U.S. Frackers Defy Output Logic with Vertical Wells

Easy money, super-sized frack jobs, and desperate drillers offering deep discounts to oil producers - all three have been credited for sustaining U.S. crude output during the worst price slump in six years.

Now there appears to be a new factor in the mix: old vertical wells that can quickly be drilled, injected with water or fracked for a second time to increase production at low cost.

Overshadowed by the fracking boom that delivered record oil and gas volumes, vertical wells are making a comeback as investors and producers shift focus away from production growth to capital discipline in the downturn.

"It makes more sense to develop vertical wells in a lower price environment because they are not growth plays but they are a very strong cash flow asset," said Benjamin Shattuck, principal analyst at Wood Mackenzie. "They are going to give you that cash flow that you need today."

It is too soon to know how big the long-term supply impact of this trend will be, but there are tens of thousands of older U.S. wells and companies say paying more attention to them is already bringing extra barrels.

The industry's ability to find some workaround every time prices seem too low to keep pumping explains in part why 15 months into the downturn U.S. output stays near highs of around 9 million barrels a day and the government forecasts only modest declines through mid-2016.

Squeezing crude from shallow mature fields allows the shale companies to produce more at a lower cost. They can use less powerful rigs that are cheaper to rent and shorter wells can be bored and brought into production in as few as 10 days, whereas a big horizontal well would normally take a month or more to complete. (Graphic:http://reut.rs/1F0FfMA)

A simple vertical well can be drilled or refracked for around $1 million. Wells with about 10,000 feet of horizontal drilling cost from $5 million to $9 million even at discounts available during the downturn, company presentations show.

'LOW-HANGING FRUIT'
In meetings with investors last week, Noble Energy Inc , Devon Energy Corp, and Apache Corp all devoted more attention to mature oilfields and vertical wells that had been overlooked when prices were high and companies focused on pumping more and faster.

According to Baker Hughes, the North American vertical rig count rose 20 percent to 120 from early June to September 4, while the horizontal rig count slipped 2 percent to 659.

John Christmann, Apache's chief executive, last week spoke of one of the company's so-called legacy oilfields in the Permian Basin in Texas that has infrastructure in place and both horizontal and vertical wells.

"We've got a lot of low-hanging fruit in terms of little quick projects you can do and get your money back in six or seven weeks and add significant barrels," Christmann told the Barclays (BCS) CEO Energy-Power Conference.

If prices stay low, Apache will probably invest more in the field, the executive said. That field has produced 77,000 barrels of oil equivalent a day so far this year, or about 27 percent of the company's total North America output.

Noble Energy said it would produce more than expected this quarter, helped by output from vertical wells in its fields in Colorado.

Devon, a shale drilling pioneer, is reviving older wells in North Texas with refracking, a process that costs far less than blasting water and sand into a horizontal well miles below the ground.

"Even in a mature area like this, there's upside our technical teams are looking at," Devon CEO Dave Hager told investors last week.

Devon said it has refracked 150 vertical wells and is testing the technology on older horizontal ones, where the process is less predictable.

Oil services giant Halliburton, which provides technology and equipment to enhance output from oilfields around the world, sees services for mature fields as way to make money in the downturn.

"What's important to remember is that in spite of the low commodity price, mature fields - they are more resilient," Jeff Miller, Halliburton's president told investors last week.

Reporting By Anna Driver and Swetha Gopinath