HORIZONTAL WELLS-1 HIGH EXPECTATIONS FOR HORIZONTAL DRILLING BECOMING REALITY

William J. Lang, Marion B. Jett
Baker Hughes Inc.
Houston

Spawned by technological developments of the late 1980s, horizontal drilling has become a separate growth industry with its own set of economic and technical variables.

The current and potential future activity levels for this rapidly expanding technology are analyzed in this first of a series of eight articles. In coming issues, the series will discuss the latest tools, and procedures for drilling and completing horizontal wells.

The upsurge in horizontal activity, though still embryonic, can best be described as being both evolutionary and revolutionary. The considerable body of literature compiled of late suggests that horizontal technology is evolving steadily, approaching the point that conventional and horizontal wells will soon be indistinguishable.

With the industry continuing to proceed up the horizontal learning curve, the economic impact promises to be substantial. Just as important, horizontal technology is revolutionizing economic planning in today's market. In other words, innovative oilmen are applying this development to produce oil at current prices rather than simply waiting for the market to improve before initiating development.

By anyone's standard of measurement, horizontal drilling and completion pose a tremendous opportunity for operators and service companies alike. Since the early 1950s when 43 wells were drilled in the U.S.S.R. and subsequently dismissed as being uneconomical, the technological evolution of this technique has progressed at a phenomenal rate.

The economic gap between vertical and horizontal drilling began to close in 1986, and in the years since, the development has been universally recognized as a viable alternative to conventional exploration and production methods. One or two wells per year are rapidly approaching 1,000 per year. The industry is just now beginning to rise significantly up the learning curve.

At this writing, oil prices are increasing and this projection, like many others, could be obsolete before being published.

Some of the more optimistic projections of the horizontal market have been staggering:1

Horizontal drilling could account for more than 50,000 wells through the decade.
The horizontal market for fluids, bits, and directional and MWD services will grow to $100 million by 1991 and to $1 billion by 1996.
The U.S. horizontal market in 1995 will be 13 times larger than the 1989 market.

Although horizontal drilling is predicted to be the fastest growing segment of the oil service market throughout the 1990s, this enthusiasm must be tempered with the economic realities of the past decade. The instinctive tendency to react vigorously to current segmentary growth-albeit substantial and expected to increase further-must be balanced against prudent business practices.

Does one continue to stockpile leases, or expand the equipment and services infrastructure in anticipation of an unabated increase in horizontal activity? This dilemma faces operator and service company alike as vivid memories of the supply and demand imbalance of the 1980s remain.

HORIZONTAL PROMPTS REORGANIZATIONS

Operators and service companies have reacted swiftly to the surge in horizontal activity that has been nothing short of phenomenal. Much like the offshore experience of a few years ago, many operators and service companies recently have reorganized and established separate divisions for the sole purpose of directing their participation in the horizontal market.

Reminiscent of the late 1970s and early 1980s, new companies are appearing regularly in hopes of gaining a share of this market. Most of the top oil companies in the U.S. and virtually all of the international producers have a group specifically designated to study horizontal technology. It is likely that the only factors constraining activity over the next few years will be shortages of equipment and trained personnel.

As depicted in Fig. 1, horizontal drilling activity is no longer isolated in such areas as the Austin chalk/Bakken plays and the Dutch sector of the North Sea. it has, indeed, become an international phenomenon.

Although, the U.S. will account for as much as three fourths of horizontal wells drilled between 1990 and 2000, opportunities will move internationally.

During the remainder of this year and beyond, it is forecast that horizontal wells will be drilled in nearly every producing nation. This includes such seemingly inapplicable theaters as the Middle East, where some 25 horizontal wells are expected to be drilled this year, jumping to 30 in 1991.

The greatest impact of horizontal drilling internationally will be in offshore field developments after 1995.2 Versions of long-reach horizontal drilling have been used offshore for years, but the employment of extended-reach or medium-radius horizontal wells, in concert with a conventional drilling program, will enable offshore operators to greatly maximize facility capacity.

