Investors want to see operators generating a profit.
Accelerating recovery and reducing costs do not improve profit as much as incremental production.
DEEPROP® incrementally improves production by a significant margin.
Fiscal responsibility is a core focus area in the oil and gas industry post-2014. Engineering teams no longer have unrestricted access capital, and Investors are no longer interested in growth at any cost; they are looking for a return on investment, profit.
The evolution of drilling and completions’ technologies and procedures, post 2014, drove a 46% boost to the cumulative production per lateral foot drilled: 12.2 to 17.7 barrels per-foot; and a 77% cumulative production increase: 61,044 to 108,209 barrels per-well. The industry also achieved a cost reduction of 64%: $128 to $46 per 1-year barrel. Shale operators were able to post lower breakeven pricing, and until 2018, increase production.
What WTI oil price does your firm need to profitably drill a new well?
Most cost reduction was achieved with advances in drilling technology; drillers developed high-performance rigs with larger drawworks, mud pumps, top drives, generators, and mast capacity; allowing operators to drill longer laterals, faster. Operational efficiency was improved with real-time automation to set performance targets and quantify the time it takes to perform repetitive drilling tasks; allowing operators to reduce non-productive time, and improve drilling efficiency.
Production improvements were achieved by drilling better prospects, increasing the number of stages, the mass of the proppant pumped, the volume of the fluid pumped and the rate at which the fluid is pumped during the completion. Fluid design has changed from expensive guar based, cross-linked fluids, to cheaper slickwater that is less damaging and enhances proppant delivery to the secondary fracture network.
However, several of these changes only served to accelerate recovery, rather than incrementally improve production. Recovery acceleration increases the rate at which the revenue is collected; incremental production, increases the total amount of revenue. Operators need to understand the design changes that cause acceleration, and those that cause incremental production; then evaluate their designs on the associated costs and revenues.
I want to ask the question: how should operators be allocating their capital, should they be focussing on cost reduction, acceleration, or incremental production?
Assume a CAPEX of $4,000,000 for drilling and completing a well and an OPEX of $6.05 per barrel; the numbers are taken from EOG’s corporate presentation. Assume a market price for oil of $45.00 per barrel, West Texas Intermediate, and a 2-year cumulative production of 192,000 barrels. The profit would be $3,600,000, without applying a discounted rate of return.
Now assume there is an opportunity to reduce CAPEX by $200,000. CAPEX would be $3,800,000, the OPEX would remain the same; $6.05 per barrel, and assume the same market price for oil; $45.00 per barrel. The cumulative production is 192,000 barrels, the profit is $3,800,000; This is an incremental profit of $200,000. Reducing the cost improves the profit by the amount saved in expenditures.
Accelerating production only adds profit through the time value of money, it does not generate additional revenue. Assume there is no time value of money and holding all variables constant; accelerating production would not increase the total revenue earned from a well, it only speeds up the rate that the revenue is collected. Rate acceleration is a dubious proposition for improving profitability – the numbers look bigger initially, but it all adds up to the same amount.
Finally, assume there is an opportunity to increase the total production i.e., incremental production, by 16%, and it requires an allocation of $200,000 in capital. The CAPEX would increase to $4,200,000, the OPEX would remain the same; $6.05 per barrel, and assume the same market price for oil; $45.00 per barrel. The new cumulative production would become 222,000 barrels and the profit would be $4,600,000; an incremental profit of $1,000,000 for a capital investment of $200,000. Allocating capital to incrementally increase production is a wise investment if you want to increase profit.
Productivity improvement i.e., incremental production, can add significant revenue compared to cost reduction or recovery acceleration. As the market price for oil improves, the revenue from improving productivity increases. Below is a bar chart race of the three scenarios explored above, to illustrate how fast incremental production improves profit.
Profit Comparisons of Different Development Scenarios
Allocating capital to incrementally improve production is a wise investment. Reducing cost also improves profit but only by the amount that is saved in expenditures. Accelerating production is not effective for improving profit, especially if the methods come at a high cost.
DEEPROP® is a micro-proppant product that has been trialed in 6 major U.S shale plays. The results have been incremental production improvements of between 20-40%. The figure below is a 10-year cumulative oil forecast for a DEEPROP® trial in the Utica. DEEPROP® increased the incremental production per thousand feet of lateral by between 7,000 to 13,000 barrels; an additional revenue of between $315,000 to $585,000 per thousand feet drilled.
10 Year Production Forecast: Deeprop® versus Offset
Get in touch with myself or send an email to info@deepropfrac.com for more information on how DEEPROP® can incrementally improve your production. Come visit us at URTeC 2021 | 26–28 July 2021 at the George R. Brown Convention Center; Houston, Texas to learn more about how we can incrementally improve the production of your wells!
In the next blog I will take a deeper look at costs per barrel and how DEEPROP® can reduce greenhouse gas emissions.