Musings: The Impact Of Rig Efficiency On Drilling And Production
This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.
The American shale revolution has changed the nature of the domestic oil and gas business in many ways. One of those changes is the embrace of pad drilling as the method for achieving more efficient drilling while minimizing the environmental impact from petroleum activity. This damage is a contributing factor to the public’s growing objection to shale development in various communities around the nation, and, in particular, in several promising shale basins. The shift to more pad drilling has changed how players seek to adjust. Producers, drillers and rig equipment companies have learned that hardware changes can improve drilling efficiency, and in turn, the exploration and development economics of shale plays.
There was a time when the most prized capability of drilling rigs, besides how deep a well they could drill, was their speed in moving between drilling locations. Rigs that could be disassembled and reassembled quickly and were packaged in unit sizes that easily fit on and maximized the carrying capacity of trucks were able to achieve higher utilization that contributed to better profit margins for their owners. The capability for moving has lost its value for customers as they have embraced pad drilling. According to one oil company, speaking at a recent Society of Petroleum Engineers drilling automation conference, by utilizing pads for drilling, rig movement now represents only 4% of total rig time versus 25-30% of rig time in the prior drilling environment. Given the change in the value of moving time, improvements in drilling rigs that reduce the drilling time and/or increase the drilling capacity of a rig is much more desirable than the time lost be the rig being less mobile or less compact for moving.
At the drilling automation conference there were some interesting discussions of what producers want from modern drilling rigs and how equipment and operational changes made in recent vintage rigs have influenced their efficiency, and thus the cost of drilling shale wells. One drilling contractor stated that 80% of wells in major shale basins are now being drilled from pads. Embracing pad drilling has as an objective, the pulling of lower-quartile performing rigs up closer to those rigs in the top quartile of performance. An official of a shale producer commented that one aspect of drilling efficiency, besides reducing the time required to drill wells, was to increase their standardization such that every well becomes the best well the company ever drilled in the basin. This representative began his presentation by saying that in the past, if you asked a producer about the best well he had drilled in a field, he would give you a low number of days. But the reality is that had you asked him to give you the history of the days needed to drill all the wells in that field, you would find that the days-per-well number would jump all around with only a few wells being the best or close to the best well drilled. He referred to this phenomenon as selective memory failure because producers always focus on their best well and not their average well or the variability of drilling performance. What producers are really trying to accomplish in their focus on rig efficiency is to eliminate the drilling-time variability. In other words, producers want all wells to be their best wells drilled.
Another goal of the increased focus on rig efficiency is to improve safety at the rig site. A step forward would be to get men off the rig floor and away from the heavy equipment involved in drilling, which means figuring out how to change the “heavy” equipment of a drilling rig – the pipe hoisting equipment and the machinery to handle fluids. Equipment manufacturers and drilling contractors are hard at work attempting to eliminate these problems, but automated drilling systems still must be prepared for manual intervention.
There was a time when the most prized capability of drilling rigs, besides how deep a well they could drill, was their speed in moving between drilling locations.
Improving rig efficiency will also mean that drilling costs can be lowered with or without increased rig automation through the application of technology that can lead to improved exploration expertise. A producer commented that the greatest value of new technology is that which can be used company-wide. The least useful are technologies that are proprietary to the service company or contract driller. As an indication of the improvements that are coming from improved rig efficiency, a representative from Anadarko Petroleum (APC-NYSE) discussed his company’s exploration and development efforts in the shale formations of the southern region of the United States where the company operated 30 rigs and drilled 600 wells in 2013. Specifically in the Eagle Ford, Anadarko has 10 rigs and drilled 200 wells in 2011, but it is on a pace to drill 400 wells this year. In 2011, the average well required 12 days to drill but today that average well only needs eight days. In 2011, the record well (based on the time from spud to rig release) had been 8.5 days, which is now down to 4.5 days. It is this improvement in drilling rig efficiency that “is why the rig count no longer matters,” he said.
