Comment: Change Coming For The 'Upstream Exploitation Machine'

Roger Anderson
Columbia University
New York
Dave Ridyard
Continuum Resources
Houston

The production, refining, and distribution of oil and gas are not ordinarily thought of as a manufacturing processes. However, recent years have produced a wonderful explosion of technological improvements that make the oil and gas "factory" run more efficiently. Individual exploitation improvements such as 3D and 4D seismic, full tensor gradiometry, and multilateral completions, to name a few, have driven growth in production that, until the recent price collapse, accounted for impressive earnings-growth improvements for the whole industry in the 1990s.

Though ultimately charged with making most of the profit for energy companies, this upstream exploitation machine still does not perform optimally in very low price environments. One reason is that it costs money to make more money using advanced technologies, and companies simply may not have the profit margins to make this investment until the price rebounds and stays reasonable for many, many months. It is, however, possible to apply several of the new exploitation technologies in sound financial ways that make sense even in today's recovering oil patch.

In the manufacturing world outside of oil and gas, price pressures have resulted in just such smart applications of new technologies, sometimes with company-saving results. Reengineering and continuous-improvement revolutions were introduced precisely at times of low margin and profit crises in industries as diverse as autos (led famously by Toyota), computers (from Intel to IBM), the military, and aerospace contractors. However, it is easier to manufacture cars under factory roofs, or chips in sterile cleanrooms, or gasoline in refineries, for that matter, than it is to manufacture oil and gas in the sprawling underground outdoors of the entire globe.

Why must this transition to more efficient manufacturing propagate to the oil and gas business? Because there still is room for a company to differentiate its business performance relative to its peers because operational costs are still too high. The world energy business is a mature industry that has more than $10 trillion of net present value, yet performance from company to company, by any measure of Wall Street business metrics, is all over the map.

For example, the three-way consideration of net present value of reserves (NPV), return on capital employed (ROCE), and reserves replacement (growth) shows no clear trends (Fig 1 [84,364 bytes]). The industry performs inconsistently when measured by these metrics. How can this be when the oil service companies provide a worldwide datum of quality technologies that are available to all in the business, for hire? These technologies are of both high technical quality and utility. Good technologies are available to all, yet performances are scattered. Why?

We believe this to be a strong indicator that the problem lies in the successful execution of new technologies in ordered, planned, monitored, cost-effective ways that constantly improve the manufacturing process. The likely reason that new technologies available industry-wide do not level the upstream performance field is perhaps that there are significant communications and logistics gaps within companies that hinder their manufacturing efficiency in ways unique to each company.

Thus, there is a wonderful opportunity for market differentiation if one company can master what other companies are having trouble with. In fact, we can see the change coming. The oil industry is just now emerging from common practices that required the keeping of paper records of all of the business, disseminated largely by telephony (albeit by faxes and cell phones). Computers and accounting systems such as SAP AG have recently replaced the record-keeping, accounting, and payroll maintenance with an electronic enterprise system.

While a few scattered attempts have been made to make overall efficiency improvements in the E&P manufacturing business, no enterprise-wide redesign or reengineering of the structure of the exploitation business has occurred since the computer revolution that we are aware of. One of the primary reasons is likely that the industry lacks the systematic understanding of what tasks are really creating bottlenecks and choke points over time.

Many E&P activities are done simply because that's the way they have always been done. The information supply, asset tracking, computer-aided manufacturing, portfolio management, business simulation, and optimization loops necessary for continuous improvement do not yet exist in the manufacture if oil and gas.

There are abundant examples today of locations around the globe where the oil industry does not get giant and supergiant projects executed correctly from the beginning. Consequently, we spend enormous resources fixing the plant, or the drilling platform, or the pipeline, or the oil well on the fly and after breakdown has happened. The modern oil field is just too complicated a place to continue to manage in such an ad hoc way.

But change is coming, and a new paradigm it will be! It is, in fact, in times of economic crisis that such paradigm changes occur in most industries. In hard times, improvement in the manufacturing process is a requirement in order for any company to survive, whether you produce oil, steel, or hamburgers.

So what will be required in order to address bottlenecks in the manufacture of oil and gas? Massive amounts of data must be continuously collected, transmitted, and used effectively in near real-time over remote communication links. Data must be gathered from sensor networks that are making the relevant measurements of appropriate physical attributes that must be controlled in ALL assets critical to the successful execution of the company's business plan, whatever and wherever that may be.

Computation, simulation, and visualization will be similarly distributed across the emerging global, high-bandwidth, information infrastructure. We believe that operations will be steered at distributed control centers by remote personnel who are comparing simulations (model predictions) of what is expected to be occurring, with observations coming in live from the field of what is really happening in the E&P manufacturing business. And the monitoring tasks will be passed around the globe among virtual team members who work with the sun (Fig. 2 [96,395 bytes]).

The upstream oil and gas business requires more than just communications improvement. At the often low commodity prices of today, the modern energy company has significantly different infrastructure needs to those that served adequately in the high-priced days of old. And change must begin with the questioning of the underlying assumptions of the E&P manufacturing process itself. The industrial change that this challenge sets off will be every bit as all-encompassing and difficult as that experienced by auto workers more than 20 years ago, but oh the results will be wondrous.

The Authors

Roger N. Anderson is director of the Energy Research Center at Columbia University and president of Columbia Enterprise Systems. He received a PhD from the Scripps Institution of Oceanography, University of California, San Diego, and has worked for Columbia for 25 years.
Anderson manages a 10 person software-development team at the Lamont-Doherty Earth Observatory that has created more than 12 million lines of code relating to new methods for processing and interpreting 4D seismic monitoring data in oil fields. The group holds seven patents for this and associated geopressure-detection, downhole monitoring, and thermal detection of hydrocarbons.
Anderson is also codirector of the Lamont Portfolio Management Consortium, which develops new management approaches and decision tools to aid exploration and production planning for a group of major oil companies. He is a founder and member of of the board of directors of Bell Geospace Inc., a geophysical survey company.
Dave Ridyard became chief operating officer of Continuum Resources in September 1998. He earlier worked for Input/Output, which in 1994 acquired a company he had founded in 1989 called QC Tools, a producer of data quality control software for the seismic industry. He earlier worked in marine 3D seismic data acquisition and engineering for GSI.
Ridyard has a degree in applied physics from University of Durham.