Oil prices are so low that the oil industry is having to consider doing things differently. It is a hopeful sign for the future for innovators who have been struggling to keep going and have potential customers with little to spend and a lot to worry about.
“What we see is a lot of consolidations and slowdowns now. A lot of risk-averse folks out there who do not know if their companies will survive from one day to the next,” said Chuck Matula, who is a board adviser and founder of a company called Drill2Frac, which offers services aimed at unconventional producers.
“2015 was an absolute blur. Absolutely everyone was trying to keep an oilfield operation afloat, there was so much indecision and uncertainty,” Richard Broderick president and chief executive officer (CEO) of Fountain Quail Water Management, said during a session at the recent IHS CERAWeek conference in Houston.
Demand for the water company and others has slowed as drilling and completion work plummeted in shale fields where the cost of adding production exceeds the price of oil, which dipped below USD 40/bbl in early April.
Those still on the payroll have powerful motivation to consider how to reduce operating costs or increase production enough to pump profitable barrels if oil edges toward USD 50/bbl.
Those with likely answers to that question “were getting some traction when prices where high, but not as much as they are now,” said Vikram Rao, executive director of the Research Triangle Energy Consortium. Sales are limited because “they can only make that point to survivors.”
Rao divides the market into three groups based on their financial needs.
At the top are the companies with secure financial futures—the majors and the strongest of the independents—and at the bottom are those in serious financial trouble. The rich have resources to spend, though it is limited by their drive to reduce costs; but their survival is not at stake. That is the issue for companies at the other extreme, which have no money to spend because they are focused on dealing with creditors.
In the middle are those companies with some money to spend and a great sense of urgency. Their long-term future depends on quickly lowering their cost per barrel enough to survive with oil selling for less than USD 50/bbl. And they will not be able to get there by squeezing suppliers for more discounts.
“What is happening is, basically, innovate or perish for anyone in between,” Rao said. “They have 2 years to show they can survive, and 3 years to make good.”
“They cannot keep doing things the same way and they are looking for new solutions,” said Mark Wilkinson, a vice president for GroundMetrics, which is trying to convince companies that they can better understand what is going on in the ground by using electromagnetic imaging to track water and carbon dioxide flooding, or spot missed oil reserves.
Faced with similar cost pressures, and an equally awful economic environment in the 1980s, Rao said operators did manage to quickly reduce the cost of production, frequently employing innovations from the service sector. The industry embraced 3D seismic, subsea completions, horizontal drilling, and logging while drilling (LWD).
Dogged persistence is an essential trait for oilfield innovators in good times and bad. “Most operators are not adverse to new technologies, but few can afford to be new technology leaders,” said George King, distinguished engineering adviser at Apache Corp. High on his long list of obstacles: “Most new technology promoters do not appear to know how to effectively introduce technology.”
The comment speaks volumes to Pradeep Anand, a consultant who teaches “Strategic Marketing in the Energy Industry” to a class of graduate students at Rice University, drawing on his experience marketing oil and gas innovations.
“We are dealing with a very risk-averse industry that is very measured in its adoption of new technologies and rightfully so. Add to it, the increasing reluctance to change corporate and process habits over time and we have a seemingly immovable object,” he said.
The key is to win support from the select group of companies whose business is built on innovation. “Rather than developing an infinite force to move this immovable object, technology innovators have to work on the fringes, which are firms that have good reasons to adopt new technologies to create competitive advantages in their markets,” Anand said.
While working as Halliburton’s chief technology officer, Rao said the company tracked which customers were most likely to use new technology. Because the list of innovative operators was short, they paid close attention to the top five, four of which were big independents.
A few oil companies “are much more aggressive about innovation. It differentiates them. Their culture is based on it,” said Rustom Mody, chief engineer enterprise technology for Baker Hughes.
Pioneer Natural Resources is an example of a company that has continued to invest in new technology through the downturn.
