• FEBRUARY 11, 2008

Exxon Looks Close to Home

High Prices Make Domestic, Technically Challenging Fields Worthwhile

http://online.wsj.com/article/SB1202...

By RUSSELL GOLD

RIFLE, Colo. -- Exxon Mobil Corp. has performed remarkable engineering feats in far corners of the world to find new stores of oil and natural gas. Next stop: Colorado.

Last year, Exxon began to drill an estimated 5,000 wells in Colorado's Piceance Basin, marking its first major new onshore energy-production project in the contiguous U.S. since the former Exxon Corp. and Mobil Oil Co. merged in 1999. For years, the domestic U.S. looked picked over, and bigger opportunities lay abroad.

Today, Exxon is turning its engineering muscle to extracting vast quantities of gas from this difficult rock formation on the western

Slope of the Rocky Mountains. The combination of new technology and higher gas prices has reinvigorated interest by big Western

energy companies in so-called unconventional gas fields, a huge new source of energy around the world. Unconventional oil-and-gas

reservoirs that once were passed over as too costly make better business sense now.

Such technically challenging projects are Western oil companies' best bet for keeping up in the global hunt for new energy sources. Many of the best deposits are behind unwelcoming borders or controlled by state-owned oil companies. Going after the deepest, most-complex projects will keep costs rising for Exxon and its peers, but could pay off if they add significant supplies and prices remain high.

The company's Piceance leases hold an estimated 35 trillion cubic feet of natural gas. That is about two years' supply for the U.S. worth $250 billion at today's prices, though it could take decades to recover it all.

Exxon won't disclose spending, but the Colorado project should boost the company's U.S. exploration and production budget. After the 1999 merger, the company looked overseas to power its growth and slashed U.S. spending by 24% from 2001 to 2004. Then the trend reversed. Spending is up 23% since then and should grow as the Piceance project gains momentum.

While the biggest, easiest-to-exploit fields are in Asia, Africa and the Middle East, North America offers both political stability and the world's largest market for selling energy. "We look at the growing gap between supply and demand and see a wealth of opportunities," says Exxon Executive Vice President Rich Kruger, who is in charge of global energy production.

Other companies in recent years have leased North American acreage that could hold unconventional gas fields. The largest holder of drilling leases in the U.S. is Oklahoma City-based Chesapeake Energy Corp. Since 2001, it leased nearly 17,000 square miles -- an area nearly the size of Massachusetts -- and expects to become the top gas producer in the U.S. later this year.

In the Piceance Basin, the roughly 300,000 acres leased by Exxon are surrounded by other companies, preventing it from expanding the field unless it buys out smaller rivals. But the company is relying on some of its newly developed technology to give it an edge in producing more efficiently and cheaply.

Within the fields, isolated pockets of gas are trapped in layers of rock, requiring each pocket to be tapped individually by fracturing the surrounding rock to let the gas flow out. Because of the complexity and cost, most drilling companies target the biggest pockets of gas, fracture them one at a time and skip the rest.

Exxon's technology takes a leave-no-gas-molecule-behind approach, fracturing 50 zones per well. While the old technology was like buttoning a coat, the company says, the new is more like using a zipper -- faster and without gaps.

After about 500 days, the amount of gas that has flowed from Exxon wells is three times that of wells using more conventional technology, the company says. "We see applications for this technology all over the world," says Jim Branch, Piceance project head, whose last assignment was negotiating a giant oil deal in Abu Dhabi. Other companies have used the technology, under license, and reported the wells produce more gas and cost less.

On a snowy afternoon in December, Exxon and its contractors working in a forest of pinyon pine performed what Exxon's Mr. Branch called an "elegant ballet," coordinating a complex series of steps with the new technology.

A worker for oil-field services provider Halliburton Co. began by turning a crank five times, releasing five ping-pong-size rubber balls that take seven minutes to fall the length of the 12,000-foot deep well. In a nearby trailer, Exxon foreman, Kenneth Flowers, watched a bank of computer monitors.

The aim of the ballet is to blast a series of holes through the well's metal casing so that a slurry of water and sand can be precisely injected into the rock, fracturing it to create cracks to let the gas flow out. Before a new set of holes can be punched, the previous set has to be plugged -- which is what the six balls are for.

A few dozen feet away from the trailer, Chris Perry sits in a white truck with a giant spool that contains 20,000 feet of wire. More than half of the wire is in the well holding carefully calibrated explosive charges.

As the plummeting balls are pushed by the slurry toward their targets, plugging the six penny-size holes, pressure in the well shoots up.

"Fire," yells Mr. Flowers into a radio. Mr. Perry flips a switch and a tinny crack can be heard over a small speaker. The explosives have created new holes through the well casing into the rock. "Looking good," Mr. Flower responds as the monitors show pressure dropping as the slurry flows through the holes, pushing its way through the sandstone. This is the 16th fracture in this well; 14 are left.

Soon, the water slurry will be pumped out and gas will begin flowing through the cracks, into the well and up to the surface.

But even Exxon's breakthrough technology might not give the company an advantage in unconventional gas for long. Oil-field service crews contracted to do the work often pass along information so that other companies quickly develop similar techniques. "This stuff doesn't remain proprietary," says Charles Stanley, head of Salt Lake City-based Questar Corp., which uses a version of multizone technology in a Wyoming gas field.

Write to Russell Gold at russell.gold@wsj.com