Doing more with less

Sept. 19, 2017
Operational efficiency is about to become even more critical



IN WHAT IS PROBABLY one of the most remarkable cases of an industry adapting to extreme change, the North American oil and gas business gets surprisingly little credit in the mainstream press.

Imagine how Apple, Ford, or Starbucks would react if the price of their products fell by 50% in only six months. Yet, that is exactly what happened to the oil and gas industry when OPEC decided to take its hands off the global oil supply and let crude oil prices tumble from $106.07 per barrel on June 30, 2014 to $53.45 by the end of 2014. Could those household brand names survive such a pricing catastrophe?

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But that is exactly what the North American oil and gas industry did. Leaders met the challenge by making the gut-wrenching decision to lay off hundreds of thousands of people, stand down thousands of rigs, and sell off non-core assets. Baker-Hughes reported that on May 27, 2016 only 404 land rigs were working in the United States, down 1,527 from the peak of 1,931 on September 19, 2014. This marked the trough, and it took only eight months for the rig count to plummet 79%.

Companies with quality producing assets and strong balance sheets survived, and some even thrived by pushing for greater efficiency and productivity in the field. Companies operating in the most productive resource plays in the Permian Basin, STACK/SCOOP region, and Appalachian Basin pushed down both finding and operating costs in order to generate economic returns even with crude priced at $45 per barrel or less. The credit is not limited to resource players, as even operators of conventional assets have been able to find innovative ways to reduce both drilling and lifting costs.

OPEC's price gambit to cripple its shale competitors rested on its assumption that the United States was the world's high-cost producer, and lower prices would put the brakes on burgeoning production from unconventional resource plays, as operators would mothball rigs and shut-in marginal wells. The cartel, however, failed to recognize the economic physics at play in a dynamic free market, and that the harsh discipline imposed by the price collapse would result in an opposite and equal reaction. The dramatic reduction in cash flow forced operators to simply do what it took to make things work, and the North American industry responded with a combination of significant cost reductions and innovations that reduced the break-even cost of drilling in the best resource plays.

Extracting price concessions from service providers is one thing, but the industry has also been able to boost well productivity, further dropping per-unit finding and development costs and breakeven commodity price decks in the most prolific plays. For example, the US Energy Information Agency (EIA) reported in the June 2017 issue of its Drilling Productivity Report for the Permian Basin that the average new-well production per rig was 617 barrels of oil per day, 54% higher than the 396 barrels of oil per day for the same month in 2015. It is important to note, however, that the June 2017 well productivity metric is 14% lower than June 2015, only one year ago, so productivity may be trending down now that the "core of the core" in most plays have been drilled.

Wellcast scheduling tab

In a related development, a recent study published in Applied Energy by MIT researchers suggests that nearly half of increases in well productivity have come from operators drilling in the "sweet spots" of plays, rather than from new drilling and completion techniques. If this presages a decline in well productivity, then operational efficiency is about to become even more critical.

As the result of lower costs and greater well productivity, operators put rigs back to work. On July 14, 2017, the Baker Hughes North American land rig count stood at 952, more than double the number of rigs working at the trough of the current cycle. Although the current rig count is still far below the 1,931 rigs working at the pre-crash peak on September 26, 2014, it is safe to say that there has been a rebound since the darkest days of the down-cycle. For example, the rig count on July 14, 2017 as compared to May 27, 2017 has increased by 187%, 172%, 176% and 123% in the Haynesville, Permian Basin, Eagle Ford, DJ-Niobrara, and Williston basins, respectively.

The ability of the North American industry to adapt to the new realities of the price environment has resulted in nothing less than a sea change in the global oil market. The BP Statistical Review of Energy reported that in 2016 the United States was the world's largest oil producer, pumping 12.354 million barrels of oil per day, slightly ahead of #2 Saudi Arabia and the Russian Federation. In April 2017, America exported just over 1.0 million barrels of oil per day, the highest level ever recorded, thanks to rapidly increasing production from unconventional resources and a repeal of the ban on US crude oil exports.

That's right, America is now an oil exporter. For people of my generation who lived through the gas rationing of the early 1970s, increased energy security and lower gasoline prices are a welcome respite from the economy being tied to the political volatility of the Middle East.

The second round of productivity and efficiency improvements will come not from more staffing cuts, tough negotiations, or reducing drilling days in half. That low-hanging fruit has been picked. For example, Pioneer Natural Resources, one of the most active operators in the Permian Basin, reported in its June 2017 investor presentation that drilling and completion costs in the fourth quarter of 2016 were more than 30% lower than two years ago. Companies like Pioneer and others are communicating that the next round of cost and productivity improvements will come from leveraging technology - in the field and the office - to work smarter.

Wellcast dashboard

Cloud-based software tools are just beginning to make their impact known in our industry. For example, operators developing resource plays have to manage their drilling rigs even more closely and efficiently than before. Years of downsizing and rightsizing have taken a toll on human capital. Bottom line, there is just not enough good talent, and companies are trying to do more with the same staffing levels.