“Technology innovation is one of Pioneer’s key paths for growth in the coming decades,” said Sha-Chelle Manning, director of corporate innovation at Pioneer.
Pioneer estimates the value of its innovation program is USD 500 million over the next 10 years, which will foster greater efficiency, reduced general and administrative expenses, increased competitiveness, and improved estimated ultimate recoveries, Manning said, adding that “with low prices, the need for investment in innovation is more urgent.”
Shock Treatment
Oilfield innovation is talked about as if it were an endangered species. That is understandable after waves of layoffs and budget cuts. One technology consultant, who asked not to be named, said, “One of the concerns we have heard, and it is a very real concern: Have we cut so much we will not be able to restart the industry again?”
Those selling innovation are waiting uncomfortably for a rebound. “I do not see that new technology is going into use like it was in cycles past. I can’t say why. Perhaps because it was such a rapid downturn,” said Richard Spears, vice president of Spears and Associates, which has also invested in a couple of startups.
Service company layoffs represent the largest number of the more than 250,000 workers laid off in 2015, according to a survey by John Graves, a Houston oil industry consultant. Big service company budget cuts have hit research and development (R&D). “For service companies I am seeing double-digit reductions—around about minus 15%” in R&D budgets, said Carolyn Seto, director of upstream technology and innovation at IHS.
A review of company annual and financial reports for 2015 shows a 9.1% drop in research and engineering spending at Schlumberger, a 29% drop at Halliburton, and reductions at Baker Hughes and Weatherford of around 20% each.
All those were well short of the revenue declines that led to deeper cuts in operational budgets. As a result, Halliburton’s spending on long-term technology development rose in 2015 to 2.8% of its 2015 revenues, up from 2.4% the year before, and Schlumberger’s rose to 3.1% of revenues last year, from 2.5% in 2014.
Pessimists warn of a repeat of the 1980s, when the lingering slump led to many years of R&D spending cuts. But the structure of technology development has changed. Back then, big oil companies were the biggest spenders on R&D. Now the service sector is the leader by a wide margin.
The transition period resulted in low R&D spending for a time. It took until the mid-1990s, when the large service companies grew through consolidation, for service company spending to surpass what oil companies were doing.
Service sector R&D spending has grown sharply since then, with a surge beginning in 2010. Inflation-adjusted R&D spending in the industry is far higher now than the peak in the early 1980s boom, even with last year’s dip. Service company R&D outlays are nearly double what oil companies spend, which is also up from where it was early this century.
The question this time around is, if the slump continues, will service companies continue cutting R&D spending as oil companies did in the 1980s. While the pressure is there to spend less, deep cuts in innovation programs now come with significant downsides for service companies in the long term.
For them, a productive technology development program is a competitive weapon. At a time when buyers are demanding, and getting, deep discounts for most products and services, a new offering which is able to lower the cost per barrel of production can still sell for a premium price, Rao said.
On the one hand, service companies must keep up with the biggest names in the business; on the other is the threat to margins posed when prices are set by low-cost producers or commodity markets.
Carbo Ceramics has committed to an innovation program to add value to the ceramic grains of proppant it sells, in a business where the price of plain proppant is set by competition with low-cost international manufacturers, and even lower-cost sand.
The company is creating a growing line of products that add new functions to the ceramic grains that go beyond propping the reservoir, such as one that delivers a controlled release of scale-reducing chemical in a reservoir. Its most ambitious project, which moves it into the geophysics business, is a proppant with a coating that shows up in electromagnetic images. That ground-breaking initiative has required that a company whose expertise is in ceramic manufacturing create methods to detect it and data-processing algorithms for imaging.
“Keeping technology development going in this downturn is not easy,” said Terry Palisch, global engineering director for Carbo. “We have committed to this project. It is tough. Customers are not willing to spend much money.”
But the commitment is seen as an essential piece of its business strategy. “If you are going to be a tech company and you do not spend money on technology, you have a gap in your program,” he said.
