followed that by using standard development practices the well could be profitable. This is not necessarily the case with unconventional resources because the hydrocarbons must be manipulated out of the source rock and many more wells are required to extract commercial quantities of hydrocarbons from the unconventional resource play; therefore, profitability is less certain. The customary phases of hydrocarbon ventures are exploration, appraisal, development and production. While these activities continue to exist in an unconventional resource play, the phases often blend together concurrently throughout the life of the development. The reality playing out in industry suggests that sophisticated practices and strategies in developing the unconventional resource are required to ensure value for both the operator and the contractors. By allocating process risk, effectively developing and managing the supply chain and contracting strategies, implementing a schedule, and aligning contractor/operator interests, long-term success can be realized. As a result, operators and contractors are redefining their relationships. Rather than viewing a specific development as a relatively short term relationship involving a minimal number of wells, operators and service contractors may be able to obtain higher total value by engaging in longer term contracts that adopt a project-like focus. A longer term contract allows for greater predictability of expenses for the operator, and revenue streams for the service providers.
Companies are implementing operational and contractual practices to enable a continuous and efficient flow of activity throughout the development chain. Well designs are often standardized to speed up both surface and drilling activities. This approach sets the pace of the project so that it is based on external constraints (like rig and materials availability) and is a notable departure from conventional development practices. It forces companies to think in terms of groups of wells and creates an environment for the development of shale that is similar to that found in a manufacturing environment or in a factory. By allowing innovation and promoting an element of flexibility into the work processes and contractual framework, companies are now using processes that adjust to accommodate a dynamic operational environment. In doing this, companies look to (i) define the triggers for revising existing processes, (ii) allow for continuous design improvement, and (iii) plan operations on a rolling schedule.
The factors supporting the original final investment decision for an unconventional development will likely change during the course of development. The unconventional development evolves during project execution. An awareness of the triggers that may prompt necessary changes, and the ability to adjust to changes, will facilitate both adaptable operating and contracting environments. If an unconventional development is approached with a project mentality, drawing from lessons learned in a repetitive manufacturing setting, opportunities to become more efficient and effective during the course of operations will surface and can be acted on.
Encouraging flexibility and innovation during the course of development are lessons-learned from past practice, and are approaches being adopted in the development of unconventional assets.
Innovation: Supply Chain Considerations and Contracting Strategies
In a typical drilling contract, the service providers (including the drilling contractor) generally hold their profit margins close. A progressive approach toward contracting in the unconventional space is to promote collaboration and incentives, and to implement a schedule in drilling and service contracts. To align the interests of the service contractor and the operator, risk-reward systems may be considered based on objective metrics that can be assessed during the life of the project. If project participants approach unconventional activities with a manufacturing/project mentality, the approach will allow for the operator and service providers to develop efficiencies that create value for both parties. Typical master service agreements may not address the scale and commitment an unconventional development presents. Optimally, the new generation of service agreements will include reasonable levels of transparency and collaboration, thus value. One approach may be for the operator to offer motivators for award of future or continued work. This is achievable if clearly established performance and schedule metrics are established and met. With this approach, the service provider should be encouraged to perform at the best possible level in anticipation of being awarded future work. Similar methods have proven successful in the construction industry, and may be adapted to contracting in the unconventional resource drilling space, enhancing both efficiencies and value.
The supply chain is critical to contracting strategy in the development of unconventional shale plays. As with manufacturing operations, a lean supply chain creates value. A significant percent of the cost related to unconventional resource drilling and completion operations will be allocated to the payment of third-party suppliers. Managing these costs and the supply chain create efficiencies that are critical to a successful unconventional resource project. Approaches that should be considered when developing procurement practices and contracting strategy include the bundling of services, pull replenishment systems, demand planning, and similar procurement approaches that maintain an effective and economical purchasing environment. Sound materials management practices that allow for continuous improvement are reflective of best practices in implementation of unconventional supply chain efforts. Processes should be considered to address infrastructure challenges; adequate stock and replenishment of materials, equipment and spares; disposal and storage of waste; and general logistics concerns both in the area of operations and in gaining access to and from the area of operations.
The Basics: Water and Sand
A major component of a fracking operation is a consistent supply of water and sand. Fracking activities may create water supply demands in excess of 5 million gallons (20,000 cubic meters) of water per well and 8,000 tons of high quality quartz sand per well. With such large quantities being necessary, it is fundamental that operators know how they will maintain a consistent source and supply of water and sand (or proppant) to meet these demands, in addition to having plans for water disposal.
New technologies are enabling operations to be more water efficient. By way of example, two types of fracking methods include (i) a slickwater process and (ii) a process that uses crosslinked gels. A crosslinked hydraulic fracture (which uses high viscosity gels) generally requires higher quality water, but lower volumes of water than a slickwater frack. The composition of the typical crosslinked gels may interact with basic source water in an inefficient manner; thus the requirement for a higher quality water. In slickwater fracking, higher water volumes are required with lower sand and gel concentrations; therefore, the composition of the water is not as critical, and brackish water or possibly saline sources (as well as other non-freshwater sources) may be used. Understanding the water requirements (volume as well as quality) will be part of the planning and procurement process.
There has been a trend in the industry to rely more on re-use and recycled fluids (this typically means re-used from prior fracking operations) with a view to (i) reduce costs, (ii) minimize depletion of fresh water, and (iii) lessen the overall environmental impact of the operations. Recycled water must be treated before it can be re-used to remove residual hydrocarbons, some of the salts, and other impurities. The strong demand for water resources during the early development phase of operations, especially where local water resources are scarce, has been a constant challenge faced by the producers, local communities, regulators and policy makers. Depending on the region of operations and water availability, water accessibility must be addressed early on.
