Shale companies’ strategy to supercharge oil and gas production by drilling thousands of new wells more closely together is turning out to be a bust. What’s more, the approach is hurting the performance of older existing wells, threatening the U.S. oil boom and forcing the maturing industry to rethink its future.
To maintain America’s status as an energy powerhouse, shale companies in recent years have touted bunching wells in close proximity, greatly increasing the number of wells drawing on a promising reservoir. The added wells would produce as much as older ones, many drillers believed, allowing them to extract more oil overall while maintaining strong returns from each well.
Those rosy forecasts helped fuel investor interest in shale companies, which raised nearly $57 billion from equity and debt financing in 2016, according to Dealogic, even as oil prices dipped below $30 a barrel. That was up from nearly $34 billion five years earlier, when oil topped $110 a barrel.
Now the results are coming in, and they are disappointing. Newer shale wells drilled close to older wells are generally pumping less oil and gas than the older wells, according to early corporate results. Engineers warn the new wells could produce as much as 50% less in some circumstances.
The newer shale wells often interfere with the output of older wells, because blasting too many holes in dense rock formations can damage nearby wells and lower the overall pressure, making it harder for oil to seep out. The moves could potentially cause permanent damage and lower the overall amount recovered from a reservoir.
Known in the industry as the “parent-child” well problem, the issue is surfacing in shale hot spots across the U.S. as companies ramp up production. Most of the tens of thousands of planned new wells will be child wells—wells drilled close to an already producing well.
It is one of the primary reasons why thousands of shale wells drilled in the past five years are producing less oil and gas than companies forecast to investors, a Wall Street Journal examination of drilling data has found.
In February 2018, RSP lowered its estimate of drilling spots in the area to 2,440 wells. The company said it had found that spacing wells closer than 400 feet hurt production, and it had come to believe that 450 feet was the optimum spacing in the Midland area.
A month later, in March 2018, Concho Resources acquired RSP for $9.5 billion, or about $75,000 per acre, creating a Permian giant. In a presentation announcing the deal to investors, Concho estimated RSP’s total inventory of drilling sites, which includes areas outside Midland, was about 30% lower than RSP’s previous estimate.
A Concho spokeswoman declined to comment. The company has previously said it would drill wells 660 feet apart in the Midland area and that synergies created by the merger will save money and allow it to go into a “manufacturing mode” of large-scale drilling projects.
When the deal closed in July, the combined market cap of Concho and RSP was nearly $30 billion. The current value of the combined company is $22 billion.