Why Technology Is the Key to Unlocking This Oil Play

While hydraulic fracturing gets most of the credit, and the bad press, for being a key to unlocking our nation's shale resources, it's not the only technological breakthrough that energy companies are using. Overall, technological advances are helping oil and gas companies better target well locations, which is leading to higher returns and lower costs. This can really be seen in the Mississippian Lime of Oklahoma and Kansas.

The Mississippian is different from other major shale plays like the Bakken and the Eagle Ford in that it's not really shale; it's a carbonate formation. This forces oil and gas companies to think differently about how to best develop the play, seen most readily in how these companies handle water.

One of the biggest problems producers encounter when developing shale resources is water. However, when it comes to the Mississippian, it's not the lack of water that's the problem. In fact, the average Mississippian well only takes about 2.2 million gallons of water to frack, which is less than half the amount needed for an Eagle Ford well. The problem is that that there is too much water which causes producers another set of problems.

Producers need to work around high water saturation levels in the rocks which causes them to expend a greater portion of capital on saltwater disposal wells. SandRidge Energy (UNKNOWN: SD.DL  ) , for example, has spent more than $450 million to develop its saltwater disposal infrastructure. While the company is keeping a lid on its capex this year, SandRidge still has plans to spend another $70 million on additional saltwater disposal infrastructure, which equates to about 5% of its drilling and completion budget. While that's a big chunk of change for SandRidge, the system it has built has given the company a distinct competitive advantage as it develops the play.

Source: SandRidge Energy

SandRidge's investments are paying off as it's developed scale which has enabled it to lower its costs. For example, over the past year the company has dropped its trucked water volumes from 8% all the way down to about 1%, which has helped its well costs to decline and has kept the company from having to spend extra on the trucking services of a company like Nuverra Environmental Solutions (NASDAQOTH: NESC  ) .

The Mississippian still offers Nuverra a huge opportunity for growth because other producers, like Chesapeake Energy (NYSE: CHK  ) , work to develop the play. Even though Chesapeake has completed its water disposal trunk line infrastructure and saltwater disposal network, it's still one of Nuverra's top customers. In developing the Mississippian, difficulties with water are part of the reason why Nuverra has been transferring and adding operating assets to the play over the past year.

In addition to saltwater disposal infrastructure, producers are turning to oil-field service providers like Halliburton (NYSE: HAL  ) and Schlumberger (NYSE: SLB  ) to help place wells that target the sweet spots of the play in order to optimize production. One of the keys has been to target deeper in the play so that the fracture height doesn't grow into the more water-saturated rocks. Halliburton is working with its customers to precisely determine the best locations and ensure that the wells are steered into the most productive zones of the play.

To do this, Halliburton is using magnetic resonance imaging logging, which helps producers identify water-free zones as well as target the most promising zones. Schlumberger is also working with customers to accurately characterize the reservoir to target the best quality areas of the play in order to maximize production. Together these two oil-field services providers are using technology to best unlock this play's resources.

These techniques are enabling SandRidge and Chesapeake to keep costs down and improve returns. SandRidge, for example, is finding the oilier spots in the play, which is why the company sees its overall Mississippian production growing by 60%; its oil and liquids production will grow by 64% this year. The bottom line is that technology is helping SandRidge and its peers by taking away a lot of the guesswork, leading to improved returns and more certainty. 

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