The key challenge for the US shale industry is to continue improving productivity per well, as illustrated repeatedly in our research. Hence, this short note reviews an advance in fracturing fluids, which has been patented by BP. Diverter compositions are optimised across successive pressurization cycles, to create dendritic fracture geometries, which will enhance stimulated rock volumes.
2019 has evoked resource fears in the shale industry. They are unfounded. Even as headline productivity weakened, underlying productivity continues improving at an exciting pace. These conclusions are substantiated by reviewing 350 technical papers, published by the shale industry in summer-2019. Major improvements are gathering momentum, in shale-EOR, machine learning techniques, digitalization and frac fluid chemistry.
Discussed companies include Apache, BP, Conoco, Chevron, Devon, ExxonMobil, Halliburton, Occidental, Pioneeer & Schlumberger.
Page 2 compares 2019’s shale performance to-date with our January forecasts, identifying that initial-month producutivity has been 20% weaker YoY.
Page 3-4 shows how continued productivity improvements matter, to unlock >20Mbpd of potential US shale output, plus $300bn of FCF by 2025 (at $50/bbl oil).
Pages 5-8 explain away the apparent degradation in resource productivity: it is a function of three alterations to completion designs.
Pages 9-12 outline 350 technical papers from the shale industry in summer-2019. They restore confidence: the industry is not facing systemic resource issues.
Page 12 covers 24 technical papers into “parent-child” issues. We were surprised by the number that were ‘negative’ versus the pragmatic solutions offered in others.
Page 13, 14 & 17 cover leading digitalization technologies: deployment of machine learning increased 5x YoY, while DAS/DTS increased 3x YoY in 2019.
Pages 14-16 cover the maturation of shale-EOR, which was the greatest YoY improvement, reaching 32 papers in 2019. The cutting-edge of EOR is exciting.
Page 18 outlines other technical highlights to drive future productivity higher.
What if there were a technology to sequester CO2, double shale productivity, earn 15-30% IRRs and it was on the cusp of commercialization? Promising momentum is building, at the nexus of decarbonised gas-power and Permian CO2-EOR…
First, this week, we finished reviewing 350 technical papers from the shale industry’s 2019 URTEC conference. The biggest YoY delta is that publications into EOR rose 2.3x. CO2-EOR is favored (chart below). Further insights from the technical literature will follow in a detailed publication, but importantly we do not see underlying productivity growth in shale to be slowing.
Second, we re-read Occidental Petroleum’s 2Q19 conference call. More vocally than ever before, Oxy hinted it could take the pure CO2 from decarbonised power plants and use it for Permian-EOR; with its equity interest in NetPower, 1.6M net Permian acres, and leading CO2-EOR technology. Quotes from the call are below:
- On CO2-EOR: “We are investing in technologies that will not only lower our cost of CO2 for enhanced oil recovery in our Permian conventional reservoirs, but will also bring forward the application of CO2 enhanced oil recovery to shales across the Permian, D.J. and Powder River basins”
- On decarbonised gas power: “What it does is, it takes natural gas combines that with oxygen and burns it together, and that’s what creates electricity and it creates that electricity at lower costs… one of our solutions is to put that in the Permian… for use in our enhanced oil recovery… It will utilize our gas that that if we sold it would make nearly as much”.
- On the opportunity: “We are getting calls from all over the world, with people wanting our help to — figure out how to capture CO2 from industrial sources, and then what to do with it and oil reservoirs”.
Our extensive work on these themes includes two deep-dive reports linked above. Our underlying models can connect c10% IRRs on oxy-combustion gas plants (first chart below) with 15-30% IRRs at Permian CO2-EOR (second chart below). On these numbers, the overall NPV10 of an integrated system could surpass $10bn.
EOR remains one of the most exciting avenues to boost Permian production potential. So far, our shale forecasts assume little direct benefit (chart below). But an indirect benefit is implicit, as we assume 10% annualized productivity growth to 2025, which would underpin a very strong ramp-up (chart below). 2023-25 currently look well-supplied in our oil market model, due to falling decline rates, but this could be compounded by CO2-EOR.
We are more positive on the ascent of gas, stoked by increasing usage in decarbonised power. We see potential for gas demand to treble by 2050.
We see enormous opportunity from CO2-EOR in the Permian. It can double well productivity, generate 15-20% IRRs (at $50 oil) and uplift production potential from the basin by 2.5Mbpd. The mechanism and economics are covered in detail in our deep-dive note, Shale-EOR, Container Class.
But what is happening at the leading edge, as companies try to seize the opportunity?
To deploy CO2-EOR, operators must be confident in the technology. It must be predictable, with well-calibrated models informed by field-tests and laboratory studies.
Excitingly, Occidental Petroleum is developing such models. Its laboratory analysis into CO2-EOR has been published in a new SPE paper, in partnership with CoreLabs.
Oxy is at the forefront of CO2-EOR, according to our screening of patents and technical papers. It has conducted 4 x field trials, with further ambitions to lower decline rates from 2020 and drive value through its Anadarko acquisition.
