Posted on October 29th, 2015
by stephanie cummings
Reuters | Oct. 21, 2015 – Stagnating rig productivity shows U.S. shale oil producers are running out of tricks to pump more with less in the face of crashing prices and points to a slide in output that should help rebalance global markets.
Over the 16 months of the crude price rout, production from new wells drilled by each rig has risen about 30 percent as companies refined their techniques, idled slower rigs and shifted crews and high-speed rigs to “sweet spots” with the most oil.
Such “high-grading” helped shale oil firms push U.S. output to the loftiest levels in decades even as oil tumbled by half to less than $50 a barrel and firms slashed rig fleets by 60 percent.
But recent government and private data show output per rig is now flatlining as the industry reaches the limits of what existing tools, technology and strategies can accomplish.
“We believe that the majority of the uplift from high-grading is beginning to wane,” said Ted Harper, fund manager and senior research analyst at Frost Investment Advisors in Houston. “As a result, we expect North American production volumes to post accelerating declines through year-end.”
Drillinginfo, a consultancy with proprietary data, told Reuters well productivity has fallen or stabilized in the top three U.S. shale fields – the Permian Basin and Eagle Ford of Texas and the Bakken of North Dakota – since July or August.
The U.S. Energy Information Administration, whose benchmark drilling productivity index is based in part on Drillinginfo data, forecasts next month’s new oil production per rig in U.S. shale fields to stay at October levels, which it estimates at 465 barrels per day (bpd).
The big challenge of shale oil work is that well output drops off quickly – often more than 70 percent in the first year alone. So producers need to keep squeezing more oil out of new wells drilled by the currently deployed rig fleet just to offset steep declines in what existing wells produce.
OLD WELL DRAG
If that is no longer possible and firms remain reluctant to add rigs because of low crude prices and an uncertain outlook, overall production is set to sink. (Graphic)
Chip Davis, managing partner at energy venture capital firm Houston Ventures, says the downward pull of declining output from older wells is getting stronger.
In the Eagle Ford, production from so-called legacy wells fell by 145,485 bpd last month, a drop that was 23 times larger than the 6,293 bpd lost in September of 2010, before the fracking boom brought thousands more wells online.
“The boulder that is decline is much bigger in size and rolling much faster than before,” Davis said. “We’ve got very few rigs to buttress the rate of decline.”
That growing drag suggests the fall in U.S. output could be sharper than a 10 percent drop the EIA sees between a peak of 9.6 million bpd in April and next August, when it expects production to bottom at 8.66 million bpd before starting to recover.
Producers’ coping strategies with the worst cash crunch in years could be also hurting productivity of new wells.
To save money, many have started drilling shorter and cheaper vertical wells. They have also cut back in some cases on the size of multi-million dollar hydraulic fracturing jobs for long horizontal wells. Both factors can hurt the average amount of oil being added by new wells.
Analysts say it is hard to predict how much U.S. output will fall and whether it will undershoot official forecasts because lower production could lift prices and that in turn might prompt producers to redeploy idle rigs to pump more.
But for now, most companies are budgeting less next year for new drilling work and the U.S. rig count has tumbled to 595, according to Baker Hughes.
Analysts at Bernstein Research have said that productivity gains so far in this downturn have come from improved efficiency rather than fundamental leaps in technology.
Yet such advances, which are hard to predict, would be necessary to boost productivity again because analysts say shale firms seem to have fully exploited techniques such as drilling multiple wells from one location, drilling longer horizontally, and more intensive fracturing along a well bore.
Initial production rates for new wells in major oil basins also appear to be slowing, Bernstein analysts said, citing their analysis of peak rates dating back to 2009.
“Shale efficiencies will be unable to overcome rig count collapse, leading to a roll in production which is bullish for oil price,” they said.
(Reporting By Anna Driver and Terry Wade; Editing by Tomasz Janowski)
Posted on October 7th, 2015
by stephanie cummings
As of August 2015, increases in daily oil production resulting from recent rig activity was 4.8x greater than it was in January 2011. In other words, it takes a lot fewer rigs today to create initial increases in production.
On the flip side, decreases in daily production deriving from wells not recently drilled as of August 2015 is 18.5x greater than it was in January 2011.
It is interesting to ponder the ratio of these comparisons in terms of a sports metaphor: “I am in 4.8x better shape than I used to be, but I have to work 18.5x harder to stay there.”
The graphic above indicates that the number of rigs required to sustain the prior month’s production (now) is about 3x what it was at the beginning of 2011. While it will take further decreases in daily production to create a meaningful improvement in drilling activity, I would note that the velocity of the decrease (even after required decreases in production) relative to the force required to counter that velocity appears to be greater than it has been before by a remarkable margin.
While everyone is looking for “markets to balance” around supply and demand for oil, I am suggesting that the fundamental calculus equations used to plot “what happens next” have changed.
Posted on September 30th, 2015
by stephanie cummings
The black line in the graphic above reflects the variability in the rates of growth and decline for drilling activity in the United States since 1990. The line indicates that the rate of growth peaks about every four years and the rate of decline does likewise. The dotted red lines reflect the means of those rate peaks for the period contemplated.
