US drillers scrambling to thwart OPEC threat

NEW YORK — The Organisation of Petroleum Exporting Countries (OPEC) and lower global oil prices delivered a one-two punch to the drillers in North Dakota and Texas who brought the US one of the biggest booms in the history of the global oil industry.

Now they are fighting back.

Companies are leaning on new techniques and technology to get more oil out of every well they drill, and furiously cutting costs in an effort to keep US oil competitive with much lower-cost oil flowing out of the Middle East, Russia and elsewhere.

"Everybody gets a little more imaginative, because they need to," says Hans-Christian Freitag, vice president of technology for the drilling services company Baker Hughes.

Spurred by rising global oil prices, US drillers learned to tap crude trapped in shale starting in the middle of last decade and brought about a surprising boom that made the US the biggest oil and gas producer in the world. 

The increase alone in daily US production since 2008, nearly 4.5 million barrels per day, is more than any OPEC country produces other than Saudi Arabia.

But as oil flowed out and revenue poured in, costs weren't the main concern. Drilling in shale, also known as "tight rock", is expensive because the rock must be fractured with high-pressure water and chemicals to get oil to flow. 

It became more expensive as the drilling frenzy pushed up costs for labour, material, equipment and services. In a dash to get to oil quickly, drillers didn't always take the time to use the best technology to analyse each well.

When oil collapsed from $100 to below $50, once-profitable projects turned into money losers. OPEC added to the pressure by keeping production high, saying it didn't want to lose customers to US shale drillers. 

OPEC nations can still make good profits at low oil prices because their crude costs $10 or less per barrel to produce.

Now drillers and service companies are laying off tens of thousands of workers, smaller companies are looking for larger, more stable companies to buy them, and fears are rising of widespread loan defaults. 

OPEC said in a recent report that it expects US production to begin to fall later this year, echoing the prediction of the US Energy Department.

To compete, drillers have to find ways to get more oil out of each well, pushing down the cost for each barrel. Experts estimate that shale drillers pull up just 5-8 per cent of the oil in place.

"We're leaving behind a large amount of hydrocarbons, and that's quite unacceptable," Freitag says. "It requires different thinking now."

Engineers have adapted some of the best sensor technology and mathematical models, developed first for deep offshore drilling, to see into the rock better. 

As they drill, they use imaging technology to find natural cracks in the rock that they can then use as a target when they fracture the rock, to leverage natural highways for oil and gas.

After they fracture the rock, they can map the new cracks. That way they can know how close they can drill another well to target more oil without sapping production from the first well. 

EOG Resources, one of the pioneers of shale oil drilling, has reduced the space between wells in an area called the Leonard Shale, in Texas, to 560 feet from 1,030 in 2012.

Drillers are finding they can back into wells drilled only a few years ago to re-frack them or inject specially tailored fluids to get oil flowing again. That can return a well in some cases to peak output, without the expense of drilling a new well.

The companies are also getting much faster.

Exxon says it has cut the time it takes to drill a well in North Dakota's Bakken formation by one-third over the past four years. It has also cut by half the cost of fracturing the rock and preparing the well for production. 

Exxon will run 13 rigs in the Bakken this year, the same number it did last year, despite the low prices.

Companies will save money in the coming months because service companies, rig operators and other suppliers to the industry will lower rates to keep business. 

Oil companies have been telling investors in recent weeks they expect to see cost reductions of 10-40 per cent, depending on location and type of service.

Drillers are also focusing on the wells in the parts of formations that they know to be the most prolific, and cutting back drilling in places where they aren't quite sure what's below. That reduces overall spending without dramatically decreasing production.

US shale drillers will never push costs as low as OPEC countries. But the US industry may be able to survive, or even thrive, if drillers can learn to quickly adapt.

"There is a significant portion of this that is competitive on a global basis," said Exxon Mobil Chief Executive Officer Rex Tillerson at an annual investor meeting earlier this month. "North American tight oil supply is more resilient than some people think it is."

Separately, Saudi Arabia's oil minister stressed that oil producers outside OPEC must cooperate to boost falling crude prices as the group refuses to take responsibility alone.

"We refuse to take responsibility alone because [OPEC] produces 30 per cent of market output and 70 per cent comes from outside," Ali Al Naimi said in remarks carried Monday by the Saudi Press Agency (SPA).

Crude prices slumped by about 60 per cent between June and February, weighed down by a glut of global supplies and concerns about stalling demand.

The slide was exacerbated in November when OPEC refused to cut production to rescue falling prices, saying it wanted to maintain its market share.

The 12-member group, led by top producer Saudi Arabia, pumps around a third of the world's oil but other major producers, such as Russia, are not tied by its decisions.

Asked whether OPEC would be willing to work with non-members, Naimi pointed to the crash of 1998 when the group cooperated with other producers to cut output and support oil prices.

"Today, the situation is difficult. We tried, met with them but did not succeed because they insisted that OPEC should take the responsibility alone," said Naimi, in reference to talks with non-OPEC producers ahead of the group's meeting in November.

"All must contribute if we want to improve prices because it is in the interest of all," the Saudi minister added.

Naimi remarked that the kingdom had the capacity to supply any new client with crude.

Saudi Arabia had no objection to new oil producers joining OPEC, he noted, indicating that several countries have in the past turned down invitations to become members of the group.

The Saudi minister also defended the oil policy of Gulf states, saying they were taking measures to stabilise the market.

"We are not against anyone. We are with all to support stability in the market and to support a balance between supply and demand," Naimi said.

Saudi Arabia and its Gulf partners have been criticised for allegedly using oil as a political weapon against countries within and outside OPEC.

Oil prices fell in Asian trade Monday with US benchmark West Texas Intermediate for May delivery down 65 cents at $45.92 and Brent tumbling 58 cents to $54.74.

Bloomberg News quoted Naimi as saying on Sunday that his country is producing almost 10 million barrels of crude a day.

Saudi Arabia pumped 9.85 million barrels a day in February, according to Bloomberg.