Long-term commitments are required because technology development re-quires professionals with hard-to-find skills mixing technical skills and the ability to create products that profitably solve difficult problems.
“It takes years to build it. The skill sets, the personnel, the know-how,” Mody said. When a program is shut down, that talent will be quickly hired elsewhere, he said, adding, it is “expertise you better protect.”
Quick Fixes
In an industry where marketers love to claim they are selling the next game-changing technology, operators are just looking to play the game better and cheaper.
“Research and development spending, and innovation spending, must align with the strategy of the company in the near term,” Seto said. “With the low oil price there is a greater focus on R&D innovation that has a more clear line-of-sight path to benefits within an 18- to 24-month time frame.”
Statoil has shown what is possible in 24 months, with a cost-cutting drive to trim the bloated cost of offshore development, which reduced the average cost of development from USD 70/bbl to USD 41/bbl last year, and it is seeking to push it lower.
“Most people think of innovation as new technology,” said Margareth Øvrum, executive vice president technology, projects, and drilling for Statoil. But she said “it can be existing technology used in another way.”
Statoil’s project included some ambitious efforts to leapfrog the existing way of doing things. Øvrum has long been committed to developing “subsea factories” that move processing from offshore platforms to the seafloor. Last year, the company demonstrated it could successfully locate a large gas-compression system on the seabed. Now she said the company is working to take what was learned from that technical achievement and reduce its cost and complexity enough to make it a widely used option.
Making what is technically possible a profitable fact of life is the challenge facing large segments of the industry now, such as US shale operators. “We know what to do, we just need to do it cost-effectively,” Rao said.
Industrywide there is a lot of room for productivity improvement. Over the past 10 years, a four-fold rise in global E&P spending yielded only 15% more produced oil, according to Schlumberger. The largest service company uses that statistic as an argument for a greater role in managing projects in a way that selects and integrates technology more productively.
Others offer interpretations of the commercially and psychologically complex relationship between those who own and operate wells and the companies competing to equip and help manage them. But there is little argument that the key performance measure is the cost per barrel produced.
“It is a well-supplied world. Everyone will have to compete on that cost-of-supply basis and margins will be king,” said Ryan Lance, CEO of ConocoPhillips, speaking during a session at IHS CERAWeek.
“We have instrumented about everything we have in the business, and we are learning how to sift through all those things,” he said. “One goal is to reduce downtime and extend the life of equipment, like compressors, with results so predictable it will be possible to extend the warranties.”
Data Points
Ask what is new and hot, and the answer is data. They offer a path to quick savings using an available technology from another industry and a little used asset—data stored and ignored.
For Christopher Robart this looks like a great opportunity. He and his brother Alexander Robart, who previously built a shale data consultancy firm called PacWest Consulting Partners and sold it to IHS, are partnering with a private equity firm to build an oil and gas software company through multiple acquisitions.
“The timing couldn’t be better to be a buyer buying low and selling for higher valuations. It is perfectly timed for valuations,” said Robart, who wants to start with a handful of established operations that offer cash flow and customer lists to support later acquisitions. The initial focus is on companies enabling operators to produce “better, faster, and cheaper.”
The goal is to build and sell the company in 5 years, but the upside is limited compared with Silicon Valley, where investors brag about finding unicorns—companies worth USD 1 billion or more.
Digital E&P applications sell to a limited group of customers with specialized functions, time-consuming testing requirements, and the need for significant support after the sale. While the thinking is that combining single-product companies into an operation able to sell a wider range of products to a larger group of customers can create significant value, there is a limit. As he put it: “There will be no unicorns in oil and gas software.”
Journal of Petroleum Technology - Data Survey
Data Survey
DNV GL recently asked 900 senior oil and gas professionals about data use now and in the future. The survey shows that they are interested, but have their doubts.
