Understanding Oil & Gas Drilling
(Source: State of New Mexico, 2017)
Drilling rigs create a hole called a wellbore that targets a geological formation where oil and/or gas may be present. Vertical wells that are straight up and down were typical in the past, but increasingly the industry is moving toward horizontal or directional wells, where the well curves and exposes the wellbore to more of the target formation. In New Mexico, typical oil and gas wells range from 3,000 to 15,000 feet in depth. The horizontal part of the well can extend for up to two miles.
To protect the wellbore and any drinking water formations, steel pipe called “casing” is placed in the wellbore and cement is pumped through the casing. The cement pushes out the bottom of the casing and flows up the space between the wellbore and casing (or through the “annulus”) back to the surface. When the cement hardens, it forms a bond between the walls of the wellbore and the outside of the casing, thus sealing that space off from the flow of fluids (water, oil, or gases). The casing and cementing is then tested to ensure its integrity. This bond protects groundwater and oil and gas reservoirs from contamination. Typically, there are three separate layers of both casing and cement placed between drinking water aquifers and the actual pipe containing crude oil and/or natural gas. To produce oil and gas, holes are made in the casing in the reservoir interval, allowing hydrocarbons to flow into the well and up to the surface where they are processed and transported to market. Once a well is drilled, cased, and cemented, many also undergo stimulation processes, such as hydraulic fracturing, to boost production and minimize the amount of residual oil remaining in the formation.
What is hydraulic fracturing?
Hydraulic fracturing (also known as “fracking” or “hydro fracking”) has been used in the oil and natural gas industry since the 1940s. Recent advances in fracking coupled with horizontal drilling have opened up vast oil and gas resources in the United States that were previously considered uneconomic to produce.
Fracking is not a drilling process, but occurs after the wellbore has been drilled, cased, and cemented. During fracking, mostly water and sand (~99.5% of the total volume injected) along with small amounts of chemical additives (<0.5% of the total) are pumped at high pressures into a well. The resulting fractures in target rocks allow oil and gas to be produced from formations with low porosity and permeability, such as tight shale. The sand in fracking fluids props the fractures open so the oil and gas can flow freely into the production casing. The chemical additives are used for a variety of purposes, including to keep the sand temporarily suspended in the water, reduce friction losses, eliminate bacteria, and prevent rust. Nationwide, 90% of wells currently are fracked, and in New Mexico hydraulic fracturing takes place in both the San Juan and Permian Basins.
Understanding Well Completions
(Source: NCS Multistage Holdings, Inc. S-1, 2017)
As a provider of multistage completion equipment and services, we [NCS Multistage Holdings, Inc.] participate in the market for completion equipment and services, which is estimated by Spears to be an $8.6 billion global market, 60% of which is generated in North America. The completion equipment and services sector includes large and international companies (including Halliburton Company, Schlumberger Limited, Baker Hughes Incorporated and Weatherford International Ltd.) as well as smaller, independent companies, including ourselves, that may operate in specific product or service categories within the overall market, or that operate primarily on a regional basis.
We believe that customers of completion equipment and services select providers based on a number of factors, including technology, service quality, safety track record and price. We believe that we are well-positioned to compete in all of these dimensions.
Over the past decade, E&P companies have increasingly focused on exploiting the vast hydrocarbon reserves contained in North America’s unconventional oil and natural gas reservoirs by utilizing horizontal drilling and hydraulic fracturing. According to Spears, in 2016, over 55% of all onshore wells drilled in the United States and over 80% of all onshore wells in Canada included horizontal well sections, or laterals, an increase from 30% and 62%, respectively in, 2011. According to Spears, horizontal wells accounted for 79% of total onshore drilling and completion spending in the United States and 95% of total onshore drilling and completion spending in Canada in 2016.
Hydraulic fracturing is a well stimulation technique in which rock is fractured by a pressurized fluid. The process involves the high-pressure injection of fluids and proppants into a wellbore to create cracks in the deep-rock formations. When the hydraulic pressure is removed from the well, proppants hold the fractures open, creating a conductive channel through which the hydrocarbons can flow more freely from the formation to the wellbore and then to the surface.
Multistage completion equipment and services provide entry points into the deep-rock formations to enable stimulation and provide the isolation between stages that allow for stimulation treatments to be more effective. Multistage completions in horizontal wells typically begin with a stage at the end of the lateral farthest away from the vertical section of the wellbore, often referred to as the “toe.” As an oil or natural gas well is completed, each subsequent stage is completed in succession moving from the toe to the section of the horizontal wellbore closest to the vertical section, often referred to as the “heel.” As the well is completed, each stage is isolated from the stages that have been completed before it. The process is similar in vertical wells, with the first stage completed being the one at the greatest vertical depth, and the last stage at the shallowest depth.
