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By Liz Hampton
SMILEY, Texas, Sept 12 (Reuters) - At a dusty drilling siteeast of San Antonio, shale producer EOG Resources Increcently completed its latest well using a new technologydeveloped by a small services firm that promises to slash thecost of each by $200,000.
The technology, called electric fracking and powered bynatural gas from EOG's own wells instead of costly diesel fuel,shows how shale producers keep finding new ways to cut costs inthe face of pressures to improve their returns.
E-frac, as the new technology is called, is being adopted byEOG, Royal Dutch Shell Plc, Exxon Mobil Corpand others because of its potential to lower costs, reduce airpollution and operate much quieter than conventionaldiesel-powered frac fleets. Investment bank Tudor, PickeringHolt & Co analyst George O'Leary estimates e-fracs could lop offup to $350,000 from the cost of shale wells that run $6 millionto $8 million apiece.
While a handful of oil producers are capturing savings fromlower well costs, the picture is less rosy for oilfield serviceproviders. These systems can cost them up to twice that ofconventional fleets to build. A rapid uptake could worsen theeconomics for a sector cutting staff and idling equipment as oilproducers pare spending. That leaves this potential breakthroughtechnology in the hands of small service providers without themeans to fully exploit it.
ONE-SIDED SAVINGS
Jeff Miller, chief executive of Halliburton Co, thetop U.S. provider of fracking services, said his firm has testedthe 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 $30billion, he estimated, too steep a price for oilfield firms, hesaid.
He recently advised an oil producer interested in thetechnology that the benefits of deploying e-fracs "work for you,they don't work for us," he said at Barclays energy conferencethis month.
Halliburton, Schlumberger NV and others have idledscores of diesel-powered fleets this year as producers cutspending due to flat to lower oil and gas prices. ConsultancyPrimary 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 andreported second-quarter profit fell 85% over the year-ago periodin part because of equipment writedowns and severance costs dueto weak demand for its frac service.
"Every week that goes by I get more and more negative aboute-frac due to the harsh imbalance between the benefits achievedby the oil company and the costs incurred by the servicecompany," said Richard Spears, a consultant to top oilfieldservices suppliers.
Schlumberger paid $430 million in late 2017 to acquire adiesel-powered frac fleet from rival Weatherford International,hoping to expand shale services. A spokesperson declined tocomment on e-frac.
This month newly-named CEO Olivier Le Peuch disclosed plansto write down investments that were "based on a much higheractivity outlook with the ambition of achieving economies ofscale."
"HARD TO JUSTIFY"
E-frac supplier Evolution Well Services, which supplied theequipment and crew for EOG's Eagle Ford shale operation, is oneof a handful of smaller oilfield firms pioneering the systems.
Evolution operates six e-frac fleets - mobile collections ofhigh-pressure pumps powered by gas turbine generators - andplans to roll out a seventh next year. U.S. Well Services,another e-frac provider, has agreements with Apache Corpand Shell. Conventional pressure pumper ProPetro Holding Corpalso announced plans to bring a handful of e-fracfleets to the market.
"We'd kind of would like to" build more systems without firmcustomer contracts, said Ben Bodishbaugh, CEO of Evolution, theonly purely e-frac provider in North America. "But in thismarket it's hard to justify," he said.
The reason: e-frac fleets can cost up to $60 million apiecebecause they rely on pricey gas turbines similar to those thatrun utilities to generate electricity, compared with as littleas $30 million for a diesel-motor powered fleet. Evolution wouldnot say how much its fleets cost, but noted it is below $60million.
"It's a bad time for service companies to be ramping up verycapital intensive service offerings," said Josh Young, chiefinvestment officer with energy investor Bison Interests. "Peoplealways feel pressure to invest in the next new things, butsometimes you shouldn't be investing in any of the things."
Companies like Evolution and U.S. Well Services that alreadyhave e-frac fleets would be winners if the technology takes off,analysts from investment banker Tudor Pickering Holt & Copredict. E-frac accounts for about 3% of active fleets, andcould reach between 25% and 33% in the next five years, Tudorestimated.
EOG began testing Evolution's gear in late 2016, and signeda multi-year agreement about six months later. The shalecompany, well known for its use of cutting edge technology, runsfour of Evolution's fleets and plans to add a fifth next year.
The agreement with Evolution "is an example of how wecontinue to find innovative solutions to both reduce ourenvironmental footprint and improve the profitability of ourbusiness," said Billy Helms, EOG's chief operating officer. EOGis among the handful of top shale producers that generate morecash than they consume in drilling and shareholder dividends.
NO SOOT, LESS NOISE
At its Smiley, Texas, oil and gas well site, EOG's crewcarried on casual conversations despite the whir of e-fracpumps. No one wears ear protection, which is common atconventional diesel fleets, and the towering white silos holdingfrac sand were gleaming during a visit in August. At aconventional frac site just up the road, the towers were blackfrom diesel exhaust.
Evolution's Bodishbaugh said some oil and gas firms see lesspolluting e-frac as improving their standing with investors whorate environmental, social and governance (ESG) attributes intheir investments.
"I’d say this year we’ve probably had more inbounds calls onthe emissions profile than the economic savings," he said.
Paul Mecray III, a managing director for investment firmTower Bridge Advisors who follows major service companies, saide-frac will only catch on if overall demand for oilfieldservices recovers.
"While it may be a good thing longer term, I think it willtake a lot longer to catch on than people think," he said.(Reporting by Liz Hampton; editing by Gary McWilliams andEdward Tobin)