In a recent interview, we heard an oilfield service company representative referring to supply chain management as planning for failure. He was referring to the habit of the industry to plan based on the likelihood of many things not happening in a reliable manner. Planning in oilfield service reflects a systemic consideration for unreliability, and management of the magnitude of unreliability is impacted by the amount of time available to build methods for synchronization. The purpose of the black line is to show the amount of time available.
If we think of US Land as a probable/expeditious swing producer, then the light gray line becomes a new possibility. The gray line depicts a lower magnitude of variability from the mean of drilling activity (about 50%) and a more frequent occurrence of peaks in both growth and decline (about twice as often). In other words, the amount of time available to synchronize is diminished.
If my job assignment was to pick the lesser of two evils, I am not sure which direction I would choose: faster with smaller bumps or slower with bigger bumps. I am wondering if “Planning for Failure” is about to become more expensive or less expensive?
Posted on July 27th, 2015
by Chip Davis
A Beaten Path
It is a human tendency to want to minimize risk. Much of private equity investing is built on the notion of changing perceptions of risk and thus increasing the value of equity. Through capital and operating strategies we alter/reduce associated risks in any number of areas. Some private equity firms specialize in managing down certain types of risk of companies in which they invest.
Younger portfolio companies generally are focusing on building initial systems for managing their risks. The lion’s share of this focus is *reactive* to unforeseen risks that materialize after the initial investment. As they evolve, portfolio companies hopefully become competent at building machines for identifying and containing risks (the sooner the better). This becomes a steady state of “being”.
What Many Companies Regularly Don’t Do
If one thinks of a portfolio company as a risk management vessel, I think it reasonable to say that it is exceptional for such a vessel to actively identify new types of risks that it SHOULD take. We go through a lot of effort to build the management machine and use it only to mitigate initially identified risks or “unexpected ones”. Seems to me we are at least slightly underutilizing an institutional competency. It is not unusual for the cost of managing risks to increase and the value of risk adopted long ago to decrease.
Posted on July 6th, 2015
by Chip Davis
In the world of private equity financing, the word “enthusiasm” or “enthusiastic” is almost verbiage of political correctness; everyone in the room is obliged to smile and nod but the listener is regularly left unsatisfied. In fact, emphasis on words like “enthusiastic” or “passionate” are sometimes taken (by folks like us) as warning signs that someone seeking funding (a) is subject to a distorted view of market assessment and problem evaluation, and (b) unhardened by the realities of repeated failure.
Firms such as ours are in the business of looking for and taking on risks. We are not trying to avoid risks but rather manage them once taken on. We view small companies as problem solving machines. Generally the more solvable problems for each company and the higher their complexity, the happier we are. To build a competent problem solving machine requires extremely clear listening and seeing – both internally and externally. When we hear hyperbole we many times interpret this as, “there are too many areas in which the presenter has not done their homework and and they are substituting emotion for analysis. As a result they can not see and listen well nor construct the required problem solving machine”.
I used to work for a guy who once said, “…if someone would just come in here and state that their projections are way overstated and completely unrealistic…I would likely fund them in one minute..”. There is an attractive truth in there.
Posted on June 26th, 2015
Software is an automation machine. When the Industrial Revolution planted itself and took root its benefits were many including the conversion of manual processes to automated ones. On the one hand, this freed up time to move thinking up to a higher level. On the other hand, humans were many times reduced to the status of appendage to a machine. Certain jobs were created and others eliminated. An extensive list of inequalities was created but on the whole the US netted huge gains ultimately leading to a very high standard of living. It was our transformation.
A large part of oilfield service is an apprenticeship. The variability of what is required in a service event in the field is as extensive as the variability of one geography to the next (literally). Understanding of how to engage and manage variability exists as tacit knowledge in the minds of oilfield service artisans of experience.
Good software is a mechanism by which manual process is converted to automation. US oilfield artisan expertise is being converted to code. The US oilfield is transforming and many US software companies are the designers of the oilfield process automation machine. If you consider these machines as made-in-america, then our expertise (that we turn into code is) becoming a highly scalable form of export crop of huge interest all over the world. There will be inequalities and there will be reorganizations but our net effect will bear a likeness to an Industrial Revolution.
Posted on May 26th, 2015
by Chip Davis
LiquidFrameworks gets to the essence of un-complicating operational life in the oilfield.
Posted on May 4th, 2015
by Chip Davis
One of the largest contributors to the failure of corporate strategies is inadequate reliability of cross-functional processes. We each are good within our individual swim lanes but many times trip up when other operating functions require an action from us or we from them. Failure finds many sources including the participants’ lack understanding and lack of motive.
At a mechanical level, process management software is an effective tool for creating understanding. Parties to an effective application understand the what and why of their processes and this increases reliability. A good application can make cross-functional translations between needs and responses thus enabling better execution on corporate strategy. Many times an ERP system can embody elements of the corporate strategy and the planners rely on this.
Now suppose we lay the concept of software driven cross-functional reliability over oil field. This allows parties from different companies to create dialogs around multi-corporation strategic planning. The same success-driving factors that enable a corporation to more dependably craft strategic ambitions can be applied across companies through planning together based on improved reliability.
In our judgment the possibilities of what is described above are attainable through Industry Clouds. It makes sense that companies that can increasingly rely on each other can evolve as partners to a high order of interoperability and value.
See OilPro discussion at OilPro.com