Why Horizontal Drilling Is Such a Game-Changer for America

Photo credit: Flickr/nestorgalina

"America has a long history of achieving the impossible. We defeated the British. We landed on the moon. We invented the Internet. And now we can add horizontal drilling to the list of American innovations that have changed the world forever."
-- Howard Hamm, CEO of Continental Resources (NYSE: CLR  )

That quote comes from Hamm's Energy Independence Day letter, which appeared in Forbes last month. What's most interesting about the letter, which also noted that the U.S. is likely to overtake Saudi Arabia as the world's largest oil producer by 2017, is that Hamm isn't crediting hydraulic fracturing for the current American energy renaissance:

Some may say this new abundance in oil and gas is due to hydraulic fracturing. However, fracking technology has been consistently in use for more than 60 years. What is new is horizontal drilling.

He points out that in 2000, there were fewer than 50 horizontal drilling rigs in the U.S.m but today there are more than 1,200, which is why we've gone from talking about peak oil to now pondering American energy independence within a decade.

Clearly, horizontal drilling wouldn't be viable without being combined with hydraulic fracturing. However, when done in combination, the results are absolutely game-changing. Consider the following quotes from Pioneer Natural Resources (NYSE: PXD  ) CEO Scott Sheffield on the company's most recent quarterly conference call. In talking about a recent horizontally drilled well in the Permian Basin, he said: "What's interesting, in six months, it's reached 140,000 barrels of oil equivalent." What's truly mind-blowing is what he said next: "Our typical vertical well takes 30 to 35 years to produce a 140,000 on a vertical well. So we did that in six months." By simply shifting from a vertical well to one drilled horizontally, the company was able to pull forward three decades of oil and gas production.

The other thing to keep in mind here is that the company isn't just pulling production forward, but it's accessing oil and gas that would never have been recoverable before. That's because companies are able to significantly improve what are called estimated ultimate recoveries, or EURs. In fact, production is so good at its recent wells that the company, which had estimated it would ultimately be able to recover about 650,000 barrels of oil equivalent from its wells, is now, based on what it's seeing, estimating that it could pull out more than a million barrels in some cases from its wells.

In one final example the company gave on its conference call, it noted that in 10 months one of its Jo Mill wells produced an average of about 50,000 to 60,000 barrels already. That's truly staggering when considering that it was thought that a traditional vertical well in the Jo Mill would produce only 20,000 barrels in 40 years. It's pretty clear: Horizontal drilling changed everything.

Further, while horizontal drilling is revitalizing legacy oil and gas basins such as the Permian where Pioneer is using it, it's also putting new emerging basins such as the Bakken and Eagle Ford on the map. In fact, without horizontal drilling, the Bakken would not be economic to produce. However, with oil over $100 per barrel, a producer like Continental can earn a rate of return in excess of 60% even after spending more than $8 million to drill each well. Meanwhile, thanks to horizontal drilling, EOG Resources (NYSE: EOG  ) is one company enjoying rates of returns north of 100% in the Eagle Ford. In fact, EOG credits horizontal drilling with its holding some of the best horizontal oil assets in North America, which have delivered an average of 40% production growth each year this decade.

For far too long, hydraulic fracturing has been the focus of America's oil and gas boom. It's time to give some credit where credit is due, and it's pretty clear: Horizontal drilling is what's leading America's energy revolution.