Executive viewpoint

In August 2019, a well-regarded oil and gas publication printed an article on break-even oil prices for a number of U.S. basins. Break-even prices shown in the article ranged from the $20s/bbl to the mid-$70s/bbl, with an average for each basin surprisingly consistent at around the mid-$50s. Other published work from late 2019 shows break-even for the rest of the world. Examples include important producers, such as onshore Middle East, averaging low $40s but as high as upper $50s, and onshore Russia averaging high $50s to low $70s.

Set against this, World Oil (Feb. 4, 2020) quotes Citigroup as reducing its forecast for Brent crude price in the first quarter to $54/bbl from $69, and even saying that the price could fall as low as $47, later in the year. Compared with the figures above for break-even prices, $47 would have a potentially severe impact on almost every active basin in the world.

The reason for this marked price drop? For starters, wildly varying predictions of a demand drop, anywhere from 300,000 bopd to 3.0 MMbopd in China, the world’s largest oil importer. And, of course, the reason for reduced demand, and the uncertainty about its extent, is the economic disruption caused by “2019 nCOV,” the “coronavirus” that has gripped the world’s attention since mid-January. The onset of an epidemic is an unusual event, but the point here is that with a small margin between day-to-day oil prices and break-even, our industry will continue to be vulnerable to similar, unusual and unanticipated events.

Working in the E&P industry, we would like to think that there is more that we can do to further reduce break-even costs than there is to impact global commodity prices. But how? Efficiencies on drilling and well construction have been dramatic and impressive in the last few years. Despite that, supply chain margins remain wafer-thin. It would appear that reducing cost, and improving efficiency, are at the point of diminishing returns.

Using technology to increase asset values. Fortunately, there is another way, and that is to use technology to increase the value of assets rather than (only) reducing their cost. In an SPE paper in 2002, Chen, Gaynor, Comeaux and Glass described a high-quality wellbore as one that “is generally considered to have 1) a gauge hole; 2) a smooth wellbore wall; and 3) a wellbore with minimum tortuosity.” There are significant benefits to drilling a high-quality wellbore, as described almost 20 years ago by these authors.

I’m going to suggest that if we focus on drilling high-quality wellbores, we can simultaneously reduce the cost and increase the value of the wells we drill. Increasing the value is achieved by boosting either a well’s initial production or ultimate recovery, or both. If we get more barrels for the same cost, the cost-per-barrel reduces. If we get them sooner, cash flow is improved, and the cost of capital is reduced.

That high-quality wellbore can impact cost and value in numerous ways. Generally, a smooth well is easier to drill, with fewer stuck pipe incidents and a typically higher rate-of-penetration, as shown by numerous recent studies. A smoother wellbore also can reduce problems running casing or completions, and it will reduce the risk of premature damage to production equipment, including ESPs and sucker rods. All of these factors can conspire to reduce well cost, if drilled smoothly.

Perhaps less intuitively, but (I would argue) equally importantly, a smooth wellbore will increase production. One example of how to achieve this is to think about vertical undulations, that is “up and down” undulations, in an unconventional reservoir. Once production starts to flow, the lowest parts of the undulating well will form sumps, in which sand can collect and hold back production. This can exert a significant effect, if liquids are being produced, but it also can impact gas production. So, a smooth wellbore not only reduces the cost of drilling and completing a well, it also reduces ongoing production costs and potentially enhances output.

That’s all good, but the benefits don’t stop there. A smoothly, accurately drilled directional well also will increase exposure to the reservoir’s sweet spot, enhancing production. Accurate geosteering, being the marriage of directional drilling and real-time formation evaluation, can ensure that the well accurately, but smoothly, follows the reservoir’s undulations and allows extraction of the maximum amounts of hydrocarbons. The last few years have seen the emergence of directional drilling solutions that automate control of toolface, or direction, and the parallel emergence of directional drilling advisory systems that indicate the best way to get to Target Depth. It’s not hard to see a future, where increasingly autonomous directional drilling systems, most likely based on RSS’s, will combine the technologies we already have and begin to geo-steer autonomously.

And, finally, new logging-while-drilling (LWD) tools allow us to look at unconventional reservoirs before we hydraulically fracture them, identifying hydrocarbon locations and shale types, and showing natural stresses and fractures in detail, allowing us to maximize the well’s value by careful design of frac stages.

All of this readily available technology is there to allow us to not only reduce the well’s cost, but also to increase its value. In difficult times like these, we should be looking at how we can best maximize our asset values, thereby reducing our break-even costs and protecting ourselves as far as possible against the next price shock.