Cheap Fracturing Offers, Benefit for Oil Producers, Headaches for Suppliers

SMILEY, Texas (Reuters) – On a dusty drilling site east of San Antonio, shale producer EOG Resources Inc. recently completed construction of its latest well using new technology developed by a small service company that promises to reduce the cost of each one by $ 200,000.

The technology, known as EOG oil-fired electric and natural gas fracking instead of expensive diesel, shows how shale producers continue to find new ways to reduce their costs in the face of pressures to improve their yields.

EOG, Royal Dutch Shell Plc, Exxon Mobil Corp and other companies are currently adopting e-frac, because of its potential to reduce costs, reduce air pollution and operate much quieter than fleets. classic diesel powered frac. According to Tudor analyst George O'Leary of the investment bank, Pickering Holt & Co, e-fracs could cost up to $ 350,000 in shale sinks costing between $ 6 and $ 8 million.

But these systems can cost oil service companies twice as much as conventional fracturing fleets. Rapid adoption could worsen the economic consequences for a sector that is already reducing its unused workforce and equipment as oil producers reduce their spending. This leaves this potentially revolutionary technology to small suppliers without the means to fully exploit it.

Jeff Miller, General Manager of Halliburton Co, the leading provider of fracturing services in the United States, said his company had tested the technology, but did not want to promote it.

"Halliburton will be really slow around fracking," said Miller, referring to the costs of upgrading diesel systems to electrical systems. Converting the industry's 500 fleets would cost $ 30 billion, he said, at too high a price for oil companies, he said.

He recently informed an oil producer interested in technology that the benefits of deploying the e-fracs "work for you, they do not work for us," he told the conference on energy from Barclays this month.

Halliburton, Schlumberger NV and others have slowed down the number of diesel-powered fleets this year, as producers cut back on their spending because of lower oil and gas prices. Consultancy Primary Vision estimates that the number of active fleets in the United States has decreased by 19% since April to around 390.

Halliburton reduced its workforce in North America by 8% and reported an 85% decline in second-quarter earnings compared to the same period last year, due in part to the depreciation of equipment and services. severance costs due to low demand for its fracturing service.

"Every week, e-frac becomes more and more negative because of the blatant imbalance between the benefits obtained by the oil company and the costs borne by the service company," said Richard Spears, consultant to large companies. oilfield service providers. .

By the end of 2017, Schlumberger had paid $ 430 million to acquire a fleet of diesel-powered spacers from its rival Weatherford International, in hopes of expanding its shale services. A spokesman declined to comment e-frac.

This month, the new CEO, Olivier Le Peuch, announced his intention to reduce his investments "on the basis of much higher business prospects in order to achieve economies of scale".

"DIFFICULT TO JUSTIFY"

The e-frac supplier, Evolution Well Services, which provided the equipment and crew needed to operate EOG's Eagle Ford shale formation, is one of the few smaller pioneer oilfield companies in the USSR. .

Evolution operates six electronic fracture fleets – mobile high-pressure pump sets powered by gas turbine generators – and plans to deploy a seventh network next year. U.S. Well Services, another e-frac provider, has agreements with Apache Corp and Shell. The conventional pressure pump ProPetro Holding Corp also announced plans to market a handful of e-frac parks.

"We would like to build more systems without firm contracts with customers," said Ben Bodishbaugh, CEO of Evolution, the only pure e-frac provider in North America. "But in this market, it's hard to justify," he said.

The reason: e-frac parks can cost up to $ 60 million each, as they rely on expensive gas turbines, similar to those that run utilities to produce electricity, compared to 30 million dollars for a diesel fleet. Evolution would not say how much its fleets cost, but said it was under $ 60 million.

"It's a bad time for service companies to develop capital-intensive service offerings," said Josh Young, investment manager at Bison, an energy investor. "People always feel the pressure to invest in the next novelties, but sometimes you should not invest in any of these things."

Companies like Evolution and the United States Well Services, which already have e-frac fleets, would be winners if the technology took off, according to analysts of the investment banker Tudor Pickering Holt & Co. E-frac represents about 3% fleets, and could reach between 25% and 33% in the next five years, Tudor said.

EOG began testing the Evolution hardware at the end of 2016 and signed a multi-year agreement about six months later. The shale company, well-known for its use of advanced technologies, manages four of Evolution's fleets and plans to add a fifth of them next year.

The agreement with Evolution "is an example of how we continue to find innovative solutions to reduce our environmental footprint and improve the profitability of our business," said Billy Helms, chief operating officer of EOG. EOG is one of the few major producers of shale that generates more money than it consumes in drilling and dividends for shareholders.

No soot, less noise

At its oil and gas well site in Smiley, Texas, the EOG team held informal conversations despite the noise of the e-frac pumps. No one wears hearing protection, which is common in conventional diesel fleets, and the imposing white silos holding fracturing sand gleamed during a visit in August. On a classic fracking site, just up the road, the towers were black because of the diesel exhaust gases.

Bodishbaugh, of Evolution, said some oil and gas companies felt the less polluting electronic divide allowed them to better position themselves with investors assessing environmental, social and governance (ESG) attributes in their investments.

"I would say this year we probably had more internal calls to the emissions profile than savings," he said.

Paul Mecray III, managing director of investment firm Tower Bridge Advisors, which follows major service companies, said the e-frac would only spread if the global demand for services for the oil fields resumed.

"While this may be a good thing in the long run, I think it will take a lot longer than people think," he said.