Oil industry searching for storage options

Already facing a storage crisis, some oil producers are being creative in how they hold on to their crude until prices rebound.

Fracklog is an increasingly popular method. Companies continue to drill wells, but stop just short of pumping out the oil. It's a way of storing the oil in the ground for the time being.

U.S. supplies of oil hit their highest level in 80 years this spring. Tank farms, such as the ones in Cushing, Okla, are nearing capacity. Cushing is one transit point for oil that is exported from Canada and likely destined for refineries in the Gulf Coast. Storage at Cushing is now at 78 per cent, according to Genscape, an energy data analysis firm. 

We do have a lot of supply in North America and we do have a slow recovery back up to our long-term price- Callan McMahon, analyst with Wood Mackenzie

Companies want to store oil, in hopes prices will increase in the future. 

"There is a strategy that some companies are implementing. And that is to drill a well, but not complete it and bring it online," says Callan McMahon, Calgary-based energy analyst with Wood Mackenzie, describing the practice of fracklog. "You still have to spend the money to complete the well, so therefore it's not like traditional storage in a tank or on a ship." 

"It's doing a portion of the work, it's retaining those relationships with the service companies, and still keeping your guys busy when the price is down, but saving that supply for the market when prices rebound."

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North American oil is trading around $55 US a barrel for WTI. The price is expected to average $55 US this year, $60 US in 2016 and about $79 US long term, according to Wood Mackenzie.

"We do have a lot of supply in North America and we do have a slow recovery back up to our long-term price," says McMahon.

There can be problems with wells that sit too long, especially if a well is fracked, then left to sit idle. Over time, the fracking fluid can reduce production. 

"You really don't want to play the game that some people have done where they will produce their well, shut it in during low oil prices and turn it on and expect production to be where it was," says Tim Leshchyshyn, an engineer with FracKnowledge in Calgary.

 "Sometimes the production drops by half because every time you cycle the wells on and off, there is a production drop."

The companies that are doing this are usually the larger producers that have the financial flexibility to store oil. Some junior and medium-sized must keep drilling wells, even during the low oil prices, when service costs are low.

"If they don't do wells slowly during the low-cost season that it is now until the price of oil goes up because everyone is desperate for work," says Leschyshyn. "They will not have cash flow and will be out of business by the time the price of oil comes back."