The most commonly used completion technique for unconventional wells is plug and perforate, or “plug and perf.” The plug and perf technique uses a tool called a perf gun to create clusters of holes, or perforations, in a section of the casing of the wellbore. After the perf gun has been removed from the well, the formation is hydraulically fractured through the newly created clusters of perforations, connecting the wellbore to the surrounding reservoir. After the frac stage is completed, the well is temporarily plugged just above the recently stimulated section and the perforation and hydraulic fracturing process is repeated until the number of desired frac stages have been placed. This technique is most commonly applied in wells in which the well’s casing or lining has been cemented in place.
“Ball drop” is another technique commonly used in open hole, or uncemented, well configurations. This technique utilizes a series of sliding sleeves pre-installed in the well’s casing or lining during well construction. Rather than using a perf gun to create openings, a specially sized ball is dropped into the well prior to each stage being hydraulically fractured. The size of the ball allows it to pass through to a matching “seat” profile on a sleeve in the well, where it acts both to enable the shifting of the sleeve, exposing ports to the formation, and to plug the wellbore below, providing isolation. Ball drop systems typically rely on different ball sizes to activate the sleeves and, as a result, the wellbore will increasingly narrow toward the “toe” and the number of sleeves and stages that can be fractured can be limited by available ball sizes.
E&P companies have increasingly adopted techniques and equipment that drive more effective resource recovery, including longer-length well laterals, closer spacing of hydraulic fracturing stages, a higher number of stages per well and more volume of fluid and proppant used per well and per foot of lateral. Additionally, as E&P companies have begun to move toward infill and development drilling, the spacing between wells has decreased, and is expected to continue to decrease, highlighting the need for more precise drilling and completion techniques.
While plug and perf and ball drop techniques have traditionally been used in unconventional well completions, these techniques have several drawbacks that limit their ability to optimize completions and maximize hydrocarbon recovery. Limitations associated with traditional well completion techniques include:
> inconsistent and uncontrollable placement of fractures that cannot be reliably repeated from stage to stage due to variable breakdown pressures and leading to under-stimulation of wells;
> inability to monitor downhole pressure or measure pressures and temperatures during stimulation, limiting control and making optimization more challenging;
> inability to close and reopen perforations and sleeves, limiting options for customers following the initial completion; and
> completion designs resulting in under-stimulation of wells to reduce the likelihood of an operational issue referred to as a “screenout” which can result in a costly recovery process.
To reduce the amount of under-stimulated reservoir area that can occur when using these traditional techniques, many E&P companies are reducing the spacing between stages, thereby increasing the number of stages per well. However, increasing stage counts with traditional completion techniques can result in other operational inefficiencies such as increased time and expense in the case of plug and perf completions, or, in the case of ball drop completions, the inability to place the desired number of stages due to the limited number of ball and seat sizes available. We believe there is significant opportunity for growth and expansion for providers that introduce innovative technology that allows customers to efficiently increase stage counts, have more control during the well stimulation process and better measure their well completions results.
The oil and natural gas industry has traditionally been volatile and is influenced by a combination of long-term, short-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and capital allocated by exploration and production companies to their budgets for drilling, completion and production activities. The oil and natural gas industry is also impacted by general domestic and international economic conditions, political instability in oil producing countries, government regulations (both in the United States and elsewhere), levels of customer demand, the availability of pipeline capacity and other conditions and factors that are beyond our control.
Demand for our products and services depends substantially on the level of expenditures by companies in the oil and natural gas industry. The significant decline in oil and natural gas prices beginning in late 2014 continued into the first part of 2016. This low commodity price environment has caused a reduction in the drilling, completion and other production activities of most of our customers and their spending on our products and services.
The reduction in demand resulted in declining prices for our products and services, a trend that continued in the first six months of 2016. As oil and natural gas prices began to recover in mid-2016, we have experienced an increase in demand for our products and services. If near term commodity prices stabilize at or increase from current levels, we expect to experience a further increase in demand for our equipment and services.