This is especially significant at a time when platform fabrication-yard capacities are tightening, putting upward pressure on future construction costs. Furthermore, amid growing environmental consciousness, widespread horizontal development will reduce the number of platforms required in sensitive offshore areas.

WHY GO HORIZONTAL?

High initial flow rates from the increased formation exposures afforded by horizontal production have been well-recorded in the past 2 years.

However, the decision to drill a horizontal well requires extensive balancing of liabilities against the potential rewards (Fig. 2).

Quite simply, the rationalization behind the drilling of a short, medium, or long-radius well is to increase production rapidly through the penetration of many times more formation than that exposed in a vertical program. As the drilling and completion aspects become more mature, the applications for horizontal wells increase correspondingly.

They now include:

Connecting vertical fractures
Increasing recovery from gravity drainage (natural or steam assisted)
Producing from thin reservoirs
Increasing infectivity of fluids
Controlling sand production
Producing low-permeability reservoirs with hydraulic fracture
Decreasing water and gas coning
Providing better sweep efficiency
Intersecting isolated productive areas.

COMPLETIONS CATCHING UP

It has been said often that horizontal drilling technology is years ahead of completion technology. Perhaps more correctly, implementation of existing applications of advanced completion systems is lagging by several years. With the exception of Canada, the North Sea, and other parts of Europe, completions presently being run are generally crude compared to drilling equipment and techniques.

In all too many cases, completions are designed with the thought, "Let's see what happens and fix it later." As the industry's experience with this new technology increases, the emphasis on short-term payout will shift to long-term reservoir management, thereby leading to an expected increase in more-sophisticated completions.

Although completion technology has been somewhat slowed by unproven techniques, the lag is due primarily to the industry not using techniques already in existence. That situation is rapidly reversing. Completion systems are presently being assembled that use the most advanced downhole tools yet developed for the oil field.

Technology already proven in Alaska, the North Sea, and elsewhere in Europe include:

Zone isolation-A variety of techniques have been utilized successfully.
Liners-Equipment and methods are available to run liners and achieve zone isolation.
Cementing-Horizontal wells have been successfully cemented.
Stimulation-Multiple-zone, high-pressure, and high-rate frac jobs have been successful on horizontal wells.
Flow control-It is now possible to open and close sliding sleeves and retrieve blanking plugs horizontally.
Gravel packing-Several horizontal wells have been successfully gravel packed.

Aside from perhaps higher MWD (measurement-while-drilling) data rates and improved formation sensors, and more reliable downhole tool performance, the industry appears to have matured insofar as the mechanics of drilling a horizontal well are concerned. The current thrust is upon improving completion and reservoir description, more versatile completions, reduction of permeability damage, improved stimulation techniques, and low-cost hole stability control.

HORIZONTAL WELL FORECAST

Today, it is fashionable to predict the number of horizontal wells to be drilled yearly between now and the end of the decade. These forecasts have indicated that anywhere from 5,000 to 30,000 horizontal wells will be drilled annually worldwide by the year 2000. Most forecasts become obsolete even before they can be published.

As shown in Fig. 3, Baker Hughes conservatively projects a 570% increase in horizontal wells from 1989 to 1992 with a 30-fold increase by the year 2000. Some 75% of those are expected to be drilled in the U.S.

In the near-term worldwide, 750 wells are predicted to be drilled this year, jumping to 900 next year and reaching the 1,000-well mark in 1992. By 2000, an estimated 5,000 horizontal wells are expected to be drilled annually worldwide. As of May, more than 400 horizontal drilling permits had been issued in Texas alone.

The major operators are expected gradually to increase horizontal activity internationally, while independents will drive the domestic activity. More multiple-well programs will likely surface as reports of high flow rates spark increased interest in individual plays.

Horizontal drilling probably will not have an appreciable impact on conventional/vertical programs for the remainder of this year.3 That situation will likely change during 1991-92 as horizontal projects switch from experimental to developmental status.

With the limited drilling and completion budgets, a fairly even mix of vertical, directional, and horizontal wells are expected this year. However, it is projected that a few vertical wells will not be drilled in favor of horizontal prospects.

