"Old Oil Is New Again; Companies say conventional wells can be profitable, no fracking required"
Cook, Lynn . Wall Street Journal (Online)
From California's Central Valley to the Native American lands of Oklahoma, more small- and mid-sized oil firms--many backed by private equity--are forgoing expensive shale drilling projects and opting for old-school wells instead.
As crude prices languish under $50 a barrel, and with increasing costs for land, labor and infrastructure, some shale fracking operations are starting to look expensive. That has some investors turning to conventional drilling to make a profit.
Tapping shale involves fracking, drilling horizontal wells that extend for more than a mile, then using a highly pressurized mixture of water and chemicals to break open underground rock layers. The process has attracted billions of dollars in capital because it can unleash huge volumes of oil, but at today's prices most producers are losing money on every barrel they pump.
Some oil companies are choosing instead to apply newer technology and methods to vertical wells in century-old American oil fields, betting they can wring out faster and safer returns. The trick, they say, is finding the special locations where stranded oil can be profitably extracted from conventional wells, which are cheaper. They tend to cost less than $1 million, compared to between $6 million and $8 million for an average shale well.
As a result, smaller outfits drilling traditional wells in and around California and Oklahoma say they can make the investments work even at $10 to $30 a barrel.
White Knight Production LLC, a driller based in Lafayette, La., is re-activating 60-year-old wells in Louisiana and Texas that were turned off in the 1980s, when the last major oil bust dropped prices to $10 a barrel.
It made sense to turn them back on and invest in newer artificial lift systems and other technology that can push more oil to the surface, said White Knight Chief Executive Jerry F. Wenzel.
In California, the company was able to get some old wells that were producing just five or 10 barrels a day up to 100 barrels a day by using gravel packs to keep silt and sand from building up inside flow lines. The cost of the packs: $100,000 a well, which White Knight recouped in a few months.
White Knight also has drilled new wells in California for roughly $800,000 each, finding that many spots were tapped extensively, but only shallowly, last century, leaving 20 to 30 different layers that can produce crude.
"That's the real magic," Mr. Wenzel said.
He estimates that reactivating old wells costs about $15 a barrel in direct expenses like leasing land, lifting oil out of the ground and transporting it to market. After covering other costs including staff, debt, taxes and general overhead, these projects typically pay off and are profitable in less than a year.
Most U.S. oil still comes from conventional wells. In 2016, 4.6 million barrels, or 52% of the U.S. total, was pumped from conventional wells while 4.25 million barrels a day, or 48%, was pumped from shale wells, according to the federal Energy Information Administration.
Will McMullen, founder of Bayou City, a private equity firm with $1 billion to deploy, and which has backed White Knight, said with all the focus on shale in recent years, it has become a crowded space.
"And we don't know where the price of oil is going to be in 10 years," he said, arguing that it is risky to favor shale based on a hope of longer-rate returns.
Petro River Oil, a small New York-based company traded over the counter, is reprocessing old data and making new underground maps in California to find overlooked crude. It recently scoured an old prospect near Bakersfield known as Sunset Boulevard, and found several additional oily zones to tackle this summer.
"We're taking new technology and going in and looking for what they missed," said Stephen Brunner, president of Petro River.
Mr. Brunner, who ran Constellation Energy Partners, a shale company that fracked in Oklahoma before Sanchez Energy Partners took it over in 2014, said he understands why many investors are drawn to shale: unlike conventional drilling, there's little risk of a dry hole.
Even so, he said Petro River's goal is to find untapped oil in old fields and get it out of the ground for roughly $20 a barrel, allowing the company to achieve as much as a 100% return in a year, at current prices.
Such investment looks attractive to some in light of the costs to lease shale land in places like the Permian Basin in Texas and New Mexico, which has topped $50,000 per acre.
But it is hard to generate huge-scale production picking over old fields, said Robert Clarke, an analyst with Wood Mackenzie.
"For a company looking to generate a return on capital the opportunity is tremendous," Mr. Clarke said. "But it can't move the production needle for a bigger company."
Still, some big companies sense opportunity in older fields.
When Occidental Petroleum Corp. moved from California to Houston about three years ago, it spun off all its Golden State oil assets, forming California Resources Corp.
It is now the largest holder of mineral acreage in California with roughly 2.3 million net acres, since the big oil companies that once controlled most of California's oil sector, such as Chevron Corp. and Exxon Mobil Corp., moved on to major new discoveries in Africa and the Middle East decades ago.
The spinoff was saddled with debt from Occidental operations and didn't initially spend much on new wells. But this year, it is back to work in fields that have been pumped for nearly a century.
"The company is drilling deeper and using directional drilling to reach bypassed pay dirt," said Chief Financial Officer Mark Smith.
Many of its 8,800 existing wells can be retapped. Since the state already has an extensive network of pipelines and oil storage tanks, little new investment is needed.
California Resources estimates it has 700 million barrels of oil equivalent in the ground that is economic at about $30 a barrel.