(Adds details in paragraph four)
By Liz Hampton
SMILEY, Texas, Sept 12 (Reuters) - At a dusty drilling site
east of San Antonio, shale producer EOG Resources Inc
recently completed its latest well using a new technology
developed by a small services firm that promises to slash the
cost of each by $200,000.
The technology, called electric fracking and powered by
natural gas from EOG's own wells instead of costly diesel fuel,
shows how shale producers keep finding new ways to cut costs in
the face of pressures to improve their returns.
E-frac, as the new technology is called, is being adopted by
EOG, Royal Dutch Shell Plc, Exxon Mobil Corp
and others because of its potential to lower costs, reduce air
pollution and operate much quieter than conventional
diesel-powered frac fleets. Investment bank Tudor, Pickering
Holt & Co analyst George O'Leary estimates e-fracs could lop off
up to $350,000 from the cost of shale wells that run $6 million
to $8 million apiece.
While a handful of oil producers are capturing savings from
lower well costs, the picture is less rosy for oilfield service
providers. These systems can cost them up to twice that of
conventional fleets to build. A rapid uptake could worsen the
economics for a sector cutting staff and idling equipment as oil
producers pare spending. That leaves this potential breakthrough
technology in the hands of small service providers without the
means to fully exploit it.
ONE-SIDED SAVINGS
Jeff Miller, chief executive of Halliburton Co, the
top U.S. provider of fracking services, said his firm has tested
the technology but has no desire to promote it.
"Halliburton will be really slow around frac," Miller said,
referring to the costs of updating diesel systems to electric.
Converting the industry's 500 frac fleets would cost $30
billion, he estimated, too steep a price for oilfield firms, he
said.
He recently advised an oil producer interested in the
technology that the benefits of deploying e-fracs "work for you,
they don't work for us," he said at Barclays energy conference
this month.
Halliburton, Schlumberger NV and others have idled
scores of diesel-powered fleets this year as producers cut
spending due to flat to lower oil and gas prices. Consultancy
Primary Vision estimates the number of active fleets in the U.S.
fell 19% since April to around 390.
Halliburton cut 8% of its North American workforce and
reported second-quarter profit fell 85% over the year-ago period
in part because of equipment writedowns and severance costs due
to weak demand for its frac service.
"Every week that goes by I get more and more negative about
e-frac due to the harsh imbalance between the benefits achieved
by the oil company and the costs incurred by the service
company," said Richard Spears, a consultant to top oilfield
services suppliers.
Schlumberger paid $430 million in late 2017 to acquire a
diesel-powered frac fleet from rival Weatherford International,
hoping to expand shale services. A spokesperson declined to
comment on e-frac.
This month newly-named CEO Olivier Le Peuch disclosed plans
to write down investments that were "based on a much higher
activity outlook with the ambition of achieving economies of
scale."
"HARD TO JUSTIFY"
E-frac supplier Evolution Well Services, which supplied the
equipment and crew for EOG's Eagle Ford shale operation, is one
of a handful of smaller oilfield firms pioneering the systems.
Evolution operates six e-frac fleets - mobile collections of
high-pressure pumps powered by gas turbine generators - and
plans to roll out a seventh next year. U.S. Well Services,
another e-frac provider, has agreements with Apache Corp
and Shell. Conventional pressure pumper ProPetro Holding Corp
also announced plans to bring a handful of e-frac
fleets to the market.
"We'd kind of would like to" build more systems without firm
customer contracts, said Ben Bodishbaugh, CEO of Evolution, the
only purely e-frac provider in North America. "But in this
market it's hard to justify," he said.
The reason: e-frac fleets can cost up to $60 million apiece
because they rely on pricey gas turbines similar to those that
run utilities to generate electricity, compared with as little
as $30 million for a diesel-motor powered fleet. Evolution would
not say how much its fleets cost, but noted it is below $60
million.
"It's a bad time for service companies to be ramping up very
capital intensive service offerings," said Josh Young, chief
investment officer with energy investor Bison Interests. "People
always feel pressure to invest in the next new things, but
sometimes you shouldn't be investing in any of the things."
Companies like Evolution and U.S. Well Services that already
have e-frac fleets would be winners if the technology takes off,
analysts from investment banker Tudor Pickering Holt & Co
predict. E-frac accounts for about 3% of active fleets, and
could reach between 25% and 33% in the next five years, Tudor
estimated.
EOG began testing Evolution's gear in late 2016, and signed
a multi-year agreement about six months later. The shale
company, well known for its use of cutting edge technology, runs
four of Evolution's fleets and plans to add a fifth next year.
The agreement with Evolution "is an example of how we
continue to find innovative solutions to both reduce our
environmental footprint and improve the profitability of our
business," said Billy Helms, EOG's chief operating officer. EOG
is among the handful of top shale producers that generate more
cash than they consume in drilling and shareholder dividends.
NO SOOT, LESS NOISE
At its Smiley, Texas, oil and gas well site, EOG's crew
carried on casual conversations despite the whir of e-frac
pumps. No one wears ear protection, which is common at
conventional diesel fleets, and the towering white silos holding
frac sand were gleaming during a visit in August. At a
conventional frac site just up the road, the towers were black
from diesel exhaust.
Evolution's Bodishbaugh said some oil and gas firms see less
polluting e-frac as improving their standing with investors who
rate environmental, social and governance (ESG) attributes in
their investments.
"I’d say this year we’ve probably had more inbounds calls on
the emissions profile than the economic savings," he said.
Paul Mecray III, a managing director for investment firm
Tower Bridge Advisors who follows major service companies, said
e-frac will only catch on if overall demand for oilfield
services recovers.
"While it may be a good thing longer term, I think it will
take a lot longer to catch on than people think," he said.
(Reporting by Liz Hampton; editing by Gary McWilliams and
Edward Tobin)