The forecasted U.S. growth in horizontal activity could be constrained somewhat by a lack of trained directional drillers, MWD technicians, and qualified contractors. In this regard, it is imperative that the industry prepare for an influx of second and third-tier suppliers, who will be encouraged by an expected supply/demand imbalance.

Internationally, it does not appear that any bottlenecks in the service and supply sector will appreciably impair growth.

U.S. independents will concentrate on the prolific chalk/Bakken-type formations. Majors are expected to employ horizontal technology as a tool to solve such reservoir and production problems as coning, heavy oil, and tight carbonates.

NORTH AMERICA LEADING

The catalyst for medium-radius horizontal exploration in the U.S. has been the Cretaceous Austin chalk of south Texas, although horizontal wells have been drilled in dozens of fields nationwide. Almost 10% of the land rigs working in the U.S. reportedly are drilling horizontally, with a substantial percentage of those working the chalk.

Since late 1989, rig activity in Texas Railroad Commission District 1 which encompasses the chalk trend, has skyrocketed (Table 1). More rigs continue to enter the theater monthly, and as of the end of July, the number of rigs making hole was approaching the high of 75 in May 1981.

Despite scattered reports of gigantic initial flow rates, not all Austin chalk wells are gushers. Quite the contrary, 75% of the wells drilled to date in the region have recorded initial production of under 500 bo/d, with a third coming in initially at under 100 bo/d.

It is the 12% flowing 1,000 bo/d, or more, that is fueling today's boom. In time, operators will step out closer to the reservoir boundaries and a more rational atmosphere will prevail.

Horizontal wells drilled in the mid-U.S., primarily concentrated in the chalk, are expected to peak in 1992 and then begin to decline slightly. By then, the technology will be applied to a number of other theaters in the U.S. An estimated 4,000 new and redrilled lateral holes will be drilled in the Austin chalk between 1989 and 1995.

The youth of these wells has made it difficult to establish production declines, although it is generally believed Austin chalk wells will experience a rapid decline in the first 6 months and then stabilize.

In the U.S. Rocky Mountain region, the estimated 150 horizontal wells expected to be drilled this year, primarily in the Bakken shale of the Williston basin, are projected to double by mid-decade. Additionally, the West's shallow coal bed methane formations, which respond well to the longer reservoir exposure, will likely continue to drive the boom. Another important factor is the tax incentives afforded coalbed methane producers.

Most analysts foresee the growth in Rocky Mountain horizontal activity declining in 1992 as producers more selectively evaluate their leases prior to drilling. Operators throughout the region appear to be well-educated on the mechanics of horizontal drilling, but there is some weakness insofar as reservoir selection is concerned.

The massive Niobrara trend in the Denver-Julesburg basin has generated a great deal of attention lately. Geologically, this trend concentrated in southern Wyoming is said to be similar to the Austin chalk, and early speculation suggests its productivity could also be comparable.

Horizontal drilling will have little, if any, impact on activity in the eastern U.S. where most of the wells are very shallow, inexpensive, and usually extremely poor producers. It is estimated that no more than 15 horizontal wells will be drilled this year, and until an inexpensive method of drilling a short radius well is developed, few will be drilled in the future.

CANADA

In Canada, horizontal activity, primarily in the tar sands, will likely more than double this year to 100 wells, compared to the 41 drilled in 1989. Activity is predicted to increase steadily to about 450 wells in 1995. Nearly all the Canadian operators polled in a commissioned survey intend to drill horizontally this year.

While the number of wells may suggest Canadian operators are behind the U.S. in applying horizontal technology, they are cited as being more innovative and overall more successful in their select projects.

As many U.S. companies continue to examine how lateral wells can aid in steam injection or heavy-oil drainage, several Canadian operators have already produced a substantial amount of oil out of tar sands.

During the course of this year, Canadian operators will no longer merely experiment with horizontal wells, but begin serious development projects. These will include deeper wells along with a few gas prospects. The primary focus will continue to be on heavy oil.