Adam Krier, co-founder of Tulsa-based Wellcast, a provider of resource play management solutions, said: "It is ironic, but the downturn was actually a growth catalyst for us. Operators had to change the way they did things, because it was inefficient, prone to error, and people were getting burnt out. We built a solution based on our first-hand experiences working on asset management teams. It is not lost on us that although there has been a dramatic increase in the rig count, operators haven't been on a hiring binge. E&Ps today have had to find ways to do more with fewer resources than they have been accustomed to."

Wellcast offers a cloud-based resource play management solution that enables operators to efficiently manage a development drilling program, workover program, and well inventory on one platform. Whether they are operating one rig or 10, Wellcast says it can help even a small team manage more productively than before.

Krier added, "Our tagline says it all - 'Meet Less, Drill More.' Asset management teams today don't have time to spend hours in a meeting discussing every drilling location and harmonizing data between disparate spreadsheets. Their time is valuable, and they need to make decisions fast and accurately to create a clear path for each rig."

Co-founder Katy Davis added, "One of the things that makes Wellcast different is our deep industry knowledge of multiple regulatory regimes and requirements. We come to the table fully prepared with the knowledge of permitting and drilling requirements in almost all drilling regions in the US."

Davis acknowledged that requirements can be different, even in the same county, given divergent regulation sets between fee, tribal, state and federal leases. A big part of Wellcast's value proposition is that the company has already completed most of the preliminary work to configure workflows for the Bakken, Permian Basin, SCOOP/STACK, Haynesville, and other resource plays. As Davis said, "You don't have to teach us the business, and that makes us a partner instead of just a technology vendor."

At Prism Group, we work with many innovative energy tech firms, and a big part of their ability to add value is based on their first-hand industry experience. The most effective energy tech solutions are developed by oil and gas people seeking to solve problems they encountered while working in industry. In the case of Wellcast, both Krier and Davis worked on the asset management team at Petrohawk, an aggressive resource play developer that was one of the most active drillers in the country at the peak of the cycle before the company was acquired by BHP Billiton for $12.1 billion.

Krier remarked, "Even when oil was $90 per barrel or more, managing an active drilling program was time consuming. Things have become even more challenging when the asset management team is a fraction of the size it used to be. In one case, we estimated that a company running a five-rig program can save 3,000 man-hours a year, generating a first-year ROI of 84% with a payout in as little as three months. Those kind of efficiency gains translate into greater strategic flexibility, and a company can ramp-up activity without a commensurate increase in overhead."

Although we at Prism Group help clients identify information technologies that will help them increase efficiency and productivity, we note that there are some added benefits to culture and morale that often go unnoticed. Having the right tool for the job goes a long way in experiencing job satisfaction. There's nothing more discouraging than being asked to mow a baseball field with a pair of scissors, but having a riding mower can make the task fun.

Davis agrees. "We find that our primary competition is an Excel spreadsheet. There are few things more frustrating to a team than trying to use Excel. Excel was not really built to be a collaborative information system, and managing a multi-rig, multi-basin drilling program means team members have to wait for hours for another member to make updates to a spreadsheet. If there's an error and it doesn't get caught, then it just gets carried on to the next iteration, which can be a big problem."

Krier chuckled at the notion. "We know, because we used Excel a lot when we were on an asset management team. When we introduce a potential customer to Wellcast, we usually start a 30 to 60-day pilot program for free. Once they start using it, they never go back to Excel. People get their jobs done, can have a family life and can access the application on their smartphone, laptop or tablet. They can stay connected with the team from home, from football practice, on the road or at a remote field location. Oh, and by the way, you can still download data from Wellcast into a spreadsheet if you want to run a custom analysis offline."

Speed is a virtue. Better information and systems enables the C-Suite to make important decisions fast, which can be a competitive advantage. Executives using systems like Wellcast can dynamically run "What If" scenarios from their desktop, evaluating the impact of ramping up or winding down rig activity.

"Strategic planning and efficient decision-making is a benefit that many companies don't realize they are getting with Wellcast when they first sign-up," explained Krier. "Our drag-and-drop interface allows planners to move rigs around, add rigs, or cut the rig count and evaluate the impact on number of wells drilled, production and other variables quickly. Being able to move quickly in this volatile commodity price environment can be a competitive advantage."

Consider the example of a CFO on a road show marketing a new equity or debt issue being asked the question by an investor, "What would you do if we upped the size of the offering by $50 million, how quickly could you put the capital to work?"

With Wellcast there is no need to wait days to answer the question. The CFO can access Wellcast from a conference or hotel room and get answers. In the current market environment, that could mean the difference between securing additional capital, or a 50 basis point increase in coupon rate on a notes offering if rates increase before the finance chief can respond intelligently.

In our experience, that's the unpredictable factor when it comes to information technology. There are so many potential benefits from making better decisions faster, that it is almost impossible to predict the myriad ways a technology-based solution like Wellcast can impact the bottom line. But, we do know this: If a company fails to leverage information technology to its advantage, then it runs the risk of falling behind the competition that does. We simply don't know what the market will look like in six, 12, or 24 months, but we do know that implementing information technology solutions that enhance productivity and increase management's ability to adapt is a good investment in any market.


James Constas, president and co-founder of Prism Group, has more than 25 years of professional experience, primarily in oil and gas, management consulting, investor relations, financial analysis, and planning, branding, and marketing. He received his BS degree in International Management from Arizona State University and an MBA from the University of Denver.