From organizational structures to procurement strategies to engineer staffing and development, the upstream exploration and production (E&P) industry is undergoing a transformation. Operators and service providers alike are not just tweaking, altering, and fine-tuning in this most recent downturn, they are completely rethinking the way they work. Our business of finding, developing, and producing oil and gas profitably, dependably, and in an environmentally responsible manner is facing unparalleled challenges.
In conversations with many chief executive officers during my term as president of SPE, the most common concern I heard expressed was cost control. And that was before the downturn. In fact, it has been a concern for management for most of the past decade.
The combination of escalating finding and development costs, relatively flat global oil production, and a steep decline in commodity prices has put significant pressure on profitability and free cash flow throughout the entire E&P value chain. Part of the reason for this is an extended period of underinvestment in the previous 3 decades. More importantly, the aging production base requires more investment to fight decline, and the newer resources such as pre-salt and unconventionals are more complex and expensive in terms of cost per barrel. Eighty percent of the global upstream research and development (R&D) spend is devoted to maintaining existing production—arresting decline.
One additional statistic that powerfully summarizes the situation is that over the past 10 years, global upstream spend has increased more than 400% while production has increased a mere 15%. Much of this production increase came from relatively expensive new frontiers such as shale oil and deep water. However, there have been significant cost increases throughout the upstream industry due to such factors as labor costs, material costs, inefficiencies in supply chains and logistics, as well as the complexity of project design, customization, decreases in equipment reliability, and the misuse or nonuse of appropriate technology.
One of the overarching objectives of my term as SPE president was to increase the extent with which our industry collaborates with other industries. We have much in common with and much to learn from industries such as the automotive, aerospace, and biomedical industries—to name just a few. It is clear that adopting technologies and processes from these “sister” industries is one way in which we can improve our own technical and financial performance.
In this article, I describe several additional areas of focus, primarily within the service provider’s domain, which when taken individually or collectively, can significantly reduce costs and improve efficiency levels and operating company returns.
Innovation
The largest oilfield service company in the world, Schlumberger, began actively transforming its business in 2008—well before the downturn. The first phase of the company’s transformation focused on boosting the performance of its technology R&D organization in several areas, including shortening time to market and speeding up the rate of innovation.
Why start there? Because as the industry has matured, both technical and financial challenges have become enormous. Mistakes in today’s highly complex, often hostile environments can cost billions of dollars.
Many oil and gas projects have become so capital intensive that evolutionary or incremental changes in tools, equipment, software, and systems are no longer sufficient to keep our heads above water. We need revolutionary new solutions—in other words, innovations and breakthroughs in technology design, development, and deployment.
Reducing the number of engineering iterations required to develop new technology, hence, shortening time to market, was one of the main motivations and is being achieved in two ways:
- Through more extensive use of software and computer simulation modeling to perform rapid prototyping
- Through developing comprehensive catalogs of standard technology “building blocks” that can be shared and reused throughout the R&D organization.
Significant acceleration in the rate of technology innovation is being achieved in two ways. First, by giving scientists and engineers greater flexibility and freedom in how they pursue fundamental research. Second, by complementing internal sources of innovation with external sources such as universities, other industries, and targeted acquisitions.
My new role at the newly formed University of Texas System Texas Oil and Gas Institute is capitalizing on this second trend by combining faculty, graduate students, and industry experts to facilitate collaboration between industry and academia to more efficiently provide solutions to industry problems. This type of collaboration is proving increasingly essential to innovation. No single company, university, or government today has all the expertise it requires. We all need to leverage one another’s strengths.
Another way this can be done is by geographically locating service company centers of innovation close to the types of resources they intend to exploit, and close to operators who have deep understanding of those particular challenges. For example, an innovation center for complex carbonates was established in Saudi Arabia. Carbonate specialists from around the world were brought there to join forces with local experts and speed the development of new tools and techniques.
Another means of increasing the rate of innovation is by partnering with established experts outside the industry—take nanotechnology, for example. Numerous potential applications of nanotechnology exist in oil and gas, from drilling fluid modification to robotics and nanosensors for enhanced oil recovery. It makes much more sense, however, to collaborate with a leading nanotechnology think tank such as the Massachusetts Institute of Technology (MIT)—as Schlumberger has done—than to try to recreate that highly specialized knowledge and skill from scratch within our industry.
Reliability
If upstream service companies could improve the reliability and performance of their downhole tools, rig equipment, petrotechnical software, and other critical technologies, oil and gas companies could significantly improve the turnaround time and financial performance of complex projects.
Boosting reliability can, in fact, increase the profitability of both operator and service provider. How? By reducing or eliminating the need for redundancy—extra backup tools and systems in the event of failure—which has such an obvious impact on everyone’s bottom line.
As a methodology, reliability begins with better design up front. Traditionally, reliability improved only through a long, brute-force process of trial and error. The service company would develop and introduce a new tool. An operator would try it in the field, frown, and send it back for round two.