Once the water used in fracking operations is no longer required, it becomes waste and must be disposed of. The most common disposal alternatives are (i) deep well injection, (ii) treatment and disposal into disposal wells or re-use, and (iii) land application (which may also require pre-treatment). Evaporation ponds are a component of the operation they are used to maintain the water until it is treated and re-used or disposed of.
As mentioned earlier, sand or fabricated beads mimicking sand, are used in the fracking operation as a proppant. They are called proppants because they in fact - prop (or hold) the fracture open allowing for hydrocarbon movement within the geologic formation. When the fracking pumps are turned off, the fractures begin to close, and are only held open if there is enough sand grain in the cracks to resist the force of the closing fracture. The frac sand is typically high purity quartz that can stand incredibly high pressures. Frac sand can be either natural material made from high purity sandstones, ceramic beads processed from bauxite, or small metal beads made from aluminum. Needless to say, each of these materials when used in fracking operations is called a proppant as they all serve the same function. The size and material of the proppant are carefully selected based on specific operational and technical requirements.
Progress: Re-fracking
A notorious problem with fracking is the reality of steep production decline rates. As global crude prices have declined, fracking of new wells has become less attractive for operators. Oilfield services companies are actively seeking ways to maintain their market share given current market challenges (whether these challenges are services supply constraints or demand constraints due to the commodity price decline). As a result, re-fracking has emerged as a possibly more economic and more efficient way to boost production in declining wells. A well that has previously been fracked has a significant number of fissures of various sizes throughout the wellbore. Re-fracking uses existing well-bores and re-stimulates them by injecting small plastic balls back into the wells at very high speeds. These balls, also called diverting agents, will find their way into the larger cracks within the formation since the larger cracks have the lowest pressure and therefore less resistance preventing the full release of the hydrocarbons. Once enough of these balls are re-injected, the pressure is decreased, and the larger cracks have been sealed, the operator can begin a process of re-injecting chemicals and proppants to stimulate smaller cracks that are under higher pressure.
Initial reports discussing the success of re-fracking have been promising; however, many industry experts are skeptical regarding these results. An initial industry study found the following positive results: (i) re-fracked wells cost up to 75% less than new fracking new wells, (ii) initial production rates of a re-fracked well was in excess of 90% of the same well after initial stimulation, and (iii) once a well is re-fracked there may be an improved production decline rate. All of these signs are positive for oilfield service companies and operators that are interested in increasing production without the large capital outlay required for drilling new wells. While the initial results have been positive, many industry experts and onlookers are not as optimistic. First, commentators are skeptical about the high initial production rates of a re-fracked well mainly because very few wells have been re-fracked to give an accurate estimate of their level of production. Second, some publications suggest that wells that were originally poorly fracked in the Eagle Ford were re-fracked with tremendous success (correcting earlier inefficiencies), skewing the average percentage to appear much higher than it actually is. As industry adopts the re-fracking practice on a broader scale, the primary hurdle for re-fracking (lack of research and testing of this technology) will become irrelevant.
Environment: Proactive Approach
In terms of a proactive approach to potential environmental challenges lessons learned by the industry demonstrate that communication and sharing of information with stakeholders is key. As with any major project, interested parties want to understand the impact of the project on communities, the environment, and business, as well as the plan to mitigate any negative consequences. Active planning and early mitigation efforts implemented to preempt future environmental consequences are fundamental to managing opposition or problems once operations are underway.
Much discussion has (and continues) to take place concerning the impacts of unconventional drilling and fracking on the water table. Regulators in the United States found that, pursuant to applicable Environmental Impact Statements, contamination to ground water could occur from fracking operations although they concluded that the likelihood of contamination is small. In addition, after conducting studies of possible migration from shale formations into ground water, United States regulators concluded that no evidence of migration could be found. Many studies support that when fracking activities are undertaken properly, the risk of ground water contamination is negligible.
Water demands have also been thought to pose environmental problems in water challenged areas. If water comes from natural sources and competes with domestic and agricultural demand it could have significant negative consequences on communities. To address this risk, fracking fluids are now typically recycled and reused; however, in arid areas, water availability will continue to be a challenge.
Within the central and eastern United States, the number of earthquakes has increased dramatically over the last few years. This increased frequency prompts the question as to whether the increase in seismic activity is due to either increased fracking activity or fluid injection related to fracking. The United States Geological Service is currently deploying various methods to further study seismic activity in the vicinity of fracking and water injection sites. Current thought leaders are leaning towards the view that fracking is not causing an increase in earthquakes, however, wastewater disposal may be a cause. Factors that are considered when analyzing the impact of wastewater injection include: the injection rate, the volume of wastewater injected, existing faults in the area, and the geologic ability for the fluid pressure to travel to existing faults. Current court decisions in the US have not placed the liability on the producers, but did leave the door open to future challenges should additional evidence emerges. Surface and infrastructure must be taken into account when considering a new fracking opportunity. One of the first concerns is the influx of workers that are necessary to operate a fracking project. Communities that are not prepared for the massive population growths will experience radical changes when large numbers of workers descend upon them. In order to accommodate these workers, new housing may have to be built, and in the case of remote areas, the responsibility to build and maintain this housing may fall on the company performing the fracking operation. New roads, additional utilities, local accommodations, and other general infrastructure considerations must be part of the planning process in areas that are not prepared for the level of activity typically associated with fracking operations.
Education, transparency, and planning are critical measures that can minimize backlash from unconventional resource drilling operations.