The future market for heavy oil may be a limiting factor in the Canadian forecast. Canadians have indicated that they do not plan to overdrill and flood the market, which would effectively drive down prices. Nonetheless, Canadian horizontal drilling should continue to accelerate through 1995.

Compared with south Texas horizontal prospects, the decline rate of Canadian producers appears to be moderate. Steamfloods, in fact, have been shown to increase oil flow over time.

EUROPEANS EYE RESULTS

In 1986, among decreasing oil prices and increasing costs, some European operators saw horizontal drilling as an economic option. Although certainly not analogous to the frenzied activity in the U.S., it is estimated that within 5 years, 20% of the average 600 wells drilled annually in northwest Europe will be horizontal.

Despite some onshore applications, particularly in France, the vast majority of horizontal wells forecasted for Europe are offshore in the North, Mediterranean, and Aegean Seas. Also, unlike the U.S., a number of European oil companies now have development plans where the majority of producers will be horizontal.

By December, an estimated 32 horizontal wells are expected to have been completed in the North Sea, which would essentially double the total number drilled in the sector .3 Plans for 1991 suggest the expected high level of activity will continue unabated. By the end of this year some 10 oil companies will have completed their first horizontal well in the North Sea.

A characteristic of North Sea horizontal drilling that differentiates it from its U.S. counterpart is the absence of short-radius drilling, which is used onshore in the U.S. All horizontal activity in that sector is conducted with medium and long-radius wells using steerable bottom hole assemblies.

In the North Sea, horizontal technology was first used and established in The Netherlands and Denmark, but has since spread throughout the region. Denmark and The Netherlands continue to concentrate on horizontal drilling with as much as 75% of some operators' drilling programs focusing on lateral holes.

The majority of horizontal prospects in the North Sea have reportedly been successful with about one half experiencing initial production rates higher than 2,000 bo/d. Some 80% of the horizontal wells are said to have initial flow rates higher than 1,000 bo/d, which is economic in shallower waters where little gas or water is produced in conjunction with oil.

FAR EAST GROWS STEADILY

Because most operators in this sector routinely use MWD and mud motors in their traditional development plans, it is a relatively simple proposition to move into long-radius horizontal wells. For this reason, it is believed that horizontal drilling will increase at a steady clip over the next 5 years as clusters of 10-20 wells are sunk in field development schemes. For example, a test on one well in Malaysia last year resulted in a five-well program for 1990.

Pushing the horizontal activity in this region is the thin oil column reservoirs characterized by overlying gas caps and/or strong water drives. Coning in many vertical wells dramatically limited production rates in those holes; therefore, horizontal drilling has made those prospects economic.

While some of the predominantly offshore horizontal wells in the Far East have resulted in strong producers, nearly half have produced initially at under 500 bo/d.

LATIN AMERICAN PROSPECTS

An estimated 15 horizontal wells were drilled throughout Latin America last year, with about 25 expected collectively this year in Argentina, Bolivia, Brazil, and Chile. A number of one and two-well programs have been announced for later this year in several Latin American countries, but the total number of horizontal wells planned for this sector is not expected to exceed 100 by mid-decade.

AFRICAN RESERVOIRS

Because Africa is generally recognized as one of the world's high-cost operating areas, operators, mainly European, are actively examining where to begin testing the technology. Producers in this sector are committed to horizontal drilling with much of the emphasis now on evaluating reservoirs that may be applicable.

Like the Far East, thin oil columns with coning problems may be the driving force behind horizontal drilling.

Only 3 horizontal wells were believed to have been drilled in Africa in 1989, and that number is expected to rise to 15 this year, growing to 70 by 1995. The majority of the activity is expected to be centered in Algeria, Angola, Gabon, Libya, Zaire, and possibly even South Africa.

An estimated 335 onshore and 225 offshore wells are drilled annually in Africa, and projections indicate 20% of these could be horizontal by mid-decade. The steady increase in horizontal activity could lead to an overall increase in exploration and production in this area.

MIDDLE EAST JOINS RANKS

On the surface the Middle East would not appear to benefit significantly from horizontal drilling, but operators have drilled, and will continue to drill, lateral holes, primarily in Abu Dhabi, Dubai, Oman, Saudi Arabia, and Turkey, among others. Some producers have said they will use this technology in lower-permeability sections to enhance reservoir drainage.

