Capture Value of Innovations

What are the underlying forces? On the oil side, it's clear that the easy oil is gone. To get enough oil to market to meet consumer demand, operators will have to drill deeper wells in deeper water, apply more unconventional recovery techniques, and work mature fields harder and smarter. On the gas side, the pricing paradigm has completely shifted. Before the shale revolution, prices reflected competition for a resource that could not meet domestic demand. Now they reflect more of a manufacturing model where the long-term price curve principally reflects the expected cost of getting the gas to the surface.

Production volume growth will depend on growing demand in the industrial and electric power sectors, finding new export markets for liquefied natural gas (LNG) and commercializing existing gas to liquids (GTL) technologies. In each case, demand can only grow if prices (and production costs) are predictable and low, at least by historical standards.

Each of these forces will move service companies and operators toward increasing focus on getting a return on every oilfield dollar. In deepwater reservoirs, the returns can be high but costs and risk are substantial. The cost of a single well can be up to $100 million and those costs can escalate quickly if something does not go as planned. Unconventional reservoirs and mature field interventions live on a different part of the risk/return curve but the decision to drill the next well or start that incremental intervention is going to depend on how far the per-barrel cost can be taken below the price of oil or gas.

Cost pressures in the oil and gas business are not new. Competition has always been relentless, and the profitability equation is very simple. Competition for customers and competition for capital drive every decision. Costs impact both sides of that equation and companies that focus on creating value with every dollar spent will be profitable and successful. If you're not thinking about reducing the cost of what you do, someone else will figure out a way to do it for you.

There's a fallacy though in a single-minded focus on total cost. Of course, all other things being equal, lower costs equal higher profits. But all other things aren't equal, and cost control can have unintended consequences when we fail to appreciate all of the moving parts that affect costs and returns and how costs and returns interact.

In the oilfield, as in any arena, a dollar spent can take a lot of different paths. In one scenario, we can simply drive out costs. We'll pay less and we'll sustain well productivity. That's a good outcome, but there's another scenario: we can target oilfield spend on technology that multiplies the value of what we spend. This may mean that more is spent in total, but those dollars will be returned almost immediately if they are spent in a way that reduces cost per BOE.

What is the way forward? I believe that there are two keys to a service company's success. The first is operational effectiveness: our ability to move people, equipment, and material to the well site and drill the well using less. Success can be as fundamental as the ability to provide reliable service on short notice. We can reduce per barrel cost and our customers' results by improving the processes we use to deliver safe and reliable services. Process design and execution are the cornerstones of a reliable, global enterprise. Automation is another source of innovation in the oil field, led by the top-tier service companies, and provides all manner of advantages in terms of safety and cost reduction.

I believe that there's something more: a value proposition that enables our customers to produce more barrels.

There are a lot of innovations that will get more barrels out of the reservoir. What kinds of innovation do we offer or can we offer? The most obvious innovation is to continuously improve our ability to identify and characterize the places in the reservoir where the initial production rates and ultimate recoveries will be the highest. The next step is to steer the drill bit to those places. We can also optimize well placement to maximize reservoir contact and production and eliminate non-producing zones from the stimulation program. Not everyone has the type of subsurface insight that's required to do that. It isn't easily replicated and will always set certain service providers apart.

Another class of innovations that leads to more barrels is the application of chemistry to the well. Each well behaves differently, requiring customized chemistry. Matching the best fluid chemistry to the reservoir during the completion process and during the life of the well can improve well economics and minimize environmental impacts. Attention to water chemistry and bacteria prevents production challenges, such as reservoir souring, corrosion, solids formation (scale), and paraffin.

Helping our customers overcome environmental challenges can also help them produce more barrels. Everyone knows that the use and disposal of water is either a gating or limiting factor in many places where there is potential for unconventional oil and gas. Even in places where unconventionals are firmly established, there is an imperative to improve the efficiency of water use. The top-tier service companies are working hard every day to figure out ways to treat and recycle produced water and each of us has demonstrated success. This capability definitely sets us apart.

The key to successful innovation that leads to more barrels is a collaborative relationship with customers. When the operator and service provider work hand-in-hand, better decisions get made, including well designs for lateral length, the number of fracture treatment stages, and the fracture treatment design. Well plans are optimized and targeted to sweet spots. A collaborative relationship makes it easy to capture lessons learned and continuously feed information into an integrated asset model to improve optimization for subsequent wells.

The best way to capture the value of these innovations is to provide an integrated service offering. Combining standardized services and materials with the more cutting-edge service attributes allows the service company to provide value in the form of lower per-boe cost, all the way through the well construction and well completion processes. We believe there's great value in integration, both for operators and for service companies, in the form of increased effectiveness, lower cost, and reduced risk.

The more I think about this, the more convinced I am that there is a value proposition for service companies to build and market a differentiated, premium offering to customers. The complexity of deepwater exploration, unconventional resources (particularly in the less well understood international plays), and mature fields requires it.

About the author

Jeff Miller is Halliburton's EVP and COO with responsibility for directing the company's operations. Previously, he was SVP of Global Business Development and Marketing, where he was responsible for strategic account management, sales, marketing, commercialization, and global business and technical solutions for Halliburton. He has also served as SVP of Halliburton's Gulf of Mexico Region, VP of the Baroid product service line, country VP for Indonesia for Halliburton's Energy Services Group, country VP for Angola, business development manager for Venezuela, shared services manager for Venezuela, and director of financial reporting. Miller holds a BS degree from McNeese State University and an MBA from Texas A&M University. He is a CPA and a member of the Texas A&M Look College of Engineering Advisory Council.