- 20% considered operations “highly digitalized today”
- 36% plan significant or moderate investment in big data and analytics in 2016
- 45% see solid or high potential for data and analytics to make the industry more efficient
- Cost constraints and uncertainty about the cost-saving potential are two factors that are limiting spending
The certification body identified these opportunities:
- Condition monitoring for more effective maintenance and inspection programs, dictated by industry, historical, and real-time data, leads to reduced downtime, with preventive maintenance based on early warnings from sensor data.
- Instant information from fields can provide timely decisions on underperforming wells and other potential issues, which could lead to enormous costs if not dealt with.
- Detecting anomalies during drilling and operation can lead to more effective decisions for cost savings.
“We have no illusions it is easy or simple,” Robart said. “It is all about getting in a position for a pretty significant up-cycle in 2 to 3 years.”
Startups
An invention does not become an innovation until someone buys it. Big leaps require a customer willing to commit the time and effort needed to prove that something new works, fit it into their operation, and tell others how it can help.
During the 1980s, Anand had the critical role of finding the initial customers for one of the big technical leaps of the era, the LWD tool made by NL Industries’ Sperry-Sun division.
“I got thrown out of more offices,” he said. “I knew one guy extremely well. He asked me to leave. He said, ‘There was no way I would risk my credibility on your tool.’”
That point of his story explains why much of what is sold as new is actually an update of what is available.
“Most service companies sell incremental (gains) because that is what most buyers want. Not what they need, but what they want,” Rao said.
Journal of Petroleum Technology - Pioneer Resources’ Drilling Ideas
Pioneer Resources’ Drilling Ideas
Pioneer stands out because its culture has long emphasized the value of innovation and the company has the cash on hand now to support it at a time many others do not. Its projects include the following:
Rig Power Optimization: Partnered with a rig operator to pilot and scale a power system to offset peak load from generators. The potential benefits are reduced generator stack maintenance and fuel use, as well as the ability to better track power use for analysis.
Real-Time Communications: Piloting and improving real-time communication services required to improve rig communication services and real-time analytics.
Analytics for Improved Team and Rig Performance: Partnering with a software company to provide analytics to compare and understand rig performance differences and share improved practices. This has yielded an efficiency gain of half-a-day per well.
Improved Performance of Drilling Tools: Partnered with suppliers to improve the design of a directional drilling component to reduce failure rate by 50%. A partnership with a private lab is investigating drilling-data-acquisition techniques.
Rao joined Halliburton when it bought Sperry-Sun, then part of Dresser Industries, after it proved LWD could be a highly profitable business. And while he worked there, he saw that pattern repeated many times as it acquired startups with promising technology.
“The truth is that most new oilfield technology comes from four guys leaving a company. They are impatient with their inability to pursue their idea where they are working so they quit to start something in their garage,” Spears said.
The flood of talented people out of work now could create a flood of startups from some of these involuntary entrepreneurs. Industry experience is a plus. Veterans in the field know the problems that plague operations, and what it takes to build something that stands up to field use. But selling a new idea is still a slog.
An example of that is Airborne Oil and Gas, which is trying to convince operators that flowlines made of thermoplastic composite pipe are stronger and lighter than metal, will not corrode, and could reduce the cost of offshore installations. Its shareholders include Shell and Chevron. Yet, when it comes to finding customers, “lead initiation has been relatively easy. Lead conversion is very, very difficult,” Eric van der Meer, CEO of Airborne, said during a session at the IHS CERA-Week conference.
The downturn in demand is a factor. Like many startups, Airborne struggles to find jobs in which it can demonstrate what it can do in the field. It has worked with two joint industry projects to prove that its pipe is capable, which took time, and still there is resistance.
“We find an asset—a flowline to replace—someone says I do not like it [Airborne’s pipe] or trust it, it is not qualified enough, or I would like to see it somewhere else, and then it stops,” he said.
The barriers are not a sign of the times. Based on what he expected after a 25-year career at Shell, it has proved “almost exactly as difficult as I thought.”
