US shale companies' decision to drill thousands of new wells closely together - and close to already existing wells - is turning out to be a bust; worse, this approach is hurting the performance of wells already in existence, posing an even greater threat to the already struggling industry. In order to keep the United States as an energy supplying powerhouse, shale companies have pitched bunching wells in close proximity, hoping they would produce as much as older ones, allowing companies to extract more oil overall while maintaining good results from each well.
These types of predictions helped fuel investor interest in shale companies, who raised nearly $57 billion from equity and debt financing in 2016 – up from $34 billion five years earlier, when oil was over $110 per barrel. In 2016, oil prices dipped below $30 a barrel at one point.
And now - surprise – the actual results from these wells are finally coming in and they are quite disappointing.
Newer wells that have been set up near older wells were found to pump less oil and gas, and engineers warn that these new wells could produce as much as 50% less in some circumstances. This is not what investors - who contributed to the billions in capital used by these companies back in 2016 - want to hear.
Making matters worse, newer wells often interfere with the output of older wells because creating too many holes in dense rock formations can damage nearby wells and make it harder for oil to seep out. The "child" wells could also cause permanent damage to older "parent" wells. This is known in the industry as the "parent-child" well problem. Billionaire Harold Hamm, who founded shale driller Continental Resources, said last year: "Shale producers across the country are finding you can get a lot of interference, one well to the other. Laying out a whole lot of wells can get you in trouble.”
Some of the biggest names in shale, including Devon Energy, EOG Resources and Concho Resources, have already disclosed that they are suffering from this problem. As a result, they and many others could be forced to take massive write-downs if they have to downsize their already optimistic estimates from drill sites.
Companies continue to try and find the perfect balance between using single wells that are operating at peak productivity and multiple wells that can provide better returns.
Laredo Petroleum is a great example. Two years ago, it was valued at more than $3 billion and was a strong advocate for packing wells into the Permian Basin. Its CEO Randy Foutch said a year ago that the company could drill 32 wells per drilling unit, with each producing an average of 1.3 million barrels of oil and gas. In November, the company announced that wells it had fracked in 2018 were producing 11% less than projected, in part due to "parent-child" issues.
Laredo spokesman Ron Hagood told the WSJ: “We tightened spacing during 2017 and 2018 to increase location inventory and resource recovery in our highest-return formations, and we achieved this goal.”
The company's market value has fallen about 75% to $800 million since the end of 2016. Goal achieved?
Incidentally, we first reported that shale companies may be facing "catastrophic failure ahead" back in October of 2018. Days before that report, we said that shale companies had a "glaring problem". We concluded that the glaring problem with 2018's poor financial results was that 2018 was supposed to be the year that the shale industry finally turned a corner.
Earlier in 2018, the International Energy Agency had painted a rosy portrait of U.S. shale, arguing in a report that “higher prices and operational improvements are putting the US shale sector on track to achieve positive free cash flow in 2018 for the first time ever.”
Now, it all appears to have been a "pipe" - or rather "milkshake" - dream.