A more optimal design process, on the other hand, would engage both the service provider and operators as early as possible, reducing the total number of iterations and minimizing the tendency to customize tools for specific end users and settings.
Using a modern data-driven approach, the design phase should include the tool’s failure patterns, the operators’ performance objectives, and expected operating environments. To enhance performance out of the box, technical complexity should be minimized, while the quality and sophistication of laboratory testing and field qualification rigs and facilities should be maximized. Finally, appropriate maintenance strategies should be developed both to monitor and assess the health of new technologies in real or near-real time during operations.
Achieving optimal reliability requires dedicated, multidisciplinary collaboration throughout both design and training processes. Benefits include greater utilization of every tool, decreased maintenance costs, lower nonproductive time, and higher overall service quality.
Efficiency
Another key transformational strategy for reducing both the service provider’s and operator’s costs is efficiency. This can take several forms, the most important of which is people productivity. Schlumberger’s goal is to increase productivity at least 20% by borrowing best practices from other industries. One example is the company’s recent transition from a highly distributed service model to a hub-and-spoke model that has been proven for many years by experts in logistics and distribution, such as FedEx and UPS.
In this model, the vast majority of trained specialists work out of one or a handful of centralized hubs, rather than dozens or hundreds of locations. Not only does this streamline the distribution of goods and materials, but also it requires far fewer experts to serve a particular geographic market.
Consider proppant fracturing services. In the past, if there were, say, 25 districts throughout the lower 48 US states, each would be staffed with its own proppant expert and stock its own inventory. However, demand varied from district to district. Some locations were slow, experts were underutilized, and excess inventory sat untouched. Others were busy, experts were overworked, and supplies ran short. Both scenarios proved unnecessarily costly.
Shifting to the hub-and-spoke model over the past 2 years effectively consolidated both inventory and intellectual capital. Today, a much smaller number of multiskilled specialists can efficiently handle proppant fracture operations across the US from one of two major hubs. This has dramatically improved people productivity while lowering inventory costs—savings now being passed along to operators nationwide.
Integration
Given the increasing scale, speed, and complexity of oil and gas projects, one way to reduce the ultimate cost per barrel of oil equivalent is to increase the integration of various facets of the project.
Historically, operators tender most oilfield products and services separately. Individual suppliers and service lines within the large service companies submit separate pricing for each of their “discrete” services. As a result, any project requiring the cobbling together of multiple services quickly becomes unwieldy, inefficient, and costly.
To control costs and minimize downtime, operators may solicit tenders for “bundled” services, lumping several discrete offerings from a single supplier for a lower total price tag. However, this approach often fails to boost efficiency, especially when all the product lines and, in many cases, individual service providers continue to function independently.
The solution lies in transforming isolated products and services into truly integrated operations. An “integrated” operation is one in which the interactions among the parts are fundamentally different than they have been in discrete or bundled service operations. All the products, services, and personnel are streamlined and coordinated—across traditional domain boundaries—as a cohesive system with a single objective.
As an industry, not only do we need to integrate services in the field, we also need to integrate technologies and workflows back in the office.
In the Eagle Ford Shale, for example, the integration of geological, geophysical, petrophysical, and geomechanical models enabled an operator to space fracture stages geologically—that is, in zones of similar quality—rather than geometrically, as in the past. In the first eight laterals completed this way, perforation cluster efficiency jumped from less than 64% to an average of 82%.
Integrated operations have, in fact, been around for years. But the total percentage of truly integrated operations in the industry remains relatively low. Overcoming the inertia of old, familiar ways can be tricky. It takes a conscious decision and strategic vision to begin integrating technologies, workflows, services, disciplines, and organizations that have long been segregated or merely bundled.
Bottom Line
To improve operator margins sufficiently to survive, indeed, to thrive in this severe downturn, we must rethink the fundamental ways in which we do business. In this article, I have described four areas that have the potential to significantly improve operator margins when exercised by the service provider. The bottom line is that we can no longer afford business as usual and these four areas should be a part of an entire service industry transformation, perhaps long overdue.
Jeff Spath, SPE, is chief executive officer of the newly formed Texas Oil and Gas Institute, based in Houston. Before assuming this position, Spath was part of the Schlumberger executive management team with past positions that included president of the Reservoir Management Group and president of Data and Consulting Services. He joined Schlumberger as a well testing field engineer in 1984 and held various global positions of increasing responsibility in reservoir engineering, research, and executive management.
Spath serves on the Deans Advisory Council at the College of Engineering at Texas A&M University and the University of Utah and is on the Petroleum Engineering Industry Advisory Board at Colorado School of Mines. Active in SPE, he has served as technical director for Management and Information on the SPE Board of Directors, as an SPE Distinguished Lecturer on production enhancement, and was the 2014 SPE President. Spath has published 26 technical papers and holds 14 patents on the subject of oil and gas production. He holds BSc and MSc degrees in petroleum engineering from Texas A&M University and a PhD in reservoir engineering from Mining University of Leoben, Austria.
