Emerging Technology Disrupters in Oil, Gas and Data

O'Reilly Report Cover

Last week I learned that WellWiki.org was profiled in O’Reilly’s Oil, Gas and Data report. Written by Daniel Cowles, the O’Reilly report covers a variety of emerging technology disruptors. The report was handed out to attendees at the Strata + Hadoop World big data conference in London.  Below is an excerpt…

O'Reilly Report Page 16

National Geographic Bakken Shale Cover Story

The March 2013 issue of National Geographic proclaims: “America Strikes Oil: The Promise and Risk of Fracking.”

201303 National GeographicInside is a 32-page story entitled “The New Oil Landscape” by Edwin Dobb, with photographs by Eugene Richards. You can read the story online and view an album of the photos.

In his introductory column, editor-in-chief Chris Johns framed the stakes this way:

Flip a coin. Heads or tails? The odds are fifty-fifty either way. Make a bet and take your chances. A gamble is just that–a decision that has risk attached to it. Someone wins. But someone loses. When it comes to fracking–the process of extracting otherwise unreachable oil and natural gas by driving fresh water mixed with other substances, some toxic, into layers of rock–the bets become less mathematically clear…

As with other unconventional formations, such as the Barnett, Haynesville and Marcellus, extracting hydrocarbons from North Dakota’s Bakken Formation depends on a combination of horizontal drilling and hydraulic fracturing. What’s different about the Bakken Formation is that it produces shale oil. (Though considerable natural gas is also produced, it is often flared).

[A]dvances in drilling and extraction technology bave made it possible to remove oil from deep, widely dispersed deposits. Since early 2006, production from what’s known as the Bakken formation has increased nearly 150-fold, to more than 660,000 barrels a day, moving North Dakota into second place among domestic suppliers, behind Texas and ahead of Alaska.

But clearly more than technology, geology and economics are at stake. Early in the article, Dobb asks:

[C]an the inestimable values of the prairie–silence, solitude, serenity–be preserved in the face of full-throttle, regionwide development, of extracting as much oil as possible as fast as possible?

After reviewing the evidence firsthand, by the end of the article, Dobb concludes:

To believe the old lifestyle will survive intact is to ignore the wrenching changes that have already reshaped this corner of the prairie.

Note: In August 2010, National Geographic published a package of stories — “The Great Shale Gas Rush” — on the Marcellus Formation.

Utica Shale Update

A recent report from the United State Geological Survey (USGS) estimates that the Utica Formation contains a mean of 38 trillion cubic feet (tcf) of undiscovered, technically recoverable natural gas, plus a mean of 940 million barrels of unconventional oil resources and a mean of 208 million barrels of unconventional natural gas liquids.

The estimate of undiscovered natural gas ranges from 21 to 61 tcf (95% to 5% probability, respectively). The estimate of undiscovered oil ranges from 590 million barrels to 1.39 billion barrels (95% to 5% probability, respectively). The estimate of natural gas liquids ranges from 75 to 398 million barrels (95% to 5% probability, respectively).

That makes the Utica Formation the third largest unconventional basin in the United States. By comparison, the USGS has estimated the Marcellus Formation contains 84 tcf of natural gas, making it the largest unconventional gas basin in the United States. The USGS estimated that extracting these reserves would take approximately 110,000 gas wells and another 17,500 oil wells.

Another Early Rhinestreet Well

A few months ago I wrote a series of posts about early unconventional wells that appear to have been omitted from the Pennsylvania Department of Environmental Protection’s (DEP) Act 13 report, contrary to requirements.

Today I stumbled across another early Rhinestreet Shale well. According to Tarr (1980, p. 4), in November 1979, in the the northeastern portion of the Lake Erie shoreline the Pennsylvania Department of Environmental Resources (DER), the US Department of Energy (DOE) and the Morgantown Energy Technology Center (METC) “completed the Commonwealth of Pennsylvania [COP], 3 DER Presque Isle State Park, Permit #ERI-20846 [now 37-049-20846] in the Devonian Shale interval 117-1247.5′. The well was bottomed at a total depth of 1276 ft in the Middle Devonian Onondaga Limestone. The well flowed 160 Mcfpd natural from the open hole. Reservoir pressure was 170# psig after being shut-in 33 days. Gas production was obtained from the interval 945-1040 ft in the Upper Devonian Rhinestreet Shale.” In other words, this well qualifies an unconventional gas well under Act 13.

