Experiential Gains with a New Technology: An Empirical Investigation of Hydraulic Fracturing

(ProQuest: ... denotes formulae omitted.)Hydraulic fracturing (known as fracing within the industry and fracking to general audiences), though controversial, has been widely cited as a transformative technology for the U.S. oil and gas sector (e.g., Rogers 2011, Jacoby, O'Sullivan, and Paltsev 2012).1 In conjunction with other technologies, such as horizontal drilling and multidimensional seismography, hydraulic fracturing has helped to transform the global energy outlook by adding oil and gas reserves from unconventional resources and has boosted production. Oil production in the United States has rebounded to levels not seen since the 1980s. And nowhere has the effect of unconventional resource extraction been as emphatic as in North Dakota, which rose from sixth to second in the ranks of oil-producing states between 2009 and 2014.This study provides an empirical analysis of job-specific data on fracturing of wells in the Williston Basin of North Dakota and Montana and focuses on the role of experience with this new technology in increasing production as it is more widely applied.2 This study also explores the role of proprietary information in the process of improving production.In the oil and gas sector, investment and production decisions are ultimately made by well operators, which are usually private oil and gas firms. Barriers to entry are relatively low so multiple firms compete for acreage and employees who have expertise in engineering and geology. Contractors that provide pressure pumping and well servicing are also important to the development and adoption of fracturing. In the past, the number of firms that provided such services was small-in 2003, the Environmental Protection Agency (EPA) signed a memorandum with just three firms in its effort to limit use of specific chemical additives in fracturing fluid. Those three firms dominated the market at the time, and Rogers (2011) reported that the three firms enjoyed a 75 percent market share as recently as 2010. By contrast, in the data examined here, those firms have less than two-thirds of the market and the share declines annually. Contractors typically work with many operators, placing them in a position as potentially valuable partners.3 And as unconventional resources have become more important, the number of providers competing to help enhance well productivity has increased. The estimation sample introduced in this study includes twelve contractors.The productivity gains stemming from relationship-specific pairings of operators and contract drillers in the oil and gas industry are economically significant (Kellogg 2011). Some operators design their own well completions, including fracturing and injected fluids. Completion contractors have developed formulas for fracturing jobs, which they can sell to operators. These "recipes" may include toxic chemicals that are intended to increase production but may also create environmental risks. Some contractors have been vociferous defenders of the need to protect the recipes through nondisclosure agreements because they consider them trade secrets. This study considers how the relationship between operators and contractors may be affected by experience with the technology and resulting trade secrets.Using detailed information about well completions, this study empirically summarizes how operators and contractors have learned from experience and the role of undisclosed additives in that learning. The success of a new formula is ultimately measured in terms of how much oil the well produces.4 This study connects completion to subsequent production by linking well-specific information from the FracFocus chemical disclosure registry, a joint venture of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission (www.fracfocus.org), with public production records. Though changes in costs and environmental risks may also be important, they are not measured. Matching production records with reported completion treatments allows for an assessment of gains from advances in technical refinements and experience. …