What it means
Most wells in tight rock produce a lot in their first year and then decline. The cracks created by the first hydraulic fracturing job (pumping fluid under pressure to split the rock) can narrow or clog over time.
Refracking aims to reopen them or create new ones so that more oil or gas can flow. The main attraction is cost.
A new well requires land, drilling, casing and surface equipment, while a refrack reuses most of that. Operators therefore treat it as a way to add production and reserves at a lower capital cost than a new drilling programme, which is especially attractive when borrowing is expensive or investors are pressing for restraint.
The results are less certain than for a new well. Some refracks lift production strongly, while others disappoint, because the condition of the old well, the type of rock and the quality of the original completion all matter.
Engineers select candidates carefully, using production history and well data to pick the ones most likely to respond, and they usually test the idea on a few wells before committing to a larger campaign. Refracking is sensitive to commodity prices.
When prices are high, even a modest production gain pays back quickly, and when prices are low, the same job may not cover its cost. Finance teams therefore model the payback under several price assumptions and approve work only where the numbers hold up in a lower-price case.
There are accounting questions as well. The cost of a refrack that extends the life or capacity of a well is typically treated as capital spending, while routine maintenance is an expense.
Auditors and investors will want to know which treatment a company uses, because it changes both reported profit and the capital budget.
In practice
Real-world examples.
Example
An independent operator reviews its older wells and finds five with steep declines but good rock. It budgets $6,000,000 to refrack them, expecting a lower cost per barrel added than drilling five new wells.
Example
A lender reviewing a producer's borrowing base asks how much of the planned spending is refracking. The producer shows that refracks make up 20% of the capital budget and provides the results from earlier jobs so the bank can judge the risk.
Example
An analyst covering a gas producer notes that a refrack campaign raised production without a matching rise in capital spending. She raises her estimate of the company's free cash flow, but she cautions that the results depend on the wells chosen. She asks management to publish the success rate of its refracks each year.
Formula
Calculation
Payback period (months) = refrack cost / incremental net cash flow per month
Suppose a refrack costs $1,200,000 and lifts production so that the well earns an extra $100,000 per month after operating costs. Payback period = 1,200,000 / 100,000 = 12 months. If the extra monthly cash falls to $60,000 because prices dip, payback becomes 1,200,000 / 60,000 = 20 months, which shows why finance tests lower-price cases. A project that looks easy at one price can look marginal at another, and the board needs to see both.Case study
Seen in the real world.
Prairie Ember Energy is an illustrative, fictional producer with a group of ten wells that had declined to a fraction of their early output. The engineers proposed refracking four of them at a cost of $1,000,000 each.
The finance manager asked for a payback calculation at two price levels. At the expected price, each job paid back in about ten months, and at a price 30% lower it paid back in about fourteen, which was still acceptable.
Three of the four wells responded well and one gave only a small gain. The company kept the programme going but chose later candidates more selectively. The finance manager also began to report the actual payback of every job against the forecast, so the board could judge how reliable the engineers' estimates were. The illustrative lesson is that refracking works best when it is treated as a series of tested bets and not a guaranteed repair.
Watch out
Common mistakes.
- Assuming every refrack will succeed, when results vary with the rock, the well condition and the original job.
- Judging payback at one price only, when a lower commodity price can stretch it considerably.
- Treating all refracking spend as an expense, when work that extends the life or capacity of a well is usually capitalised.
Questions
People also ask.
Is refracking cheaper than drilling a new well?
Usually, because the well, the land and much of the surface equipment already exist, though the outcome is less predictable.
Why do wells need it?
The cracks created by the first job can close or clog over time, and production declines as they do.
How do investors view it?
They tend to welcome it when it adds production at a low cost per barrel, but they ask for results from earlier jobs before giving the programme much credit.
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