As of 1994, ERI-20846 was one of two gas wells in Presque Isle State Park, then known as the “Marina” well. According to a DER report, the Marina well was completed on October 10, 1979, at a depth of 1,276 feet. It was estimated to heat several buildings (marina, manager’s home, and administration building) for 30 to 40 years. The DER provided $23,000 towards the $200,000 project. This well last reported production in 2006. It was not listed in the DEP’s Act 13 report of spud unconventional gas wells.

The same report noted that the second well — the Beach #7 — was drilled in 1910 by the City of Erie at a depth of 3,572 feet. It was used to run machinery at waterworks park and later abandoned in the 1920s. However, the well was apparently not plugged.

In 1970, a black, foul-smelling surface discharge was reported in the Beach 7 well area. The discharge resulted in the release of hydrogen sulfide gas into the air and other hazardous substances into the soil and shallow ground water near the well. As the odors continued, DER uncovered the pavement overlying the discharge in 1979, and identified the well as the source of the discharge. The discharge was found to be emanating from a deep underground formation called the Bass Island formation.

From 1964 to 1971, over one-billion, ninety-million gallons of wood pulping wastes were injected into the Bass Island formation by the Hammermill Paper Company at wells located approximately four miles to the east of the Presque Isle State Park 7 well. An explanation is that the injected wood pulping wastes flowed along the Bass Island formation and surfaced at the Beach 7 well. [The] Beach 7 well was shut off and plugged in April 15, 1980 to 900 feet of the surface. At that time a substantial amount of gas was found near the surface that did have potential for use.

In September 1983, the Beach 7 well was placed on EPA’s National Priorities List. The National Priorities List consists of hazardous sites across the country where cleanup need’s are so serious as to warrant designation as a Superfund site. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the “Superfund,” was passed by Congress in 1980. The Act addresses the nationwide problem of uncontrolled hazardous sites.

In 1992, EPA delisted the well from the National Priorities List. Restoration work was done on the site.

So, according to this report, wastes injected into a disposal well four miles away traveled from the Bass Island Formation, (which is of Upper Silurian age, and thus, much older and stratigraphically lower than the Marcellus Formation), and a depth of 3,500+ feet, through numerous intervening formations, before finally migrating up the Beach #7 well, with a bottom depth of ~1300 feet. In other words, here is at least one example that suggests fracking fluids may be able to travel laterally and vertically without much difficulty!

What Counts as an Unconventional Gas Well Spud?

As I have delved deeper into Act 13 of 2012, I’ve realized that one critical question is: what counts as an unconventional gas well spud?

According to Act 13 an unconventional gas well fee is “imposed on every producer and shall apply to unconventional gas wells spud in this Commonwealth regardless of when spudding occurred. Unconventional gas wells spud before the fee is imposed shall be considered to be spud in the calendar year prior to the imposition of the fee… (Ch. 23 §2302(b)).”[1]

The population of wells liable for these fees is circumscribed by three interdependent definitions (see Ch. 23 § 2301). First, a spud is “the actual start of drilling of an unconventional gas well.” Second, an unconventional gas well is “a bore hole drilled or being drilled for the purpose of or to be used for the production of natural gas from an unconventional formation.” Third, an unconventional formation is “a geological shale formation existing below the base of the Elk Sandstone or its geologic equivalent stratigraphic interval where natural gas generally cannot be produced at economic flow rates or in economic volumes except by vertical or horizontal well bores stimulated by hydraulic fracture treatments or by using multilateral well bores or other techniques to expose more of the formation to the well bore.”

Criterion 1: Formation Geology

One critical determinant of unconventional gas well fees is formation geology – wells spud in shale formations below the base of the Elk Sandstone or its stratigraphic equivalent. The Elk Sandstone is late Devonian-age, or more than 360 million years old (Ma) (Carter, 2007). Accordingly, shale formations older than the Elk Sandstone qualify as unconventional formations under Act 13. In Pennsylvania, at least 12 formations containing 19 different shale members meet this requirement according to recent subsurface nomenclature (see Table 1).[2]

Table 1. Shale Formations in Pennsylvania Below the Elk Sandstone


Source: Gehman et al., 2012

Criterion 2: Well Timing

The second determinant of unconventional gas well fees is well timing – any unconventional well spud regardless of when spudding occurred. Devonion-age shales have been spud in Pennsylvania since at least 1860, the year after the famous Drake well. Since the 1880s, formations older than Upper Devonian-age have been drilled, with at least 36 wells drilled to the Marcellus Formation or deeper before 1930 (Fettke, 1950).

