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Locking in the gains

Bud Strandquest

Bud Strandquest | Senior Vice President, Canada, Calgary | 07 July 2017

Faced with the reality of sustained market price erosion in 2015, Operators responded by launching relentless cost cutting initiatives.

As a result, direct field operating costs have been significantly reduced across US unconventional plays. In the Permian, cost cutting initiatives have reduced lifting costs by 10% to 20%. A significant portion of that cost reduction came from cutting oilfield service company costs. The majority of operators successfully required rate reductions of between 10% and 30% from their service providers.

In addition to cost reduction, producers continued to exploit new technology leading to innovative improvements in production and surveillance techniques. For example, operators have begun seeking ways to lower water costs via innovative distribution and recycling techniques. They are also beginning to explore the possibilities of remote operation and drone surveillance.

As a result of those combined cost reductions and improvements in production, many locations in the Permian have achieved breakeven at USD $30, and even less, per barrel!

As market recovery is becoming a reality, the challenge is to sustain those unit cost gains in the face of improving market conditions. With improved conditions comes the threat of significant cost rate increases, particularly from field contract services. Given that the majority of operators cut their costs through reductions in rates received from the oil field service companies, when prices recover the oilfield service companies will simply increase their prices. Many operators will have no protection from these rising costs since they did not take additional steps to reduce their ongoing, inherent cost to operate. These cost increases will substantially erode lifting unit cost gains, therefore sustaining and continuing to improve production rates is imperative to preserving those gains.

A winning strategy to counter rate increases includes not only an updated contracting and procurement plan but a relentless assessment of production and surveillance capabilities. Have the Permian producers exploited the full production capabilities of their installed technology (e.g., SCADA)?  Are there other latent production improvement opportunities that still exist?

Identifying the gaps to achieving the technical production limits, or even the best demonstrated rates, can be a springboard from which to launch focused efforts that can rapidly lead to unit cost reduction. Understanding these gaps will invariably result in further utilization of existing equipment, available technology, and additional human capital capabilities.

As a recovering market offers opportunities for exploiting exciting new discoveries and acquisitions, along with accelerating the development of existing assets in the Permian, there will be many distractions that could inhibit continuous improvement of production operations. In particular, the challenge to the Permian operators will be the need to ground their further development on a foundation of operational excellence.