This note profiles our top five findings from Oxy’s recent technical paper. CO2-EOR’s deployment is supported.
(1) CO2 was found to be “the best solvent” for huff’n’puff in the Permian, after laboratory-testing Wolfcamp cores, with CO2, methane and field gas. Under simulated reservoir conditions, around 3,600psi, bubbles of CO2 immediately began dissolving into the oil, helping to mobilise it.
(2) CO2 swelled the oil by 15-76% under the reservoir conditions tested in the study (below, right). Swollen oil is more likely to dissociate from the reservoir rock and flow into the well.
(3) Accurate ‘Equation of State’ models have been developed, matching the pressure, viscosity and well data from the laboratory study.
(4) Multiple Cycles. Huff’n’puff works by sequentially ‘huffing’ gas into a depleted shale well to entrain residual oil, then ‘puffing’ back the mixture of gas and oil. Ideally, this cycle can be repeated multiple times, recovering more oil each time (illustration below). Oxy’s laboratory study continued recovering material volumes of oil over six cycles. Lighter fractions were recovered in earlier cycles, followed by heavier fractions in later cycles. The authors concluded: “The multi-cycle incremental recovery – even at the small core plug scale – suggests the significant potential for multiple HnP EOR cycles for a future unconventional EOR project design”.
(5) Huge Recovery Factors. What slowed the eventual recovery of oil in the study was the high volume of oil already recovered. Initially, these shale samples contained 10.3% oil (as a percentage of the initial pore volume). By the end of the huff’n’puff trial, they contained just 2.4%, implying c77% of the oil had been drained: an incredibly high number, when compared with c 8-10% recovery factors in most analyst models. The result matches other lab tests we have seen in the technical literature (chart below). The field-scale implications of these studies are discussed in our deep-dive research.
Source: Liu, S., Sahni, V., Tan, J., Beckett, D. & Vo, T. (2019). Laboratory Investigation of EOR Techniques for Organic Rich Shales in the Permian Basin. SPE.
We have all heard the criticism that shale oil is “too light”, so its ascent will create a surplus of natural gas liquids and a shortage of heavier distillates. Less discussed is the opportunity in this imbalance. Hence this note highlights one such opportunity, based on an intriguing patent from Chevron, which could convert ethylene into diesel and jet fuel, to maximise value as its shale business ramps up.
Conclusions and Further Work?
Shale’s light product slate may create opportunities for integrated companies. Chevron’s ethylene-to-diesel patents are one example. But we have also seen a surprising uptick among other Oil Majors in patent filings for GTL, for oxidative coupling of methane and for a process to convert C3-4s into gasoline and diesel range molecules.
Can we help? If you would like to register any interest in the topics above, to guide our further work, then please don’t hesitate to contact us.
Will Shale-EOR add another leg of unconventional upside? The topic jumped into the ‘Top 10’ most researched shale themes last year, hence we have reviewed the opportunity in depth. Stranded in-basin gas will improve the economics to c20% IRRs (at $50 oil). Production per well can rise by 1.5-2x. The theme could add 2.5Mbpd to 2025 output.
Pages 3-5 review the theory of shale EOR. Its recovery factors could in principle surpass conventional EOR.
Pages 6-7 review lab results and field trials. They have been promising, suggesting >1.5-2x production uplifts should be attainable.
Pages 8-10 review the economics in detail. Our full model is informed by technical papers, and can be downloaded here.
Page 11 tabulates key statistics for using CO2 as a huff-n-puff injectant, the economic opportunities for carbon capture, but also the challenges.
Pages 12-13 attempt to quantify the production upside from shale EOR, by adapting our basin models.
Pages 14-15 cover the remaining challenges, including E&P patent-filing insights.
Page 16 lists a handful of companiesat the forefront of shale-EOR, including some earlier-stage start-ups.
EOG has patented a system to deploy pressure and temperature sensors in its frac plugs, which are then retrieved at the surface, providing low cost data on each frac stage. The data can be used to improve subsequent frac stages. We model the economic uplifts at +$1M NPV and +5% IRR per well (at $50 oil).
Pioneer Natural Resources is improving the accuracy of its Midland basin depth-models by up to 40%, using a machine-learning algorithm to re-calibrate its seismic from well logs. Faster drilling and better production rates should follow.
The Majors’ deepening interest in shale was illustrated by Chevron’s $50bn acquisition of Anadarko. Consolidating in the Permian fits our ‘Winner Takes All‘ thesis.
But who else wants more shale in their portfolio? This is not to speculate on M&A, but simply looking at the companies’ research activity last year…
Shale is a ‘tech’ industry. The technology keeps improving at an incredible pace. But Permian technology is improving fastest, extending its lead over other basins.
These are our conclusions from assessing 300 technical papers across the shale industry in 2018. They are outlined in a new, 10-page note.
Across the board, we found 30% of our 300 technical papers should improve future economics. 60% were highly digital, and thus tended to be more impactful. Advanced analytics are still in an early innings.
The Permian stood out, extending its lead over other basins. It produced c25% of all the research; 25% higher-impact research and 40% more data-driven research.