Shale 2.0 – Permian Basin takes aim at Saudi production costs

Permian Basin already has shale fields that are profitable under $20/b, how much lower can costs go with Big Data/analytics?

It’s an oil price war and American shale producers are bringing out the big guns, according to supporters of the Shale 2.0 model. And that is good news for the Permian Basin, the most prolific shale play in the United States.

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

Mark Mills of the Manhattan Institute wrote a study last year entitled “Shale 2.0 – Technology and the Coming Big-Data Revolution in America’s Shale Oil Fields.” He believes that shale oil production is more like the Silicon Valley than the traditional extraction business model, with high growth rates and heavily dependent on new technologies.

But the revolution Mills writes about is based on data. Unbelievable amounts of data generated that can be mined and analyzed by sophisticated software to identify efficiencies that drive down costs beyond what anyone in the industry previously imagined.

How low?

“Shale 2.0 promises to ultimately yield break-even costs of $5–$20 per barrel—in the same range as Saudi Arabia’s vaunted low-cost fields,” he says.

As unlikely as those costs appear, Bloomberg says some Texas fields are already profitable at $25/b or lower and another half dozen are profitable under $30. This may explain why so many energy companies are crowding into the Permian and Eagle Ford basins.

shaleMills said an interview with American Energy News that the evidence for the shift to Shale 2.0 is mostly anecdotal at this point – the shifts aren’t big enough yet to show up in Energy Information Administration studies. But he says that during his research for his study he talked to a number of leading US shale producers and the change in corporate culture is perceptible in many of them.

“I think the culture will change under pressure [from low prices] to look for new solutions,” he said. “The shale industry is populated by hundreds of companies that are more dynamic and entrepreneurial. There is some cultural overlap with the bigger producers, but there’s a reason Exxon Mobil bought XTO Energy.”

But the biggest driver of big data and analytics may be the service companies, according to Mills, whose study notes that Halliburton reports analytic tools achieving a 40 percent reduction in the cost of delivering a barrel of oil, while Baker Hughes claims analytics have helped it double output in older wells.

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“If you talk to Halliburton or Weatherford about what they are doing with analytics, they are far more aggressive than they were a few years ago,” he said.

Atanu Basu, the CEO of Austin, Texas-based Ayata Prescriptive Analytics.

I also interviewed Atanu Basu, the CEO of Austin, Texas-based Ayata Prescriptive Analytics, which has spent the last decade honing its Big Data/analytics services with Fortune 500 companies and the past two years helping American shale producers reduce their costs.

Basu says the amount of data generated by oil and gas is rising rapidly. And not just the usual suspects, like downhole pressure and temperature. Data can now mean video, photographs, audio files – all of which become valuable to sophisticated software able to tease insights that help companies produce oil more efficiently.

Take fracking as an example. “There are hundreds of variables – sand volume, water pressure, and so on – and we prescribe settings for those hundreds of variables,” Basu said, adding that his company will create a “custom recipe” for each well – with significant results.

“We get on average 13 per cent improvement over the first 12 months of production,” he said.

Not everyone is as happy to talk to a journalist as Atanu Basu. Mills says most shale producers and service companies are using proprietary methods that they keep close to their chest.

But as the use of Big Data and analytics grows, the practice will come out of the shadows and become standard operating procedure in the industry.

When that happens, the Saudis may find themselves in a battle they can’t win.

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