During the open discussion period of the conference, a question was posed to the panel of producers that brought an interesting response relative to rig efficiency. The question was: “Twice the time, or a third of the cost?” The point the questioner was raising was what was more important to the producer – the time required to drill a well or the cost to drill it? In order to cut the cost of drilling by one-third, it is necessary to drill twice as fast. But as another questioner pointed out, drilling faster doesn’t mean it is the most efficient process. Besides, drilling faster may ignore the issue of production. Yes, the production would start earlier if the well is drilled faster, but the ultimate recovery (total well production) and the well’s production profile could be damaged by drilling too fast. The point that several of the producers on the panel made was that there are many considerations in drilling wells that do not necessarily translate into the need for ever-increasing speed. The direction of the discussion mirrored those we heard years ago of the different objectives and financial incentives within oil companies for the people responsible for drilling wells and those in charge of completing and producing them. The staffs in the drilling departments of oil and gas producers historically were incentivized to drill wells at the lowest cost possible. That meant hiring the lowest cost contract driller and using the least costly drilling supplies. When the drillers were successful, the staffs of their company’s production departments often complained about the lousy condition of the wellbores and how the process of drilling the well damaged the formation making it more expensive to complete the well and often limited the volume of hydrocarbons that would be recovered from the well.
Producers have worked to improve the teamwork of drilling, completing and producing wells in order to maximize output for the least costly well. Some companies seem to do a better job in this regard than others. It seemed that the thrust of the discussion about this struggle for improved rig efficiency did not necessarily mean greater rig automation. In our search to better understand the rig efficiency issue, we decided to examine some historical statistics about drilling in the United States.
Source: EIA, Baker Hughes, PPHB
The first chart (Exhibit 6) examines the number of wells drilled in the United States and the annual rig count since 1975 through 2013. While the popular view is that the rig count no longer matters, the history of drilling, even last year, shows a close association between the rig count and the number of wells drilled.
A more interesting chart (Exhibit 7) is one showing the average number of wells drilled per rig during 1975-2013. What the chart shows is that in recent years, as the industry has almost totally focused on drilling shale wells, the number of wells drilled per rig has declined to levels below those of the 1970s. Part of the explanation is that the nature of the wells being drilled has changed. Recent wells tend to be deeper and have longer lateral sections.
Source: EIA, Baker Hughes, PPHB
That conclusion is borne out by Exhibit 8 that shows not only the number of wells drilled but also the average well depth and the number of days needed to drill the average well. The days to drill a well is potentially overstated because we have assumed that each rig in the Baker Hughes weekly rig count worked for seven days. Because there is no data base of when rigs spud wells and when they are released, as exists in Canada, our assumption may be overstating the number of days. Our defense is that we have used this methodology consistently for all years in the survey period, so all years would be overstated, which is likely to average out over the time period. The chart shows that there has been a sharp increase in the number of days required to drill the average well at the same time the average well depth has increased, something that would appear to be a logical conclusion.
EIA, Baker Hughes, PPHB
When one plots just drilling days and well depth, the closeness of the relationship becomes clear, as shown in Exhibit 9 below.
Source: EIA, Baker Hughes, PPHB
Two other charts validate this relationship. The charts below show the relationship between the rig count and the days to drill wells (Exhibit 10) along with wells drilled and the number of days to drill each well (Exhibit 11).
Source: Baker Hughes, PPHB
Source: EIA, Baker Hughes, PPHB
When we completed our review of the drilling data, we believe that part of the push for increased rig efficiency is producers’ understanding that unless they can improve the performance of their drilling operations, their ability to maximize shale profitability will be challenged, meaning that without drilling improvement, producers will need significantly higher commodity prices to establish profitability. The fastest way to boost oil and gas prices would be for producers to reduce shale output or to stop drilling. Unfortunately, taking either of those steps would hurt production and reserve growth of individual companies that would be detrimental to their share price and/or the financial support they are receiving from Wall Street and private equity investors.
At the drilling rig automation conference, the representative of the producer who commented that “the rig count no longer matters,” also stated emphatically that his company would be living within its budget in the future. This is the Age of Austerity for the oil and gas industry and it has emerged from the clash of rising finding and development costs, higher production costs, and the need for producers to generate a current return for their shareholders. We are probably at a critical juncture for the future of the domestic oil and gas business that may not be fully appreciated by everyone.
WHAT DO YOU THINK?
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Managing Director, PPHB LP