From The Wall Street Journal
Fracking is entering a new expansion phase in this Canadian town more than 2,000 miles from the center of the U.S. oil boom—one that heavily favors the world’s energy giants.
Chevron Corp. CVX -0.05% is laying the groundwork here for what it calls a “factory model” for shale drilling, master planning an entire region of small shale wells by locking up labor, building infrastructure and securing sand and other needed materials, all at once.
Shale drilling, once the province of small, scrappy operators, has run into growing pains in places such as the Permian Basin in Texas and New Mexico, as producers struggle with pipeline bottlenecks and rising labor and material costs.
Big oil companies seeking to re-create the U.S. shale boom in countries such as Canada and Argentina are trying to avoid these problems by managing shale sites in concert to prevent logistical difficulties and streamline operations, similar to the way they run traditional oil megaprojects.
Already in Texas, there is evidence that larger companies such as Chevron and Exxon MobilCorp. are weathering the bottlenecks and rising costs there better than smaller rivals—and continuing to ramp up production—because they have the economies of scale and wherewithal to develop their own solutions to these problems.
The big international oil companies were initially slow to recognize the potential of fracking and found themselves behind the competition in the first phase of the shale boom as smaller operators locked up land and stepped up production in places such as North Dakota and Texas. But they have since become major players in the Permian Basin, and are in the process of trying to leverage large footprints in the region into tangible shale profits—something that to date has eluded many of their smaller rivals.
“They can transfer technology and skilled people across assets and parts of their portfolio from North America to Argentina,” said Andrew Slaughter, executive director of the Center for Energy Solutions at Deloitte LLP. “These bigger companies have the scale to build or finance infrastructure and secure the best equipment and supplies. They have come to shale in quite a material way.”
The “bigger is better” mantra has started pushing smaller operators toward a new era of consolidation in fracking. A similar pattern has played out throughout the history of the oil industry, with wildcatters pioneering new technologies and discovering new fields, and larger, better-financed companies eventually taking over.
Deals among smaller oil-and-natural-gas companies that don’t own refineries are on track to reach almost $300 billion for 2017 and 2018, the highest two-year merger volume in more than two decades, according to Dealogic. The biggest tie-ups have occurred in the Permian Basin, where oil this year has sold at a price as much as $20 a barrel below global benchmarks because of bottlenecks and other constraints.
As Chevron seeks to expand shale around the world, it is taking lessons from Texas oil fields and from a model it pioneered in Southeast Asia in the 1990s. In the Gulf of Thailand, Chevron drilled thousands of wells to access isolated pockets of oil and gas. Over time, Chevron learned the value of standardizing equipment and processes to save money and keep costs low.
Earlier this decade, as the company began to turn its attention to fracking, teams of engineers working in Canada, Texas and Pennsylvania began visiting Thailand to see how they could improve in the U.S. oil patch.
“Shale was a great fit because of the quantity of wells you’re going to drill, the repeatability, well designs and rig types,” said Kim McHugh, vice president of drilling and completions at Chevron. “It’s a working ecosystem.”
In Fox Creek, about 160 miles northwest of Edmonton, Chevron is putting what it has learned into practice. That includes the use of underground data sensors linked via fiber-optic cables to analyze continuing fracking jobs, which blast rock layers with water, sand and chemicals. The company uses the resulting information to make adjustments and stimulate the release of more trapped oil and gas.
But it is also making changes to account for local conditions—and leveraging its size.
At a remote well site in Alberta, where employees are more likely to contend with logging trucks or bears than residential neighbors, Chevron built a facility that functions like a grain elevator and can store 1,800 tons of the sand that drillers use in fracking.
Known as the Sahara Sand Storage unit, it allows Chevron to continue drilling and avoid having to wait for deliveries from dozens of trucks a day. That is especially important after spring, when frost here melts and road bans stemming from the thaw’s effects can limit accessibility.
Chevron hasn’t disclosed how much oil and gas it might ultimately produce from the region. Analysts were once skeptical about the company’s Canada prospects, but many now say its position might be worth billions of dollars.
Shale development has taken off in the country, where production linked to fracking is expected to reach the equivalent of about three million barrels of oil and gas a day in 2020, according to Rystad Energy. That is more than five times higher than in 2011.
“We should be able to accelerate faster here based on our success in the Permian,” said Andrea Schnare, a Chevron operations manager who recently switched assignments from West Texas to Canada. “It’s much easier to adopt best practices across different areas.”
