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| Model of a Well Completion (FTS International) |
One
of the many things in my accounting career which truly gives me joy is
Operations Accounting, specifically the logistics related to proppant used in
hydraulic fracturing by the Oil and Gas Industry. To my knowledge, there are no
books or tables of best practices related to this logistics process from the
perspective of management, either operations or accounting. Over a period of
time, I’ll endeavour to provide some guidelines and observations that I have
used successfully. While I will try to group like topics together, there is no
underlying rhyme or reason to the order in which concepts will be presented. To
begin, we’ll discuss the concept of fracturing and the desirability of
proppants within the process at a very high level.
The
efforts related to the production and movement of proppants from the point of
origin to the well-head are of vital interest to any servicing company, and by
extension to their customers. Many costs within this value chain are controllable
or at least predictable and decisions made early in the business cycle --- especially
capital decisions --- have a tremendous impact on profitability.
Mechanical
fracturing as a process is not new; in fact, the concept goes back to Colonel
Edward Roberts, a Union Army veteran who got the idea of tamping explosive charges
with water from witnessing Confederate artillery rounds hit the water in a
canal at the Battle of Fredericksburg (Virginia). The theory was to put a large
explosive charge (called a torpedo) at the bottom of a well to shatter the
surrounding formation, permitting a greater flow of water, petroleum, or
whatever product the well was drilled to extract. This process was called “shooting
a well”. Dynamite was used at first, with nitro-glycerine becoming the
explosive of choice by the close of the nineteenth century. In 1947, a well was
even completed using war surplus napalm as the explosive agent.
Due
to the technology involved, all of the wells treated in this fashion were what
are known as vertical wells. These wells were generally intended to be drilled
straight down from the surface, and occasioned no significant public notice or
concern. While lateral deviation of the well bore did occur and created
significant case law, the concept of directional drilling did not really take
off until the 1970’s.
Horizontal
drilling was the huge game changer. Wells could now be drilled such that the
production area could encompass a relatively large lateral line proceeding
horizontally through a pay formation or “play”, rather than merely punching
holes through it from the top. This opened up “tight” shale depositions for
extractive exploitation.
Tight
shale formations have challenges related to their permeability and porosity. In
short, it is very difficult to induce a flow through such a formation to the
well bore, and is dependent almost entirely on the differential pressure of the
individual well, or what is referred to as the drive. A field may be water
drive, gas drive, or a combination of the two. Think of putting a bookcase on a
tube of toothpaste, and opening the top; the concept is quite similar. It is evident
that the drive will be reduced over time by the release of the pressure
differential caused by movement of gas, oil, and water up the well bore. At some
point, the product will cease flowing by natural means. The traditional pump
jacks seen while driving down the highway assist in scavenging gas and oil, but
eventually even they become ineffective.
There
are a couple of things we can do here. We can inject a fluid (usually water as
it does not contract with pressure) into the formation to increase the drive, e.g. an “injection well”, or we can attempt
to mitigate the reduced pressure by increasing the permeability of the
formation. This is where fracturing comes in. Instead of using an explosive charge,
a series of large pumps are used to put water at extremely high pressure into
the formation. The goal is to shatter the formation surrounding the well bore
lateral to allow the flow of product. This
is done in “stages”. The fracturing process uses copious amounts of fresh
water, some small amount of chemicals, and proppant. The chemicals enhance the
performance of the specific frac stage. Once a stage is complete, a large
amount of the water returns to the surface. This water must be treated or
disposed of, which creates some issues – not due to the chemicals so much -- as
concerns related to naturally occurring radioactive material (NORM) which
return to the surface along with the water. As can be intuitively grasped, it’s
great to crack something, but the crack simply returns to its original
displacement unless we can jam something into it – like a grain of sand to “prop”
the crack open – hence the term “proppant”.
When
proppant was used on an experimental basis, the performance of the well was
increased significantly. The next step was obvious. If fracing a well worked as
a technique for an older, existing well, it might also be employed for a new
well. Fracing is now a normal part of any well completion in a shale formation.
Experience has also shown that the more proppant is used, the higher the resulting
performance. It is now common to use huge amounts of proppant and dozens of
stages to complete a well. This is also being done for “re-work”, where a well’s
performance has declined over time.
In
the future, I’ll discuss proppant, both natural and man-made, and it’s movement
from the point of mining or manufacture to the well-head. Please note that I
will not be discussing anything specific to any one company or operator, and
that these principles have general application across the industry.
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