For instance, in 1889 the Presque Isle Natural Gas Company drilled a well to the Trenton Limestone (i.e., penetrated all 12 formations listed in Table 1). Starting in 1930, exploration of formations older than Upper Devonian grew dramatically, with 559 such wells drilled from 1930-1949 and another 1,391 drilled from 1950-1959 (Fettke, 1950, 1956; Lytle et al., 1961).[3] Thus, Act 13 requires that fees be imposed on unconventional gas wells drilled, even as far back as 1860, with a subset of these wells more visible and prevalent from 1930 onward.

Criterion 3: Spud Interval

The final determinant of unconventional gas well fees is spudding – the start of unconventional gas well drilling. In the oil and gas industry spudding is clearly differentiated from completion and production, both of which are activities that can only occur, if at all, after spudding. Indeed, not all spud wells are completed or placed in production.

By anchoring its definition of an unconventional well on spudding, Act 13 requires that unconventional gas wells be identified without reference to completion or production activities – as wells may never undergo such activities. But in that case, how does one differentiate unconventional and conventional wells, as both are essentially identical at the start of drilling?

Option 1 is to differentiate between two spud dates – the start of surface drilling and the start of subsurface unconventional shale drilling. Thus, unless and until a well penetrates a shale formation below the Elk Sandstone or its stratigraphic equivalent it would not qualify as an unconventional gas well spud. Although Act 13 does not explicitly distinguish between surface and subsurface drilling, this distinction is implicit in the Pennsylvania Department of Environmental Protection’s (DEP) (2012a) interpretation of Act 13:

An unconventional gas well is a well that is drilled into an unconventional formation, which is defined as a geologic shale formation below the base of the Elk Sandstone or its geologic equivalent where natural gas generally cannot be produced except by horizontal or vertical well bores stimulated by hydraulic fracturing.

In other words, once a well is drilled into a shale formation below the Elk Sandstone it counts as an unconventional gas well. Because one or more unconventional shales (i.e., formations 1 through 3 in Table 1) occur throughout the areal extent of Pennsylvania’s extant oil and gas production, the population of wells liable for unconventional gas well fees under this interpretation would minimally include any wells that penetrate the Tully Formation, as there is no way to reach this formation without first going through (i.e., spudding) an unconventional shale. By way of example, all 1,986 deep wells known to have been drilled before 1960 would owe unconventional gas well fees under this interpretation, plus any similar wells drilled since then. Additionally, any wells spud in the three formations described above would be liable for fees, whether or not they reached the Tully Formation.

Option 2 is to only count wells as unconventional spuds if the formation targeted for production is an unconventional formation. In other words, spudding an unconventional shale formation en route to a deeper formation would not automatically result in unconventional well fees. Instead, only in cases where the intended production formation contained shale would the well be liable for unconventional gas well fees. Under this interpretation any wells ultimately spud in any of the 12 formations listed in Table 1 would owe unconventional gas well fees.

Finally, for analysis purposes only, Option 3 would entail counting wells that have been spud and completed in an unconventional shale formation. This is a far more stringent standard than Act 13 requires, and thus, violates its requirements. Nonetheless, such an approach may be analytically useful in establishing the minimum number of unconventional well spuds that any complete analysis would have to exceed to be credible. Said another way, any report from the DEP to the Pennsylvania Public Utility Commission (PUC) with less than this number of wells is necessarily deficient.

Together these three criteria – geological age, well timing, and spud interval – determine the population of wells subject to unconventional gas well fees under Act 13 of 2012. The scope of these requirements can be visualized by constructing a matrix of the 12 formations by the 152 years (1860-2011) over which unconventional gas exploration in Pennsylvania has potentially occurred, resulting in a total of 1,824 formation-years.

In sum, it is not possible to calculate the total unconventional gas well fees due under Act 13 without first determining the number of unconventional wells spud in each and every one of these 1,824 formation-years. Obviously, the results of this calculation are likely to vary considerably depending on which of the three spud interpretations is utilized.

