Needed: Radical Efficiencies

During my 35 years in the upstream oil and gas business, I have seen firsthand the tremendous gains in efficiency, productivity, and cost reduction that the industry has achieved through innovation and technology.

Source: Getty Images.

During my 35 years in the upstream oil and gas business, I have seen firsthand the tremendous gains in efficiency, productivity, and cost reduction that the industry has achieved through innovation and technology. Drilling and completion times have been shortened dramatically, wells perform much better than they used to, we are drilling even-longer laterals, and we are able to operate in increasingly hostile conditions. As we have seen during the current downturn, these types of gains have been critical to survival for many operators. 

Despite our progress, we face a pressing need to close the sizable efficiency and productivity gaps that continue to hinder performance and value creation industrywide. These gaps limit profitability during growth cycles and exacerbate vulnerability during downturns. We must fundamentally change the way we operate to be sustainably successful going forward.

The good news is that we have a very powerful tool in our arsenal to reset the bar in these areas. That tool is technology. It can lead us to what we at Baker Hughes like to call “radical efficiencies” in well construction and oil and gas production that will create a more profitable and resilient industry—one that is less vulnerable to the cycles and volatility we constantly experience.

The Gaps

To put context around the efficiency and productivity gaps that currently exist in our industry, we need look no further than hydrocarbon recovery factors. There are currently 1.5 trillion bbl of proven reserves globally. Yet average recovery factors are less than 30% across all operating environments, and less than 10% in deep water—shocking statistics. We are leaving a lot of value in the ground.

Equally shocking is that, by some estimates, the industry is at best 50% efficient along the entire spectrum of E&P costs when nonproductive time (NPT) is taken into account. NPT continues to be one of the largest challenges facing operators. Although many gains have been made in this space, delving into the details reveals that the cumulative NPT, as well as the invisible lost time of all participants in a particular project, are significant. This takes into account the efficiency performance of all players involved in the value chain. What is more, performance may vary at the country or even basin level for similar customers or service providers.

All of this unpredictability and inefficiency often translates into hundreds of hours of downtime and millions, or even tens of millions, of dollars per project, which could mean the difference between profitable and uneconomic outcomes at today’s prices.

Perhaps the most disturbing metric is return on invested capital performance (ROIC), which is considered the best measurement of long-term value for commercial entities. Bloomberg’s tracking of ROIC across the upstream oil and gas industry for the period 2009–2014 shows that, even during that growth cycle, integrated companies and national oil companies marginally exceeded their return on cost of capital by around 2 to 3 percentage points, while North American independent operators actually underperformed by 4 to 5 percentage points. So, we can’t blame subpar performance purely on the downturn.

Oil and gas return on invested capital performance, 2009–2014. Source: Bloomberg.

Achieving Radical Efficiencies

It is my strong belief that efficiency and productivity must improve radically for the industry to both meet demand and create value for shareholders. Our company is improving the technical capability and performance of existing products while investing in research into designer chemistry and materials science that can change the actual physical properties of things; digitization, automation, and virtualization leading to tools that can think, act, and heal themselves before problems arise, without the need for human intervention; and additive manufacturing, which can deliver better designs faster and with more flexibility. Early results of this research are very promising. 

For example, our chemists are studying ways to treat hydrocarbons at the molecular level before they come out of the ground through in-situ manipulation to improve recovery factors and reduce refining costs. Another exciting area of research is shape-memory alloys, which can change their shape bi-directionally multiple times, based on external stimuli such as heat or an electrical charge. These materials will have far-reaching implications for drilling and completions products that will save time, use fewer parts, and reduce complexity.

Another step change in efficiency and productivity comes from advancements in data mining and analytics, which are digitizing the oil field. More sensors gather more data from more sources. Through increased computer power, which can cut analysis time dramatically, and advanced algorithms, we will be able to conduct more realistic simulations of the entire reservoir. Imagine the power of having the reservoir in virtual form, with the ability to test millions of variables to make the best possible decisions, leading to the best outcomes. And then imagine if the computers and models made the decisions and changed the behavior—without the need for human intervention. That is where automation comes in.

We have made great strides over the past 20-plus years to automate certain processes, such as drilling systems, which have allowed us to drill complex well paths while accessing more of the reservoir than ever before, but we have only scratched the surface of what is possible. We are working on technologies that will enable tools to think, act, and heal themselves, all in the interest of dramatically improving the quality of our products and the reliability of our service while reducing our dependency on human capital.

In the realm of additive manufacturing, the benefits of 3D printing are well known: better designs, with fewer components to weld together; improved performance, longevity, and reliability; faster time to market; and distributed manufacturing nearly anywhere in the world and closer to the point of use. The practical implementation of this technology in the oil and gas industry is still in the nascent phase. Bottlenecks today are due to available materials, size of the printing machines, and the ability to produce components at scale in a repeatable way.

Nevertheless, the breakthroughs we foresee from our research and work in this area are staggering, and not just in terms of printing larger components, which we do expect. In fact, very soon we will be able to print drill bits. At the opposite end of the spectrum, we expect to print at a nano scale at the wellsite. The potential of this technology to improve productivity and efficiency is very exciting.

Not Science Fiction

In-situ manipulation and drilling and completion systems that can change shape downhole, adaptable drill bits, tools printed on demand, and automated reservoir modeling and behavior—these may sound like the stuff of science fiction. But, the opportunity is there, and so is most of the technology. It is a matter of tying these components together.

It will be the responsibility of technology providers to invest in research and development of new materials, chemistries, and processes that will enable the radical efficiencies the industry needs to be more resilient to the inevitable volatility we face. And, it will be the responsibility of E&P companies to aid in the investment and be open to adopting the technologies that investment produces.

HSE: A Mandate

Just as we need to raise the bar for what is acceptable and what we believe is possible for productivity and efficiency, we also need to raise the bar for what is attainable for health, safety, and the environment (HSE). HSE standards and processes, effectively communicated and universally adopted and applied, actually contribute to efficiency and productivity by reducing risk, NPT, and deferred production. Efficiency can, and should, be safe. Productivity can, and should, be environmentally benign. When it comes to HSE incidents, we have to expect zero. And settle for nothing less.

I am very optimistic about the future of our industry, because I believe that through technology advancements such as those I have mentioned here, we can become more resilient and less vulnerable to the extreme cycles and volatility that we constantly experience. By working with radical efficiency, intelligence, and safety, we can continue to meet world energy demand and create value safely and sustainably well into the future.

Martin Craighead is chairman and chief executive officer of Baker Hughes Incorporated. He joined Baker Hughes in 1986 and, during his career with the company, he has had various technical and operational leadership responsibilities throughout the Americas and the Asia Pacific region, including 3 years as group president of the Drilling and Evaluation business unit. Craighead holds the International Executive Master of Business Administration degree from Vanderbilt University and earned a BS degree in petroleum and natural gas engineering from Pennsylvania State University. He is the recipient of the 2015 Alumni Fellow Award at Penn State and the 2010 C. Drew Stahl Distinguished Achievement Award at Penn State.