A commissioned study uncovered 8 horizontal wells drilled in the region last year with an estimated 25 planned for 1990. This number is expected to double by mid-decade.

ECONOMIC GAP NARROWING

Operators' willingness to experiment with horizontal drilling in its infancy is a plausible explanation for today's rapidly narrowing gap between finding costs and payback. That was reflected in the early 1980s when the first horizontal well drilled in France penetrated 886 ft of payzone.

While the lateral well cost four times that of a vertical hole in the same field, the operator deemed the operation a success because of the knowledge obtained.4

The difficulty of locating untapped oil and gas reserves, coupled with pressures to reduce per barrel finding costs, are seen as the stimuli behind the upswing in horizontal drilling. The drilling and completion costs of a typical U.S. horizontal well ranging from $800,000 to $1.1 million, are much more expensive than those of a vertical counterpart; however, when considering the hastened payback, the economies appear to be nearing alignment.

In Canada, an operator disclosed that the costs of drilling and completing horizontal wells were 1.5-4 times that of a vertical well, depending upon such parameters as depth and casing design. By the same token, they generally competed favorably on total economics by producing 2-5 times more oil than a vertical well in the same area.5

In retrospect, Gust speculated that increased use of this technology hinges on removing a number of established perceptions.5 Horizontal wells are seen as too expensive, subject to cost overruns, and seldom reaching projected rates of production, not to mention being difficult to workover and operate.

He says these perceptions are encouraged by the fact that not enough cost and production data have been released to make a meaningful comparison between vertical and directional wells in the same field.

Nearly all horizontal projects are geared toward an improved return on investment, which in the U.S. is most often in the form of accelerated production. Internationally, the impetus is on increasing recoverable reserves.

In many instances, horizontal drilling has been credited with enabling many relatively high-cost areas, such as the U.S., to compete in the global market at today's pricing structure.

Much of the research being undertaken by service companies and operators is slanted toward further lowering the cost per barrel associated with drilling and producing horizontally. If finding costs could be lowered by 10% over the next 5 years, even today's most liberal projections would be adjudged conservative.

The economics of reentering existing wells, particularly the strippers scattered throughout the U.S., presently are out of sync. The expense associated with drilling into a well producing 1 0 bo/d in hopes of doubling output greatly limits economic opportunities. This is one area, however, that is under investigation. For example, in the Texas Panhandle, horizontal drilling was used this summer to enhance production from marginal vertical wells.6

Drilling and completing a typical horizontal well in the U.S. ranges from an average high of $4.3 million in Prudhoe Bay, Alaska, to an average of $850,000 for an Austin chalk well. With its extensive experience in producing laterally from tar sands, Canada has made enormous inroads in lowering the cost of horizontal exploration and production. The average cost of a Canadian horizontal well is about $1 million, which is now about 1.5 times that of a vertical well.

The average $2 million per horizontal well in the European offshore arena is only 1 020% more than the cost of a conventionally drilled prospect in the same area. Regardless, the drilling and completion expenses of a North Sea horizontal well are dwarfed by the $8-10 million per slot cost. No cost data are available on Far Eastern and African prospects.

REFERENCES

Infotek Group, Internal Baker Hughes study, July 1989.
Spears and Associates Inc., "The Worldwide Horizontal Well Market 1989-1985," Baker Hughes Inc. Commissioned Study, March 1990.
Fox, C., "North Sea Drills Into the Nineties with Horizontal Wells High on the Agenda," Offshore Engineer, July 1990, pp. 27-32.
Astier, B., and Jourdan, A., "Elf Turns 90-And Stays There," Petroleum Engineer, January 1981, pp. 40-44.
Gust, D., "Horizontal drilling evolving from art to science," OGJ, July 24, 1989, pp. 43-52.
Slayton, M., "Horizontal Efforts To Test New Methods of Marginal Wells," The Land Rig Newsletter, July 1990, p. 3.