The last barrel

As can be seen from this issue’s North American Mid-year Forecast, the upstream industry is undergoing an historic activity downturn not equaled since 1986. The common wisdom that prevailed around Houston, back in January, has not proven to be true. This was the view that the downturn would not be as it is now, and that some form of recovery would take place by fourth-quarter 2015.

Given that the Saudis are once again the instigators of sharply lower oil prices, just as they were in 1986, a few of us in the minority, back in January, tried to warn of the E&P tsunami to come, but few people wanted to hear that message. Now, prompted by recent, significant staff and activity cuts by such stalwarts as Shell, BP and Chevron, not to mention many equipment and service companies, the industry is finally attuned to the magnitude of the problem.

Plenty has been written about the downturn’s negative effects, but what we have not heard nearly enough about is how it is actually stimulating the industry to achieve additional technical innovations and cost-efficiencies. In fact, a whole smorgasbord of innovation was viewed and discussed at last month’s Unconventional Resources Technology Conference & Exhibition (URTeC) in San Antonio.

Perhaps one term that describes how operators, in shale and other unconventional plays, are handling low oil prices is “adaptation.” Consistent with URTeC’s theme of “getting more for less,” Barry Biggs, V.P. for Onshore at Hess Corporation, said that his firm’s response to low oil prices has been to focus on the “sweet spots” in the Bakken (North Dakota) and Utica (Ohio/Pennsylvania) shales, while also implementing other measures, such as rig reductions and design optimization. “Most importantly, we retain our focus on technology.”

Biggs also said that Hess is “applying a ‘Lean Culture Model’ to develop our performance capability in any operating environment.” Hand-in-hand with that model, Hess has set up “Asset Collaboration” rooms, which feature structured communications, expedited decision-making and removal of barriers to get work done. All of this takes place, said Biggs, “with a focus on the metrics and the activities that are due in the next one to two weeks” of an ongoing project.

And while Hess has further reduced its unconventional activity since first-quarter 2015, the remaining work in shale plays is showing the fruits of the company’s strategy. “In the Bakken, explained Biggs, “we’ve seen a 49% reduction in drilling and completions costs in the play during the same period. And in the Utica, we’ve achieved a 50% decrease in drilling costs, and a 41% reduction in completion expenses.”

Technology is definitely the key to keeping unconventional assets competitive in the low-price environment, noted Peter Richter, V.P. of Strategic Development at BHP Billiton. “Proper testing and evaluation of what we’re considering for implementation of new technology is absolutely critical, because one size does not fit all,” said Richter. “We’ve made a lot of progress on the drilling side—the next generation will see even more integration of functions.”

In addition to equipment and hardware advances, integrating data is also critical, added Richter. “The more data that you have available, the more precise and efficient your drilling and development plans can be. There are now several good software packages available that can do this data integration.”

“How to improve the recovery rate of shale wells and reservoirs will be a priority,” said Biggs. “We’re also concerned about sharing knowledge to improve our efficiency wherever possible. So, we’ve had teams from the Bakken and Utica meet together, to compare lessons learned and shorten the time to share knowledge.”

Memo to the Saudis. As referred to above, Saudi Arabia is the common element in the 1986 and 2015 E&P downturns. Just as they did 29 years ago, the Saudis are overproducing deliberately, believing that they are entitled to a specific share, or greater, of the global oil production and export market. Thus, this editor would like to send the following tongue-in-cheek memo to Saudi Oil Minister Ali al-Naimi, and his minions within the ministry and Saudi Aramco: It is obvious that you folks have a specific market share figure in mind, from which anything less simply won’t do. So, will you please tell us all what that figure is, so that the global oil and gas industry can adjust its operations accordingly. Then, finally, maybe the rest of us can resume some form of normalcy in our day-to-day lives.

Texas Petro Index takes a whopping. The Saudis may not care whether their actions affect anyone’s prosperity, other than their own, but it’s clear from the most recent Texas Petro Index (TPI) that the effects have been significant. The TPI, a monthly measure of the Texas industry’s health, is assembled by Karr Ingham, an economist for the Texas Alliance of Energy Producers.

“The TPI has declined 18% since peaking in October 2014 at 312.0, and is off 17% compared to June 2014,” said Ingham. “Virtually all TPI components (rig count, permits, wells drilled, employment) are posting deep, year-over-year declines, with the notable exceptions of crude oil and natural gas production. Oil production simply has not declined in response to the clear market signal of the steep decline of crude oil wellhead prices.” Yet, noted Ingham, the Texas E&P industry shed 24,000 direct jobs between last December and May, already roughly half the total that he predicted would be lost, due to the downturn.

Ironically, added Ingham, “It seems clear, at this point, that Texas crude oil production in 2015 will surpass its all-time high of 1.263 Bbbl in 1972, with estimated annual production in 2015 totaling 1.284 Bbbl.” He also noted that the 3% growth in Texas gas production this year is driven by casinghead output from wells drilled to produce oil. Any further production growth could hamper the E&P sector’s recovery, concluded Ingham.

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com