OIL WILL PLAY A KEY ROLE IN THE WORLD FOR MANY YEARS, BUT OPERATIONS MUST TRANSITION INTO A SUSTAINABLE FORM

JEFF PFERD, HALLIBURTON, Houston

THIS ARTICLE PRESENTS SOME IDEAS about the oil and gas industry that are believed to result from the new price environment. The ideas presented in this article are meant to stimulate thought and possibly lead to action to meet the future in a constructive manner.

PROJECTION OF VOLATILITY ALONG DECLINING MEDIAN

Because future industry trends will arise from present industry conditions, the following paragraphs describe the current market environment for the oil and gas industry.

Lack of producer control means persistent market volatility.

The low price of oil and gas is fluctuating around the long-term median price. Volatility will persist as unexpected international and natural events affect expectations and the market. The price stability of post-World War II brought on by agreements made in the 1950s and 1960s are long gone. An analysis of oil prices before 1940 shows volatility also because it was not controlled by producers. This is the condition today. There is no producer control and a broader resource base exists.

High prices drive progressive investment in alternative energy.

The median price may still trend lower. When oil prices increase significantly above the median, additional sources or alternative energy solutions emerge. There are several examples of this: North Sea investments in the 1990s increased supply and reduced the incremental cost of bringing additional reserves on stream; tight shale investments in the 2010s increased reserves and production; and the rise of wind farms and hybrid cars replaced or reduced need for hydrocarbons. These investments both increased supply and reduced demand. Future high-price periods will likely continue this pattern.

Tepid world economic growth slows demand.

Economic and population growth is necessary to increase oil demand. The tepid growth in emerging markets shows that demand is not increasing as fast as in the recent past.

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TRENDS IN THE OIL INDUSTRY

Several industry trends are emerging to meet the new price environment. This section describes current technical, knowledge, and staffing trends of the oil and gas industry.

Layoffs abound.

As the price of oil has declined, profit margins have decreased even further. The immediate response to reducing operating costs includes traditional personnel layoffs. But this can only go so far. Some expertise must be maintained to operate productively. To reduce costs further, new approaches are needed to meet a persistent low price environment.

Automation and analytics lower cost structures.

The digitalization of the oilfield provides a path to lower operating expenses. It must be wisely and widely applied. The instrumentation of devices, as seen by Internet of Things projects like Voice of the Oilfield, progresses us down this path by providing information that must be analyzed, understood, and linked to decision-making and (possibly) automated actions. The analytics must be derived from knowledge and understanding that can be imbedded in technology in the field. Without this, we have only meaningless data, which will add more risk to operations.

Businesses demand standardization and rationalization of technology.

Hardware and software should be rationalized and standardized to allow technology adoption at scale. Standard devices and fewer software applications will reduce maintenance and support costs. In addition, acquisition costs can also be reduced because larger purchases from fewer vendors should produce greater discounts. Figure 1 illustrates the major themes of technical transition. Security is a growing concern and, with risk management, will command the attention of industry during the next decade.

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Oil industry trending toward engineering manufacturing models.

The industry is becoming more focused on a manufacturing approach to operations, optimizing costs and benefits of total systems and not treating every well and field as a unique deployment. This shift has been enabled by the engineering success of producing oil and gas from tight formations. Shales, considered to be source rock a decade ago, are now reservoirs with characteristics that enable production as an engineering endeavor. The global distribution of these reserves has expanded the resource base considerably. Of course, more engineering and risk reduction is needed to reduce water consumption and continue protecting overlying formations from contamination to obtain greater acceptance. Environmental concerns will have an impact.

Reservoir management enhances recovery.

In the shale plays, the contribution of the geosciences is increasing as high-grading and targeting the most productive intervals has become critical to the economics of shale production. For both unconventional and conventional reservoirs, a strictly manufacturing approach led to a significant number of uneconomic wells, which drove the $/BOE cost above current pricing. Detailed knowledge of the reservoir, in both 3D space and time dimensions, is critical to enhancing recovery and maximizing producible reserves. Advances in seismic acquisition and imaging, as well as geomechanical understanding of the reservoirs, will assist significantly in planning the pace of well placement and extraction. Engineers must know the properties and behavior of the reservoir materials they are engineering, and geoscientists will provide that information.

