How American shale producers will drive down costs, drive up efficiency

Continuous improvement of American shale technology, operations also important to lowering costs – Charlotte Batson

One of the most interesting debates in the American oil patch is the role innovation and new technology will play in reducing costs for shale producers. Is this how America will compete with Saudi Arabia’s famously low cost structure?

A Production Lift Technologies technician remotely monitoring wells.

There are two basic schools of thought on the issue:

One, the primary factors determining cost are good upfront geology and engineering, prudent capital management, and reducing service company costs. Ed Hirs, University of Houston energy economist, and geophysical consultant Art Berman champion this view.

“What’s going to happen in this bust is what always happens. The really well managed and efficient producers are going to get better and bigger, and the inefficient ones are going to fall by the wayside,” Hirs said in an interview.

Two, Big Data/analytics are about to transform American shale production and drive down production costs to Saudi levels. Mark Mills of the Manhattan Institute set out this argument last year in his study Shale 2.0: Technology and the Coming Big-Data Revolution in America’s Shale Oil Fields.

Mark P. Mills is a senior fellow at the Manhattan Institute, CEO of the Digital Power Group.

“When the money goes away and you’re done firing people, that’s when it’s easier to get someone’s attention for a new technology,” Mills told me in an interview.

But there is a third school that deserves attention because it may turn out to wield the most influence of all on shale costs: The cumulative effects of adopting many small, more efficient innovations. Petroleum engineer Charlotte Batson, who helps energy companies understand and adapt to new technologies, likens this approach to the management technique of continuous improvement. Like Mills, she thinks shale production is different than traditional oil and gas extraction, more like a factory, with high levels of “repeatability,” which lends itself to ever increasing efficiency by adopting many small improvements.

“This idea of continually making your operations better, and innovating in the field, is something the oil industry has always done, how its always operated, back even to Rockfeller,” she told me in an interview.

Charlotte Batson, petroleum engineer, owner of Batson and Co. Photo: Charlotte Batson.

I thought of Batson this morning when a press release from Greggory M. Bigger of QS Energy caught my eye. Unlike most oil patch CEOs pimping their newest widget in a press release, Bigger cleverly couched his product in the context of America’s competition with Saudi Arabia in global oil markets.

OPEC-bashing always makes for good news copy in the hyper-competitive oil patch, right?

But the attention grabber was this line: “In a down cycle such as this, obviously the key is to trim costs, remain solvent and survive until prices inevitably return to normalized levels.”

The release then goes on to describe QS Energy’s product, called AOT™, an “industrial hardware system designed to improve the performance of crude oil pipelines through viscosity reduction.” Basically, making crude oil more slippery reduces friction.  QS Energy claims to increase pipeline efficiency by one to four per cent, and to improve pumping station efficiency by two to 10 per cent.

Bigger claims AOT™ can save a midstream operator $1.5 million or more depending on volumes. Who wouldn’t be interested in those savings in today’s low-price environment?

Another example of continuous improvement comes from the Permian Basin, where Midland, TX-based Production Lift Technologies [Full disclosure: This company advertises with American Energy News] offers remote well monitoring for oil and gas producers. No more pumper driving around leases checking wells. Instead, the data is available 24/7 to the producer and a Production Lift technician, who can not only check for problems but also optimize production.

Less cost, fewer problems, more production. Another example of innovation leading to higher efficiency.

The more I meet Permian Basin oilfield service companies in both my capacity as an energy journalist and as publisher, the more impressed I am by the commitment to “continuous improvement” in today’s oil patch. The same trends I see in the Permian I also see in Calgary and the Bakken and the Barnett and elsewhere.

As we debate American shale’s drive to compete in global markets, it’s useful to get our arms around how companies will do that.

Good management (geology, engineering, capital), big innovations (Shale 2.0), and continuous improvement (many small innovations) provide a framework within which to understand American oilfield innovation.

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