Oil drillers bet choking wells will keep shale from going bust



HOUSTON (Bloomberg) -- Encana Corp. wants to ensure the shale-oil boom keeps booming.

The Canadian producer is among a growing number of companies that are restricting initial output—a process known as choking back—in basins from North Dakota to Texas. They’re conceding huge up-front gushers of crude in exchange for smaller production declines over time so that the wells ultimately generate more oil.

The strategy sacrifices one of the biggest benefits from shale. The early gushers paid back investments fast, allowing companies to pour capital into new projects. Instead, Encana and others envision a future with a more stable flow from wells, so that they don’t always have to keep drilling simply to maintain output.

“You’re losing a barrel today to get two or three barrels tomorrow,” said Allen Gilmer, CEO of consultant Drilling Info Inc. in Austin. “It’s not a zero-sum game.”

Red Queen

Curbing initial production allows companies to maintain the pressure and integrity in their wells, which means output doesn’t fall as fast. Shifting to the technique can avoid steep declines, a phenomenon known in the oil world as the Red Queen, the character in Lewis Carroll’s “Through the Looking-Glass” who tells Alice, “It takes all the running you can do, to keep in the same place.”

Choke management is among a number of strategies—including moving to richer parts of fields, completing wells with more sand and water, and refracing—that U.S. drillers have used to stave off a collapse in production. Output has fallen just 5% from its peak even though companies have shelved more than half their rigs amid a price slump.

The oil industry is “finding ways to continue marginal production in a way that would have defied probability and reasoning before companies took the kinds of actions they’ve taken,” said Ed Morse, the head of global commodity research at Citigroup Inc., in an interview.

Shale has revitalized the U.S. energy industry, turning around decades of falling oil production and driving investment down the chain in areas including pipelines, refining and chemical manufacturing. U.S. gross domestic product will be about 0.7% higher in 2020 because of shale, the Congressional Budget Office estimated in December.

Wells are equipped with valves that can open and close to control the flow of oil and gas. When they’re first tapped, hydrocarbons rush to the surface because of the difference in pressure between the atmosphere at the top of the hole and the reservoir sitting under the weight of thousands of feet of rock.

Pressure Differences

When Newfield Exploration Co. opened new wells in the Bakken formation in North Dakota, it found the pressure difference created flows so strong they would sweep along the sand meant to prop open cracks in the shale, said Danny Aguirre, the company’s head of investor relations. By using pressure control, Newfield gets more oil over the life of the well and can save money by not having to add as much artificial pressure, he said in an interview.

Encana credits limiting up-front production with boosting the overall output from its wells.

“We choke wells back in the early time because we think it produces more production over the first 180 days and a bigger EUR,” Encana CEO Doug Suttles said last month at an investor conference in New York.

The difference can be seen in Karnes County, Texas, the heart of the state’s Eagle Ford shale region. EOG Resources Inc. drilled there last fall, delivering an average 2,000 bopd in their first month. For its part, Encana wells produced about a third of the output in the equivalent period.

EOG’s wells, though, declined 54% by the third month of production, while Encana’s dropped by 17%, according to analysis by Bloomberg Intelligence’s William Foiles and Andrew Cosgrove. Within nine months, Encana’s wells will be pumping faster than EOG’s and over five years they will have produced more, according to Bloomberg Intelligence modeling.

Still, the fast cash from higher initial output can be used to drill more wells or pay off creditors more quickly. EOG’s Karnes County wells are expected to pay back their investment within eight months, compared with about 12 for Encana.

EOG spokeswoman K Leonard said the company “does not often publicly discuss the specific practices that drive EOG’s outstanding production results.”

More Value

The Encana method trades a faster payback for more output down the road. Over 10 years, the wells it drilled in Karnes will produce an average $13 million of value, compared with about $11 million for the EOG wells, according to Bloomberg Intelligence modeling.

“Pulling on wells as hard and as fast as possible tends to result in the highest economic returns,” said Chris Feltin, an analyst at Macquarie Group Ltd. in Calgary. On the other hand, slowing the production treadmill could be just as important for producers while low oil prices are curbing budgets, he said. “It means you don’t have to spend as much capital to sustain your production and it leaves you a little bit more capital for growth to redeploy back into the ground.”

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