Never Try to Tame A Wildcatter? Changing Approaches to Shale Oil Production

Crude oil production in the Oklahoma and Kansas Anadarko basin increased by 50 Mb/d in 2012 and is expected to increase from 190 Mb/d in December 2012 to 240 Mb/d in December 2013 – another 50 Mb/d (source: Bentek). These numbers are slow and steady compared to the bigger Williston Basin to the north where production jumped by 230 Mb/d in 2012 and is expected to increase by a similar amount this year. And yet a hard core of producers is happily ensconced in the Anadarko enjoying solid returns from drilling. Today we ponder changing approaches to shale production.

The image most folks have of independent oil producers is that of wiry guys wearing hard hats, overalls and cowboy boots staring into the camera with steely jaws as they mop specs of black oil from the latest gusher off their brow. In fact the reality of today’s shale oil production is much different  - since most of the action takes place behind a computer screen in a control room. Here operators move small levers to adjust drilling or completion processes that are happening a safe distance away and are largely controlled by computers. This ain’t your granddaddy’s oil bidness.

But there is still a sense of frontier spirit in the exploits of the independent producers that figured out how to extract gas and then oil from shale formations. Especially in remote locations like North Dakota or West Texas. …the rush to sign up lease acreage in the latest drilling hot spot, …the need to deliver oil to terminals in trucks because there are no pipelines. …using rail tank cars (iron horses?) to navigate past pipeline congestion. …seemingly always waiting on midstream companies to build adequate infrastructure. That’s the way its supposed to be, right?

Or is it? For example, last year we reviewed oil production in the Oklahoma and Kansas Anadarko basin (see Panhandle Hog Shoot). And as we pointed out above, the output numbers in the Anadarko are not as exciting as the Bakken or Eagle Ford basins but they are increasing steadily. When we looked at the presentations that larger producers in the Anadarko made to their investors this year we noted just as much emphasis on terms like “efficiency” and “keeping costs down” as on the obligatory upward pointing production charts. This emphasis is evidence to us of a mature approach to shale production. In fact it suggests that producers increasingly look at shale production as something akin to a factory farming process rather than a wildcatting roughneck ride. Innovation at the wellhead is more about planning and efficiency than it is about potluck drilling in hopes of striking it rich.

Take Apache for example, one of the largest US independent producers and the most active driller in the deep portion of the Anadarko Basin. The company has 30 operating rigs and over 2500 active wells in the basin. Apache has 1 MM “net” acres [1] of leases and claims 32,500 known locations to drill across plays like the Granite Wash, Cleveland, Tonkawa, Canyon Wash and Marmaton. Certainly production numbers are not too shabby - between May 2012 and July 2013 Apache increased Anadarko output from 60 Mb/d to 90 Mb/d of oil equivalent. But the company’s success also owes a great deal to consistency of approach and efficiency.

The Anadarko basin is similar to the Permian Basin in that it contains multiple layers of oil-bearing formations that can be exploited by drilling at different depths (see New Adventures of Good ole Boy Permian for more on these techniques).  The Anadarko is not a “new” oil and gas basin but has already been extensively and successfully exploited for decades using conventional vertical drilling technology. Apache and other producers are now exploiting these proven assets using new horizontal drilling and hydraulic fracturing technology (see Tales of the Tight Sands Laterals for more on these technologies). But the effort is directed towards extracting known resources at the least cost in a systematic manner.

That means keeping downward pressure on costs. The table below is from Apache’s October 2013 Investor presentation and shows the reduction in drilling and completion (D&C – see The Truth is Out There) costs per well in the Permian Basin (Wolfcamp and Cline) as well as the Anadarko (Granite Wash and Tonkawa). The company presentation highlights savings accomplished by using either liquefied natural gas (LNG) or compressed natural gas to power drilling equipment (versus the higher cost of diesel) and further savings by powering frac’ing with natural gas. Because Apache is settled in for the long term and has extensive acreage, it has made sense to invest in their own gathering infrastructure and storage. Apache has also invested in several 60 MBbl water recycling facilities that save money on completions and generate revenue.