Although volatility is likely to persist in the industry, we believe that the following trends will positively impact the completions equipment and services market, and providers of multistage completions products and services in particular, in the coming years:
> Increasing global demand for crude oil and natural gas. We believe the oilfield services industry will benefit from continued increases in the demand for hydrocarbons over time, primarily resulting from increased demand from industrializing nations, including China, India, other Asian countries and the Middle East. Demand growth from these regions is projected to more than offset decreasing demand from Organization for Economic Cooperation and Development nations. In its 2016 Energy Outlook, BP p.l.c. (“BP Energy Outlook”) estimates that total oil demand will increase from approximately 92 million barrels of oil per day (“Mb/d”) in 2014 to 112 Mb/d by 2035. Over the same period, the U.S. Energy Information Administration estimates that the total demand for natural gas will increase by 1.8% per year, from approximately 128 billion Mcf (calculated in thousand cubic feet per day (“Mcf”)) to approximately 192 billion Mcf. The following charts illustrate the projected increases in demand for oil and natural gas from 2014 to 2035:
Global Oil Demand by Region Global Natural Gas Demand by Sector
Source: International Energy Outlook 2016,
U.S. Energy Information Administration
> Unconventional formations are becoming a larger part of the overall hydrocarbon production mix. Increases in efficiency and the continued development and implementation of new technology have led to significant improvements in the economics of the production of unconventional formations. According to BP Energy Outlook, since 2005, tight oil has increased from less than 1% of overall global oil production to nearly 5% of overall oil production in 2014 and tight oil production growth is projected to outpace growth from all other sources, reaching nearly 10% of all oil production by 2035. The BP Energy Outlook estimates that shale gas production increased from approximately 1% of total global natural gas production in 2005 to nearly 10% of total global natural gas production in 2014 and that shale gas production is projected to continue to grow at 5.6% per year through 2035, and is projected to reach 24% of total natural gas production by 2035. The following charts illustrate the projected increases in production of global tight oil and shale gas from 2014 to 2035:
Global Tight Oil Production and Share Global Shale Gas Production and Share
Significant new well completions are required to offset naturally-declining oil and natural gas production. Oil and natural gas production from an individual well will generally exhibit its highest production level in the months following its completion, and production will decline over time thereafter. As a result, significant drilling and completion activity is required to offset the production declines from the existing producing well base, with such declines for global oil production estimated at 6% per year by the International Energy Agency in its 2013 World Energy Outlook. Additional drilling above the level needed to offset declines is required to provide the production growth required to meet increasing global demand. Tight oil and shale gas wells typically experience faster production declines during their first few years of production than conventional wells. As a result, as tight oil and shale gas becomes a higher percentage of the global production mix, average decline rates will rise, increasing the amount of drilling and completion activity required to sustain production levels. Spears projects that the number of horizontal wells drilled in North America will increase from 11,702 in 2016 to over 25,600 in 2019, a compound annual growth rate of 29.8%.
U.S. Horizontal Wells by Year
Canadian Horizontal Wells by Year
> Increasing completion equipment and services requirements per horizontal well. Oil and natural gas producers continue to evolve the designs in their completions of horizontal wells targeting unconventional formations. On average, horizontal laterals in wells targeting unconventional formations have been trending longer, the number of completion stages per well has been trending higher and the spacing between stages in a horizontal lateral has been decreasing. In addition, many oil and natural gas producers have been increasing the amount of proppant they are placing into their wellbores on both an aggregate basis and when measured in the amount placed per foot of the horizontal lateral. Based on estimates from the U.S. Energy Information Administration Energy, the average number of stages per horizontal well increased every year from 2006 to 2015 from fewer than 10 in 2006 to approximately 25 in 2015, and we believe this trend will continue. We expect to benefit from this trend, as the number of frac sleeves we sell is likely to increase, corresponding with increases in the average number of stages per well.
> Tighter well spacing and completion of multiple zones within a single productive horizon. Oil and natural gas producers have been undertaking well spacing studies to optimize the number of wells they drill and complete on their acreage. In many cases, this results in tighter well spacing. In a similar fashion, oil and natural gas companies are testing well placement strategies in which they can complete wells landed at different vertical depths targeting the same hydrocarbon-bearing formation. Tighter well spacing and placing multiple wells in the same formation can have the result of increasing the inventory of potential wells that can be drilled, completed and brought on production. As individual wellbores are placed in closer proximity to one another, we believe it is important to control the growth of hydraulic fractures to maximize production from each individual well and to minimize the risk of negatively impacting production from the surrounding wells.
> Secondary recovery strategies for horizontal wells. Wells drilled targeting unconventional formations are estimated to recover a much lower percentage of the original hydrocarbons in place than conventional sources of oil and natural gas. The U.S. Energy Information Administration estimated tight oil recovery factors to range from 3% to 7% on average and shale gas recovery factors to range from 20% to 30%. Oil and natural gas producers are evaluating and implementing strategies to increase the recovery from their existing wells, including through refracturing, waterflood and natural gas flood operations. We believe that our MultiCycle sliding sleeves provide our customers with increased long-term flexibility in pursuing secondary recovery strategies.