The Current Squeeze on Drilling & Fracking Companies

by Duane Nichols on February 13, 2015

The Current Squeeze on Drilling & Fracking Companies

Commentary by S. Tom Bond, Retired Chemistry Professor and Resident Farmer, Lewis County, WV

Let’s begin by remembering how the fracking boom got started. Shale had been known for some time as a “source rock” for gas, the idea was that gas in seams above it had been formed in shale and migrated up to the porous sandstone and limestone where drillers had successfully obtained paying quantities.

Attempts to get gas from shale formations were generally failures. Shale lacks the interconnected pores of sandstone, but taking samples by core drilling showed the gas was there – huge amounts. The problem was how to get it out.

Fracking itself had been around for some time, used in sandstone, but the more or less simultaneous maturation of several new technologies, along with the vast reserves predicted for shale gas (DOE’s 1976 Eastern Gas Shales Project determined there was a lot of gas in shales) spurred it on. The new technologies included horizontal drilling in shale (DOE), the use of slick water and proppants in multiple fracturing (DOE), inertial guidance of the drill head (allowing precise directional and positional control) and microseismic observation of the actual fractures (DOE). (Technologies marked DOE were researched by the U. S. Department of Energy.)

The first successful well was drilled by Mitchell Energy, and subsidized by the federal government according to Dan Steward, Vice President for Mitchell. “They did a hell of a lot of work,” said Steward, “and I can’t give them enough credit for that. DOE started it, and other people took the ball and ran with it. You cannot diminish DOE’s involvement.”

There was a certain amount of stumbling in the 1990′s, it was like a hot new girl at school, everybody and his little brother chasing it. One type of company was Chesapeake Energy. Aubrey McClendon started the company with $50,000 and a lot “chutzpah.” He appreciated the need for reserves, and went about getting them as rapidly as possible. It was built on PR and that other two letter abbreviation that frequently goes with PR. (Hint: what is a male cow.) His board of directors was almost entirely politicians. When they tried to drill, somedays they had so little diesel they had to stop drilling, according to my expert (see last article or note below). They even tried to redrill older wells, converting them to shale wells to save the initial drilling. Then they tried “farm outs,” letting other companies do the actual drilling, while they concentrated on leasing more.

Many such companies leased beyond their means to drill, because “there is only so much land out there,” and eventual size of the company depends on how much land you have. Foreign countries desperate for reserves, like China and India, and others, like Norway and Britain, which had money, became important sources for capital. Bankers who handled the money were riding high. The term used to describe this is “play promotion.” It was possible because the initial production of some wells was fabulous, and the promoters had not learned the rapid decline typical of shale wells. They projected ultimate yields as though the decline rates were 3-4%, like conventional wells in sandstone, when in fact ,the wells had rapid decline rates and were down to 75% of original rates in 3-4 years.

At the other extreme were the major oil companies, like Exxon and Shell and BP. With already vast operations and strong capitalization they were slow to enter – conservative in the true sense – waiting to get in until they could see which way the wind was blowing. But get in they did. Exxon bought XTO, a shale drilling company at a too-high price. It is now a drag, but they are going to be able to show good return to their investors this fourth quarter, after the fall of price of oil, now in the $40-50 per barrel range. Expect companies like this to do relatively well.

The companies who leased much more than they could drill, those that went in deep and have to rely on service companies to carry the weight of drilling or are unfortunate in where their lease holdings lie, will have more difficulty. Investors (investment funds, retirement accounts and banks) pumped more than $1.4 trillion into the oil and gas industry the past five years. Bloomberg tells us that they are feeling the pain, too. It says “The bear market has wiped out a total of $393 billion since June.”

As for which shale companies will go first, here is a voice more expert than mine. Notice this matrix has been worked out by Goldman-Sachs. There are several familiar names there.

Finally, how will it affect the “little people” – the workers, people living in the drilling area, i.e., folks like you and me. Some experts believe that the companies will first take it out on labor, in lower pay and lower per diem (if any).

They will cut corners, so safety is out the window. Cutting costs means less care in cementing in the well casings, none of this leisurely 8 hour wait while the cement sets up. (So more leaks in well casings, and aquifer damage will result. That is technically called “well integrity.”) They will work harder to play one supplier off against the other. Supplier prices will have to adjust in time, but haven’t yet.

Where in the past they have used $6M to drill a well, they will aim for $4.5M. It’s get cheap or get out. They will decrease in use of expensive technology, and so will have less control over where the bore goes. As for royalty owners, who have a problem collecting their money already, witness the $8M suit for back royalty payments in Doddridge County, so expect it to get dramatically worse. Squeezing on roads and other public facilities will redouble. Cleanups are expensive, so they will be minimized.

It will be tougher to get the money from investors they need to drill. Quarterly reports by each company are a key, and they will get less reliable. The safer companies will pick up acreage from the losers. Public relations and political arm twisting will not be shorted, because these are the life blood of the fracking industry. The coming adjustment will be messy.

Assistance with my articles has been provided by others knowledgeable regarding shale drilling, fracking, and the related activities.  This is to acknowledge those who have provided input and comments to me.   Thank you very much, S. Tom Bond, Jane Lew, WV

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S. Thomas Bond February 13, 2015 at 4:03 pm

The day this article appeared, February 13, 2015, was Global Divestment Day. There were more than 400 events in 48 countries around the globe.

Individual members pledge: 1. Make no new investments in the top 200 oil, gas and coal companies. 2. Sell my existing assets tied to these oil, gas and coal investments within 3-5 years. 3. Invest in a sustainable and equitable new energy economy.

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