they’re doing other drilling. And there’s dozens of variations on this that are still coalescing around whatever the new tool is going to be, and each company excels at a different piece of this. It’s disseminating far more rapidly than any other technology in the energy sector ever has. The geophone is basically a big wire that has dozens of sensors going all the way down to the bottom of the well shaft, and they leave that in place as long as they’re doing operations. Now that we’re getting into things like re-fracking and going back to fields for the second, third, and fourth time, you basically can leave that installed. So, in places like the Permian, where we’ve been doing conventional operations for decades, they’ll go into a depleted area where the conventional oil’s gone, they’ll run the geophones down an old well, and then they’ll frack in new wells all around it. The more layers you have, the thicker the petroleum bearing layer is, the more economically viable it is. It is a massively disruptive technology that alone can lower the break-even price by at least $15 a barrel. Remember, it’s an emerging technology and the pace it is moving is lightning fast. You could say that some bits of this book are already out of date, because it’s moving so fast and we are at a stage that not everybody is even using it yet. I would say it was probably used in just 5% to 10% of the wells that were drilled last month (December 2016). A year before that, it was probably only used in 1% to 2% of the wells. Now that oil prices have rebounded a little bit, and you’ve got a broader array of companies that can make profit at this margin, you might not see that percentage creep up very quickly because there’s a little bit more breathing space in terms of breakeven costs. But the companies that know how to do it are the ones that are going to grow the fastest.
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GC: What else is going on in the shale industry?
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Peter Zeihan:Other advances are more linear than logarithmic. Liquid pits are now a thing of the past; it’s all water tanks. So, you don’t have to worry about site set up, you don’t have to worry about site breakdown, you don’t have to worry about land reclamation or rehabilitation. The water is all in a tank. Operators recycle it as they go and mix the frack fluid on site. The footprint of a well is 5% of what it was two years ago. You also need a lot fewer rigs. Instead of going down a mile and over 6,000 feet, down a mile, over 6,000 feet, now you hit the same well but at every vertical layer. By hitting the next layer again and again, you’re getting up to 50 miles of horizontal contact out of one well. That’s why I ignore the rig count now and view it as basically a meaningless number.
GC:You’ve also seen a 60% jump in rig count off the bottom too.
Peter Zeihan:That’s some of the older rigs that are coming back. I would not read into that too much because last year most of the rigs that were in operation were the multilateral rigs. Now that prices have come up, some of the older single spike rigs are coming back. They can work at $50 per barrel, but they can’t work at $40 or $30. So, I would caution you that a lot of the companies that might be seeing really big growth right now will not be able to sustain it. If you take these technologies and you compress them down to a nice little package, the companies that can do that are going be able to ride out any price shock, and the companies that can’t do that will make money only when the prices are higher.
The only area where the volume of inputs has not dropped is sand. Everything else has become more efficient. They are actually using more sand per foot of well stage. The general areas where efficiency has improved is with stronger pumps and cramming more sand to create bigger fractures. The good news is sand is cheap and they’ve also discovered that the fancy designer sands that are made out of artificial materials really don’t do much for you. You could just buy the absolute cheapest brown sand that Texas puts together and you’re good. So, we’ve seen a bit of a sand recession, if that’s even a thing, in Wisconsin. It wasn’t as bad as what happened in the rest of the energy sector because everybody still needs some sand, but then they started experimenting with cheaper and cheaper sand, and they discovered it didn’t make much of a difference. So, all the good sand out of Wisconsin is kind of falling by the way side, now they’re just using that for glass. Instead they are using cheap sand from wherever you can dig it up. And they’re using two, three, sometimes even five times as much per foot of well stage. The length of the fracks is much shorter now. It’s now 20 to 80 feet; an 80-foot one is really a long one.
They’ve gotten good enough with the precision application that the industry is now fracking stage-by-stage. Those cracks might technically go a couple hundred feet, but they are so tiny that the sand only goes a quarter of that distance and the water maybe half. The cracks are so thin you don’t have to worry about seepage nearly as much as you used to so that problem has gone away, and the Obama administration even signed off on it. The EPA report on water quality finally came out in 2016, and it basically said, “Yeah, fracking, don’t worry about it.” There have been instances of contamination, but they’re not statistically significant –and that’s according to the Obama administration’s EPA.
GC:You said operators are now seeing up to 40 miles of horizontal access per vertical well. Is that a significant increase?
Peter Zeihan:Back in 2004, it was 600 feet. In 2007, it was about 6,000 feet. We’re talking about a 10-fold increase since 2007, and that’s all with one horizontal. Now, remember pad drilling? Pad drilling’s going away. With pad drilling, you’d go down vertically and then go over a mile. And then you’d have another vertical shaft and then go over a mile, and then another vertical shaft. And you could do up to 20 of those on one pad. They’ve done away with all these vertical shafts. Now there’s just one. The apparatus turns around in the main shaft and goes out again and again, so they are using half the steel. Multilateral drilling is another linear advance, although a pretty steep one. They use much less water, and that’s huge on the environmental side of things. Micro-seismic is the logarithmic advance. Gathering infrastructure required absolutely no changes with what they were doing, but when you have 20,000-30,000 barrels coming out of one vertical well, because of all that horizontal connections, you need a bigger pipe, and you need fewer of them. So, you’re using less
