Cost Reduction or Productivity, What Strategy Should Operators Choose?
We’ve focussed on cost reduction because we don’t understand what drives revenue (and profit).
The best design for any well is the one that is the most profitable allocation of capital.
Investing in new technologies can be an immensely profitable allocation of capital.
In the twelve months following the 2014 price crash, the industry responded by slashing budgets, squeezing oil field servicing companies and seeking cost reductions and productivity improvements through horizontal drilling and hydraulic fracturing design optimizations. This resulted in a 70% productivity improvement.
In the 12 months before the 2019 pandemic, DOE data showed that the per well productivity in major U.S shale plays only grew by about 10%. A far cry from the 70% productivity improvement that was witnessed following the 2014 price crash. The technologies of horizontal drilling and hydraulic fracturing are now mature and while there are still opportunities to generate productivity improvements, the industry has become facetted on cost reduction.
The reason was made clear to me from an excellent presentation given by David Anderson and as he so eloquently put it and I’m paraphrasing here “There is a disparity between how well the industry understands costs and revenue. The industry has a pretty good understanding of cost but has a hard time understanding revenue, i.e. if we spend money on x, is it going to lead to well performance y.” Understanding this is critical to optimize capital allocation and ultimately profit. I’m going to take this a step further and say that the same disparity exists within the market, where investors also understand cost but don’t know how decisions at the asset level relate to well performance. The only common language between the operators and the market is cost and so it becomes a focal point. Tying in the fact that fiscal responsibility has finally become a priority, it makes sense, it’s the metric that investors use to understand and measure performance in the industry.
But what should we be focussing our efforts on? The answer again was made clear by Dustin Anderson, we need to focus on whatever is the most profitable allocation of capital.
Fortunately, new technologies are emerging that can be an extremely profitable allocation of capital by lowering production decline rates and increasing EUR in unconventional shale plays. DEEPROP® is a breakthrough in proppant technology that allows operators to place proppant in smaller fractures, further from the wellbore and it has been shown to lower decline rates and increase EUR. DEEPROP® has been generating a huge return on investment in multi-year trials in several major U.S shale plays on the order of between 20-40% uplift in total production.
How much more valuable is a productivity improvement versus cost reduction? We’ll explore a modest 25% uplift in total production in the next blog post and see if its worth spending an extra $100,000 - $300,000 per well versus trying to cut costs by an equivalent amount.
We’ll see you in the next blog post!