KPI toolbox not yet full
Diagnosing the health of the industry was once a straightforward proposition: All you had to do was count the rigs actually making new hole. More rigs drilling signified prices were strong and all was well in the oil patch; an appreciable drop usually suggested it was time to dust off the resume.
No more. With the unconventional plays having completely upended the dynamics of the North American onshore E&P sector, even the tools we use to evaluate the overall fitness of the industry have had to change with the times. Thus, the originator of the weekly rig count, which for 70 years has been the last word on determining the industry’s health, said tracking the active rigs, alone, does not provide a comprehensive diagnosis of the industry’s health these days and should not be used as the sole criterion for making critical decisions.
As it approaches the first anniversary of augmenting its iconic rig count with tabulating the number of wells that those rigs are actually constructing, Baker Hughes wants to set the record straight: The two tallies are not mutually exclusive and, in fact, work hand-in-hand, as important elements in an evaluation toolbox that will continue to evolve, as new key performance indicators (KPI) come into play.
“Historically, the rig count was sufficient to predict both the health status of the industry and where it was headed going forward,” said Ahmed Youssif Mousbah, Baker Hughes North America marketing and business development director. “A couple of years ago, when we were looking at the health status of the industry in North America, and the U.S. in particular, we noticed a phenomenon. The rig count wasn’t growing, but the industry was very healthy.”
It soon became apparent that the new-generation AC walking rigs, which fostered the rapid acceleration in horizontal drilling of multiple wells from a single pad, with minimal in-between time, meant that relying on the rig count, alone, to evaluate the industry’s heartbeat was akin to using only a stethoscope to determine if someone suffered from coronary heart disease. A valuable diagnostic tool, sure, but a transformed industry required a more extensive evaluation. That reality inspired the July 2013 creation of the quarterly Baker Hughes well count, which tabulates the number of new wells drilled in all U.S. onshore basins, including 14 of the most active shale plays.
“At first, that trend (less rigs, more wells) was not intuitive, based on our previous thinking, so we had to dig deep to find out the reasons. That’s when we figured out there’s a new KPI, which is wells per rig and how efficient the rigs are becoming, and how many wells they are able to yield over a given period of time,” Mousbah said.
Reflecting the continually evolving next-generation measurement models, the U.S. Energy Information Administration (EIA) last year built off the rig and well counts to calculate efficiency per rig. In other words, how much oil and gas production is being delivered per rig in a given basin. “That’s another KPI in the toolbox,” Mousbah said. “Baker Hughes, however, was one of the first to really flag the importance of efficiency.”
Combining the rig count with the number of wells those rigs drilled in a play gives operators a much clearer picture of where the industry is, and where it’s headed, Mousbach said. In 2013, for instance, the U.S. onshore rig count averaged 1,705 active units, down 8.9% from the average 1,871 rigs active over the previous year. Despite nearly 9% fewer rigs, the well count dropped only 3.7% year-over-year from 36,824 new wells in 2012 to 35,703 last year. The drop was largely attributed to less gas drilling, which is improving after the historically harsh winter. Consequently, the first quarter of 2014 saw 8,853 new wells, up 319 from the like period last year. These new wells were drilled with 1,724 rigs, which, likewise, was up 18 rigs compared to the first three months of last year.
BACK TO FUTURE
Mousbah said the unconventional plays are trending much like the earliest days of the U.S. oil field. “In the early days, the industry drilled a lot of wells and tried to get as much hydrocarbons out of the ground as possible. The next phase turned to formation evaluation, and how can we increase initial production and also estimate ultimate recovery (EUR) from those reservoirs. We’re doing the same thing with the unconventionals.”
He said the much-ballyhooed factory-style drilling approach has succeeded beyond anyone’s imagination, and now the time has come to take another approach. “If you think about it like a manufacturing operation, when you set up a new manufacturing facility, the most important thing at first is optimizing throughput. How many products can you get out in X period of time? That’s basically what we’ve been doing with the unconventionals. We’ve done a great job with efficiencies from the drilling side, but we’ve reached equilibrium. There are only so many wells you can drill in a field over time. Now, we have to look at how we can get smarter wells and more recovery from those wells. From my perspective, that will be the next era or second phase of the unconventional boom.”
“As we get deeper into this, we’ll see more KPI and will have to further refine the tools we now have.”
Mousbah believes that increasing the EUR of shale wells in the U.S., likewise, will jump-start the international plays. “In my opinion, I believe one reason the international (shale) industry has not taken off is the low recovery rates. The business environment in North America is different, in that it can still work with 15% to 20% recovery rates, but internationally it’s different. Once we come up with higher recoveries, then I believe the international plays will take off.”
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