American oil producers’ love-hate relationship with new technology

American oil engineers are a hard sell for new technology, but innovation always seems to find a way into oil patch

Will American oil companies be able to innovate their way to lower production costs? Maybe, according to the experts I interviewed, but their engineering corporate culture both helps and hinders the process.

Oil and gas extraction is a very technology-intensive business. The industry has always been about equipment that can get hydrocarbons out of the ground quicker, cheaper, more efficiently, and with less risk. Service companies and manufacturers are continually investing and refining better tools.

Here’s one small example that illustrates how dynamic the industry is: As an energy news publisher, I’m flooded with press releases about new or improved oil and gas equipment. Using product development as a metric suggests that the oil and gas industry is very innovative.

But University of Houston energy economist Ed Hirs, who also serves as the managing director of Hillhouse Resources, told me in an interview that there’s a real challenge introducing new technologies to the oil patch.

“There is such a herd mentality. No engineer wants to go out and try a new technique on his well,” said Hirs. “Think back to the maxim of John Maynard Keynes who said it’s better to fail conventionally than to succeed unconventionally.”

In other words, oil company engineers are risk-averse. The high cost of modern drilling and producing discourages mistakes. If an unproven technology fails, the cost to the company – and the resulting damage to the engineer’s reputation and continued employment – could be significant.

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Hirs points to 3D seismic surveying as an example of industry’s approach to new technology. The technology was introduced in the 1980s and really caught in the 1990s because it significantly reduced the risk of drilling a dry hole.

“The success rate on 10,000 foot wells has been 76 per cent, that’s over hundreds of wells, which is an incredible improvement over 2D, which was maybe one in 10 or one in 20. It was such an incredible leap forward.”

But geological consultant Art Berman draws a different conclusion from the 3D seismic experience. He argues that 3D seismic, which he calls the most significant new technology is in his 37-year career, was more expensive and in the end did nothing to lower the unit costs of producing a barrel of oil.

“We ended up spending more money, now everybody has to buy this expensive 3D seismic and it took longer to interpret and process,” he said in an interview. “But tell me what it costs to produce a barrel of oil or a thousand feet of natural gas. If you tell me it doesn’t cost any less per unit, it costs more, but we can just produce more of it, then there’s your answer.”

The lesson for engineers is that zoomy new technology that works better than the steam-powered monolith they currently use doesn’t always equal lower costs.

One more reason to be cautious when the service company salesman drops by with the latest newfangled widget.

Petroleum engineer Chalotte Batson is the antidote to Hirs and Berman. Her firm, Batson & Co., helps oil and gas companies adopt new technologies that reduce costs, especially in today’s low-price environment.

She acknowledges oil companies are often reluctant to be the first to try a new technology “because the cost of catastrophe is too high. What they do is push the risk onto their suppliers. [They say] prove to me that your service, your new technology, your new idea – prove to me that it works, then I’ll give you a trial.”

But she also points to the culture of continuous improvement that has characterized the oil and gas industry from its earliest years.

“This idea of continually making your operations better, and innovating in the field, is something the oil industry has done, how it’s always operated, back to the days of Rockefeller,” she said in an interview.

Hydraulic fracturing is a great example of a recent innovation that has changed the face of the American industry, according to Batson: “Hydraulic fracturing was first commercialized in 1949. Millions of directional wells have been drilled, of which horizontal wells are just an adaptation. The piece that really makes the difference is using them together. A new kind of frack job in a horizontal well in a non-permeable formation. It’s really quite miraculous to think we’re getting mass quantities of hydrocarbons from those reservoirs.”

To help make sense of the conflicting expert views on oil and gas innovation, I turned to Alan Means, a veteran petroleum engineer based in Midland, Texas. Means has seen oil booms come and go, as well as new technologies that worked and many that did not.

He takes a pragmatic approach to the impact of new technology: “As far as this downturn goes, the main driver is the lack of activity [caused by low prices], but there’s still quite a few rigs running in West Texas and if they hadn’t been innovative, there’d probably be less.”

While Means doesn’t foresee a game changing technology on the horizon, he agrees that innovation will continue to play a role in driving down American oil production costs.

“I’d say it’s an 80-20 situation. It’s 80 per cent like every dang downturn we’ve seen and 20 per cent that are able to continue because of innovation,” he said. “We never do anything 100 per cent in the American oil patch.”

Means sums it up nicely. American oil producers will continue with what has worked in the past, but are innovative enough to adopt new ideas, technologies, and processes that promise to make their operations more efficient, juggling caution and risk on a case by case basis while struggling to compete at $30 oil.

As long as the flow of technology press releases continues unabated, it appears American oil and gas producers will continue to innovate, even if not every innovation is a home run. Bunts and singles can win games, too.