The price of crude, the cost of data
Reducing data costs while improving data utilization will result in a dramatically reduced cost structure
Bill Biewenga, Qv21 Technologies Inc., Austin, TX
We have all read that the market price of crude oil is down from prices a year ago. The fact is evident as we pass gas stations around the country and read the posted prices. That, of course is the good news. The bad news is the effect it is having on jobs and profitability in the oil industry.
The causes for the drop in crude oil prices are many and debatable. Some say it's oversupply. Others suggest that lower demand, both domestically and globally, is the cause. Whether we blame the Saudis or thank the frackers, there is little to be gained or better understood by going down that path. Ultimately, it comes down to economics. No one is going to pump oil for long if it costs exploration and production companies more to pump than they can recover when they sell it. When there are ample supplies around, the cost of production plays an increasingly important role in viability.
Conventional vs. Unconventional
It's not so easy to calculate the cost of drilling for oil. Different types of wells cost different amounts of money, depending on whether they are conventional or unconventional fracked wells. Some geologies and cost factors favor one over the other. Typically, conventionally drilled wells, unburdened by the expenses associated with fracking, are lower in cost to drill and complete.
The wells are economically viable if the geology of the reservoir is suitable. If the geology consists of shale and the reservoir requires more coaxing to get the oil to flow, fracturing the rock and other technologies are required to pump the crude. That adds cost to the process. If the oilfields are relatively new and gathering pipelines, terminals, and railheads are few and far between, more costs are added to the process. If the fields are located great distances from refineries, transportation charges add still more cost whether the crude is moved from the oilfields to the refinery by pipeline, rail, or barge.
Thanks to numerous technological advancements, drilling costs have plummeted as single pads are now often used to drill multiple wells and fracking techniques have been improved to maximize initial production (IP) rates as well as estimated ultimate recovery (EUR) rates. As I write this article, delivered prices at which oil is traded on the open market hover around $45 per barrel in the US. It will undoubtedly be different next week.
The Bakken
As an example, cost per barrel in the Bakken shale at highly efficient wells with high IP rates can be as low as $20/bbl to $45/bbl or even higher, depending on the cost to drill a particular well at a particular site. Whether or not it's cost-effective to drill a well depends on how much oil can be recovered both initially and over time. IP rates quickly drop off, however, in fracked wells, lowering the amount of oil that's being retrieved and raising the cost per barrel.
Another aspect of Bakken oil wells is that there is typically an 80% decline in the production rate within the first year. Without re-fracking the well, supply drops off quickly. However, because Bakken wells produce so well and it is such high-quality, low-sulfur crude oil, it is worthwhile for companies to accept that lower recovery rate and production decrease. It is not uncommon to see initial production of 1,000 barrels per day from these wells.
Canadian oil sands
Although technologies and the resulting oil differ greatly, the Canadian oil sands may break even at about $40/bbl. If the oil sands production is already up and running with associated infrastructure, breakeven may be as low as $10/bbl to $20/bbl.
Saudi Arabia
Due in large measure to geology and the fact that Saudi Arabia's oilfield infrastructure is already well established, the cost to drill a barrel in Saudi Arabia is significantly lower than the cost per barrel in most places. Ali al-Naimi, Saudi Arabia's veteran oil minister, recently said that the production costs in Saudi Arabia are about $4 to $5 a barrel. Getting the crude out of the ground is only part of the cost, however. There are still transportation and transactional costs to consider.
Ultimately, whether the world uses oil from Saudi Arabia or North Dakota, the decision will lie in the price that the purchaser must pay on the open market. The solution for companies in the US is to add efficiency to each and every action and transaction.
Geologies, drilling methodologies, and transportation all contain variable costs, some of which are controllable, some of which are not. While great strides have been taken in the area of production, much more is even now being done to lower the cost of transportation. And still more needs to be done in the processing of transactions.
Traditional transactional methods require legions of people, thousands of paper delivery tickets, and stacks of ledgers with data input multiple times by multiple people throughout the supply chain. With relatively new technologies of crude oil production bringing with them variable crude qualities and erratic decline curves, crude gatherers and purchasers require improved technologies to ensure they can balance their operational constraints against their commercial obligations.
In this environment, manual recording and reconciliation of load data days or weeks after delivery will potentially result in unmet deal obligations, improperly hedged positions, and significant end-of-the-month P&L swings. Timely, accurate, comprehensive data enable better data analytics, leading to predictive analytics in the oilfield. Reducing data costs while improving data utilization will result in a dramatically reduced cost structure.
By utilizing the latest truck management technologies and properly integrating the newly available real-time field data with terminal operations and ETRM solutions, oil producers can optimize their physical operations, reduce costs and exposures, and improve profitability. Handwritten paper run tickets cost money in labor at multiple levels throughout the supply chain, adding inaccuracies and reducing timeliness. Waste, poor situational awareness, and inaccurate inventories cost real money in good times and bad.
In good times, profits are reduced. In bad times with low crude prices, the additional costs can mean ruination. Electronic ticketing and order management allow more efficient integration and utilization of data throughout the oil and gas supply chain. Digitizing the oilfield from the wellhead to the midstream is the only solution to take advantage of this new marketplace.
Low-cost information technology is in place to dramatically reduce data costs, adding previously unavailable efficiency and competitive advantage. Whether the price of crude is up or down, the time is now.
About the author
Bill Biewenga is COO for Qv21 Technologies Inc., a provider of logistics support software for the oil and gas industry. He has founded and built construction companies as well as a weather consulting firm. Listed in the Guinness Book of Records, Biewenga has written numerous articles about how data is applied to improve competitive efficiencies.