ROLES OF BIG OIL, SMALL OIL, NOCS, AND SERVICE COMPANIES IN THE NEW ENVIRONMENT

Organizations within the oil and gas industry are adapting to the changing environment. This section explores the changing roles and focus of these organizations.

Digitalization will be required for successful transformation.

Successful adaptation to the changing environment will require a shift to digital business, including new ways of working, new technology, and new organizational structures. The disruption of the past and the construction of the future company will be difficult and must be aligned with the strategy of each company. The loss of expertise from layoffs will be felt by every organization, increasing the need for virtual teams and increased collaboration. Those organizations that preserve and enhance knowledge and capabilities will be successful. Huge volumes of data will drive unprecedented insights and efficiencies. The roles of Big Oil and Small Oil will change. Service Companies will find unusual competitors and must find new ways to provide value. NOCs, with social responsibilities to their countries, must accept new cost savings and production optimization to maintain the revenue required for a peaceful populace. The following paragraphs explore how some of these changes might occur in these organizations.

Big Oil buys assets and makes deals with NOCs, competing with Service Companies.

Big Oil needs assets to maintain production levels and must further enhance their expertise in production optimization from the reservoir to the gas station pump. Big Oil companies may find additional reserves from acquisitions and partnerships with NOCs rather than from exploration. They can offer to NOCs their superior low cost structures and optimized production capabilities as well as large scale project management. This concentration on reducing costs and on production optimization will be important to their future success.

Small Oil is the engine of the Explore, Find, and Sell Strategy.

While Big Oil is concentrating on production, Small Oil may take the approach of finding assets and then selling them to Big Oil. This is fairly commonplace even now and is likely to expand. The capital demands of locating assets are less than the capital demands of developing and producing. Consequently, this may yield a synergy to sustain both Big Oil and Small Oil. An interesting challenge will be how to value proven, unproduced reserves to make deals with volatile oil pricing.

NOCS must meet social responsibilities, squeeze costs, and partner with Big Oil and Service Companies.

NOCs have a different dynamic to their activities. They have social responsibilities that include revenue goals and possibly employment goals. In the low price environment, NOCs need cash flow. Production optimization will have strong appeal. These companies must choose their partners wisely and develop programs that yield new operational practices. Both Big Oil and Service Companies can play a role in this transformation. NOCs also will try to reduce costs in their interactions with all suppliers. They may rationalize their tools and software to save costs and increase leverage. They also may be more aggressive, venturing outside of their home countries to develop additional assets. However, the same cost and revenue environment will require carefully planned projects.

Service Companies focus on providing expertise and technology-led transformation.

Service Companies should try to be the provider of choice in customers' rationalization projects. They may be able to compete on price, but should also include value-added offerings such as enabling rapid adoption by younger staff and lower total cost of ownership with Cloud deployments and analytics. The major Service Companies have strengths that come from exposure to a broad set of global operational issues. They should be able to develop standardizations for operations in the key global oil and gas terrains and have the R&D assets to accelerate technology and practices.

The new approach to operations is potentially the key to the success of major service companies. They maintain expertise and may be nimble enough to demonstrate the future business state to the industry. It is critical that they articulate the new world model and provide comprehensive solutions that consider technology, as well as organizational changes, that will be required for business transformation. A key action is to demonstrate a solution that can be witnessed by company engineers. Providing a working example with documented benefits can affect customer adoption significantly.

FINAL THOUGHTS

There is a future for the oil industry, and it will play an important role in the world for many years. Its operational approach will change and hopefully transition into a sustainable form for its customers and for the professionals working in the industry.

ABOUT THE AUTHOR

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Jeffrey W. Pferd, PhD, is a senior member of the Halliburton Information Management team with more than 25 years of experience in the oil and gas industry. His background combines scientific domain knowledge and advanced technology. Pferd's professional goals include developing business strategies and leading multidisciplinary teams of domain experts and computer professionals to successfully implement information technology focused on business goals.

Strategy for the next decade

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