Magnolia Boosted By Strong Production Results From Oklahoma Wells

roger-swartz-1-photo-10LONDON (Alliance News) – Magnolia Petroleum PLC saw its shares rise early Thursday after the company said it has received positive initial production figures from six wells in Oklahoma in the US.

The US-focused oil and gas company said the six wells in the Woodford and Mississippi Lime formations in Oklahoma, operated by Devon Energy, produced strong initial production results, ranging from 641 barrels of oil equivalent per day to 159 barrels.

Magnolia holds a 4.1% net revenue interest in the wells. The initial production figures add 91 barrels of oil equivalent per day to Magnolia’s net production.

“The excellent initial production rates achieved demonstrate the low geological risk associated with drilling on units where production has been established, and also the presence of multiple productive formations on our leases, in this case the Woodford and Mississippi Lime,” said Magnolia Chief Operating Officer Rita Whittington.

Magnolia shares were up 6.2% to 1.195 pence on Thursday, one of the best performing stocks on the AIM All-Share index.

By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance

Copyright 2014 Alliance News Limited. All Rights Reserved.

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Oil producers cluster wells in classic push to extend boom

World Oil News Center

roger-swartz-1-photo-8Oil producers cluster wells in classic push to extend boom

BRADLEY OLSON and DAN MURTAUGH

HOUSTON (Bloomberg) — U.S. shale producers are cramming more wells into the juiciest spots of their oilfields in a move that may help keep the drilling boom going as prices plunge.

The technique known as downspacing aims to pull more oil at less cost from each field, allowing companies to boost profit, attract more investment and arrange needed loans to continue drilling. Energy companies see closely-packed wells as their best chance to add billions more barrels of oil to U.S. production that’s already the highest in a quarter century.

“We would be dealing with more than a decade of inventory,” said Manuj Nikhanj, co-head of energy research for ITG Investment Research in Calgary. “If you can go twice as tight, the multiplication effect is massive.”

To make downspacing work, the industry must first solve a problem that for decades has required producers to carefully distance their wells. Crowded wells may steal crude from each other without raising total production enough to make the extra drilling worthwhile. Too much of that cannibalization could propel the U.S. production revolution into a faster downturn.

In the past, most wells were drilled vertically into conventional reservoirs, which act more like pools of oil or gas. Companies learned quickly that packing wells too closely together just drains the reservoirs faster without appreciably increasing production, like two straws in the same milkshake.

Different Rock

Shale rock is different, acting more like an oil-soaked sponge. Drilling sideways through the layers of shale taps more of the resource, while fracing is needed to crack the rock to allow oil and gas to flow more freely into the well. That’s why packing more wells together can work, said Lance Robertson, Marathon Oil Corp.’s V.P. over Eagle Ford operations.

Because shale is so dense, the oil and gas can’t travel as far in the rock. As long as the fracing cracks don’t interlace, the more wells drilled, the more oil each field will produce, he said.

Working against producers are crude prices that last week dipped below $80 for the first time since 2012, escalating borrowing costs for drilling wells that have a tendency to peter out quickly. Harvesting oil and natural gas from dense rock layers is expensive, making operations even more vulnerable to sinking prices than in past boom-and-bust cycles.

So far, early results from downspacing experiments by a handful of companies have been mixed.

It’s “the billion-dollar question,” said Jonathan Garrett, a Houston-based upstream analyst for energy consultant Wood Mackenzie Ltd. “Is downspacing allowing access to new resources, or is it drawing down the existing resources faster?”

Interfering Wells

An analysis of a group of wells on the same lease in La Salle County, in the heart of Texas’s booming Eagle Ford formation, showed that closer spacing reduced the rate of return for drilling to 23% from a high of 62% for wells spaced further apart, according to a paper published in April by Society of Petroleum Engineers.

In Louisiana’s Haynesville field, which mostly produces gas, data from producers and regulators shows that efforts to drill wells closer together has led to what industry insiders call “interference.”

That’s when a second or third well drilled close to an existing location produces less than the first, according to an analysis of the practice by Drillinginfo, which collects and analyzes data on thousands of wells across the U.S. Closer spacing may mean that wells deplete faster, and ultimately produce less, leading to diminishing returns over the life of the field.

Less Productive

EOG Resources Inc., one of the most experienced drillers in the Eagle Ford and North Dakota’s Bakken formation, saw last year that some wells with tighter spacing were less productive over a longer period of time, according to an Oct. 8 investor presentation. Marathon has seen similar results.

That’s fine with producers if downspacing still leads to higher total profits from a field.

Here’s the basic math. Three years ago, in an earlier phase of development, five wells might have been drilled on a 640-acre parcel of land at a cost of $6 million each. At an ultimate per-well yield of the equivalent of 450,000 bbl of oil, the total production would be about 2.3 MMbbl at a cost of $30 million. At an oil price of $80/bbl, that would produce profits of about $150 million from that 640 acres.

Math Problem

Based on tighter spacing being tested now in Texas, 16 wells could be drilled on the same parcel at a cost of $5.5 million each. Even if each well yields less, about 400,000 bbl, that’s still a recovery rate of 6.4 MMbbl from the same land at a cost of $88 million. Profits in this scenario at today’s oil price would amount to $424 million, or almost triple.

To counter production declines in individual wells, companies are using a combination of methods, including drilling wells that extend farther underground horizontally and using more sand to prop open cracks during fracing. Data from EOG’s tight well spacing tests in Texas’s Eagle Ford are showing the tactics are helping producers keep per-well recovery the same, or even higher.

Tighter spacing was the primary reason EOG boosted its estimate for how much oil and gas it may be able to get out of the Eagle Ford by 1 Bbbl in the past year. The company’s use of spacing and other techniques has helped top operators such as EOG reduce their costs to $46/bbl in the formation, according to Wells Fargo & Co. That’s about 32% below the average across the area estimated by ITG.

Taking Risks

Companies experimenting with downspacing, including ConocoPhillips, Continental Resources Inc. and Anadarko Petroleum Corp., are still trying to figure out how quickly wells will become depleted when they’re so crowded together, said Leo Mariani, an analyst with RBC Capital Markets in Austin. If that happens too fast, those initial extra profits might eventually become losses.

It may take as long as five years before the industry has a solid understanding of how much oil they’re leaving in the ground by crowding wells so closely together, Mariani said.

“It definitely works, but you might end up with 80% of the recoverable oil,” he said. “The question is whether the economics will be as good. It’s certainly not without risk.”

In the short-term, most tightly spaced South Texas wells so far are yielding more oil, not less, the Drillinginfo analysis shows. Technological advances including spacing and higher per-well productivity have been “important to maintaining production” amid falling prices, the Paris-based International Energy Agency said in an Oct. 14 report.

In 2013, Marathon’s Eagle Ford wells that were tested at the closest spacing levels were 34% more prolific after six months compared to wells spaced further apart in 2011.

“What we see is that we are getting better over time,” Robertson said in an April interview. “We have a very small body of knowledge about this kind of spacing so far in the industry, but this is our single greatest opportunity to create greater value.”

10/22/2014

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