Oilfield Services Companies Are Betting On Re-Fracking. Will It Catch On?

Improving production efficiency and cutting well site costs have been two key themes in the upstream oil sector over the last few quarters, as producers look to cope with lower cash flows amid a tough crude oil pricing environment. The term re-fracking, or the practice of fracking a well a second time, has emerged a particularly hot buzzword in the industry. The premise for re-fracking is simple: it allows operators to maximize production from existing assets without having to drill and complete new wells. Re-fracking could also help oilfield service companies bolster utilizations of their massive pressure pumping fleets, bringing in additional revenues in a shrinking oilfield services market. The broader pressure pumping product line (which includes fracking) accounts for over 30% and 16% of Halliburton (NYSE:HAL) and Schlumberger’s  (NYSE:SLB) 2014 revenues, respectively, and both companies have indicated that re-fracking could be an emerging opportunity in the current market. ^[1]

The Re-Fracking Market Appears To Be Large

Output from a shale oil well, measured in barrels per day, can drop by as much as 70% within a year after they are fracked. However, by some estimates, only about 8% of  the oil in a reservoir is recovered after the first round of fracking, leaving the asset severely underutilized. However, by re-fracking a well by deploying newer or more effective extraction technology, production rates can be boosted to or near their original levels. Re-fracking essentially simulates the bypassed pay intervals of a shale well and re-inflates natural fissures and helps to contact new rocks. On the face of it, the process appears to be quite economical as well. While it can cost about $8 million to drill, complete and stimulate a new tight oil well, re-fracking an existing well can cost just about $2 million. ((Drillers Take Second Crack at Fracking Old Wells to Cut Cost, Bloomberg, February 2015)) The market also appears relatively large. More than 100,000 tight oil wells have been fracked in North America over the last 4 years. ^[2] According to Bloomberg, there are over 50,000 existing wells in the U.S. that could be candidates for re-fracking.

Inconsistent Results And Lack Of Data Pose A Challenge

Re-fracking is only recently being applied to shale wells and the technology remains in its infancy, with companies still experimenting with different re-fracking technologies. A key challenge for re-fracking lies in identifying the right candidates for re-fracking and deciding on suitable a method to re-frac them. Designing a proper frac also requires a lot of data on a well’s characteristics and the required data points are often not available. For instance, frack crews may need to isolate particular spots along a horizontal well (often running to over 5,000 feet) that need to be blasted in order to yield additional production.

Additionally, gains in production from re-fracking are much more difficult to forecast compared to the output from new shale wells. Even if a well is a good re-frac candidate, current oil prices might still be too low to justify the risks involved and customers might be better off with the certainty of drilling new wells in the most productive areas of their acreage, rather than invest in re-fracking an existing well which could turn out to be a dud. For example, EOG Resources, widely regarded as one of the most efficient U.S. tight oil producers, has not tried re-fracking any of its wells, noting that it still favors drilling fresh wells. ((U.S. shale oil firms say refracking not the best path in downturn, Reuters, May 2015))

Service Companies Adapting Risk-Based Contract Models To Entice Customers

The the nascent nature of re-fracking technology and its inconsistent results are likely to make operators more apprehensive about committing to the service. However, oilfield services companies are exploring production risk-based business models that could limit downside risks for customers. For instance, Schlumberger is looking at contract terms that could even see the company foot the entire bill for the refracturing work, and then get paid back by the operators based on production from the re-fracked well. The model does pose risks for Schlumberger, given that it would need to absorb the initial labor and technology costs for the re-frac. However, the relatively low costs of evaluation (estimated to be a few percentage points of the total re-fracking cost) and the company’s expertise in the area of reservoir characterization should help the company select an ideal portfolio of wells for re-fracking. ^[3] (related: A Look At Schlumberger’s Reservoir Characterization Business)

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1. Howard Weil Oilfield Services Factbook Conference Edition 2015 [↩]
2. Refracs raise questions about further US oil production: At the Wellhead, Platts, April 2015 [↩]
3. ref:3 [↩]