[1] Under Act 13 the PUC is responsible for determining the fee an operator owes based on several factors, including whether the well is vertical or horizontal, the average annual price of natural gas, the age of the well, and potentially, the urban consumer price index if the number of wells drilled in the current exceeds the number drilled in the preceding year.

[2] This nomenclature was not necessarily operant historically, as a result, any analysis must also consider alternative designations for these formations over time. For instance, the Medina Group (Carter, 2007) was known as the Albion Formation (e.g., see Fettke, 1950) until as late as 1995 (Ryder, 2004).

[3] It is worth noting that already by the middle of 1954, hydraulic fracturing was “used extensively” in Pennsylvania, including in wells to the Oriskany and Medina Formations, among others (Moore, 1955).

DEP May Have Omitted at Least $49 Million in Medina Group Unconventional Well Fees

This post continues my series on unconventional wells that have been omitted from the Pennsylvania Department of Environmental Protection’s Act 13 reporting, with a look at wells in the Medina Group. In Northwestern Pennsylvania the Medina Group consists of three lower Silurian-aged members: Grimsby Sandstone, Cabot Head Shale, and Whirlpool Sandstone.

Figure 36 of Oil and Gas Developments in Pennsylvania in 1987 provides summarized records of 391 well completions that penetrated formations of Middle Devonian age or older (i.e., to the Marcellus Formation or lower). The majority of these wells were categorized as producing from the Medina Group. Details on the depths to and thicknesses of each of these three members, together with the depths of the producing interval, were provided for approximately 350 Medina Group completions. Using these data it is simple (if tedious) to calculate whether or not the Cabot Head Shale was completed. If my math is correct, 198 out of 350 Medina Group wells were completed in the Cabot Head Shale.

The Appalachian Basin Tight Gas Reservoirs Project, a three-year project sponsored by the U.S. Department of Energy and undertaken by the West Virginia Geological and Economic Survey and the Pennsylvania Geological and Topographic Survey, reported on 10,906 Medina completions in Pennsylvania through approximately 2007. Assuming the ratio of Cabot Head Shale to Medina Group wells from 1987 holds for other time periods, this would suggest approximately 6,170 Cabot Head Shale completions.

This is significant, because any well completed in the Cabot Head Shale meets Act 13′s definition of an unconventional well, and thus, is required to pay unconventional impact fees. Assuming these wells were all vertical, that would be a fee of at least $8,000 for 2011, or a total of more than $49 million in impact fees due under Act 13. And yet, none of these wells were included in the Pennsylvania Department of Environmental Protection’s reports to the Pennsylvania Public Utility Commission as required by Act 13.

As startling as this oversight is, the above estimate likely understates the number of Medina Group wells liable for unconventional impact fees. First, I have been overly conservative in my calculations —  only including wells that explicitly completed the Cabot Head Shale. In many cases the wells reported in 1987 were completed to within a foot or so of the Cabot Head Shale. Because the Medina is generally more than 2,000 feet below the surface, any hydraulic fracturing of the Grimsby Sandstone or the Whirlpool Sandstone will grow vertically, and therefore, penetrate and produce from the Cabot Head Shale. In that case, the number of unconventional wells may include every Medina Group well ever completed. If so, the impact fees due under Act 13 would grow to more than $87 million.

Second, I have only reported on completed wells, but Act 13 requires that impact fees be paid on all spud unconventional wells. A well is spud the moment drilling begins. As a consequence, the number of spud wells is likely to be meaningfully higher than the number of completed wells, but so far I have not found a data source that would allow me to reliably estimate the ratio of spud wells to completed wells for the Medina Group during this time period. Whatever this ratio turns out to be, it simply adds to the magnitude of the reporting failures by the Pennsylvania Department of Environmental Protection.

Third, to estimate the total population of Medina Group wells I used the well database generated by the Appalachian Basin Tight Gas Reservoirs Project. But it is likely that this is actually not the population of Medina wells, but only a sample of them. To the extent that more than 10,906 Medina wells were spud in Pennsylvania in the Cabot Head Shale, then my estimate of the impact fees due is too low.

In sum, my analysis suggests the operators of Medina Group wells collectively owe a minimum of $49 million to $87 million in unconventional well impact fees under Act 13, and the total could be much higher. And yet none of these wells has been reported as required by the Act.