Lloyd's Register discuss the potential of marginal field development in the USA
June 5, 2017
InnovOil speaks with Lloyd's Register’s Steve Gilbert and Clinton Abbate about the potential of marginal field development in the US
For many oil-producing nations, marginal field development has become a new priority. As output falls from regions such as Malaysia and the UKCS, there is new momentum to find technologies and commercial models to make these fields, and so-called “small pools”, a viable economic prospect. Yet similar trends are also emerging in prodigious US onshore plays as E&P companies weigh up their options in the current price environment.
Lloyd’s Register Energy vice president of operations Steve Gilbert and Lloyd’s Register Drilling Services senior analyst Clinton Abbate explained to InnovOil that in the current (and foreseeable) market “all developments could be considered marginal.” Each development opportunity has to be assessed on its own merits and a bespoke development plan created for it. This will be influenced by the potential size of the reserves, nature of hydrocarbons, location, proximity to existing infrastructure and markets and the risk/reward tolerance of the developer.
The current market has required many operators to focus on developing only their most efficient assets. As E&P budgets have declined over the last several years, portfolio managers have then had to exercise additional discretion in CAPEX allocation driving investment toward only the most margin-efficient projects.
But according to a recent Barclays survey of upstream operators, more than 77% of survey respondents said they expected onshore well costs in North America to trend down during the next 12 months – despite more than 51% anticipating pressure pumping pricing to rise over the same period. Lloyd’s suggests that this indicates there is some opportunity to leverage low service costs to develop otherwise uneconomic marginal resources if operators’ balance sheets can tolerate additional risk.
While many operators continue to defer investment into the US offshore assets (with some having exited the market altogether, e.g. ConocoPhillips), investment in onshore resources within the US market is now beginning to show growth. Commodity prices remain low but have stabilised to a point where assets with low lifting costs can now be brought to market at a profit with some reliance on pricing support.
Progress through technology Economically, reductions in capex, opex and through-life costs can independently or collectively drive development of marginal resources. By lowering the cost to find, lift and market hydrocarbons, the pool of viable resources is expanded, effectively increasing the operator’s access to profitable reserves.
For example, offshore production facilities may represent an opportunity to reduce opex through tighter management of shift intervals, leave policies and overall compensation structures provided that any revised policy still complies with applicable safety and labour laws.
Field development strategies must wind their way through a full assessment that focuses not only on what is most technically appropriate but also on factors owing to timeline and resulting cost. Critical to this assessment is an understanding of the sensitivities , so that as the market continues to stabilise and rebound, sophisticated operators can identify when changes to key variables dictate action or a change in investment approach.
Technology is the predominant driver for sustained decreases across the value chain, the pair added. On many recent calls with analysts, management teams acknowledge that many service companies are providing services at unsustainably low levels and that those costs will need to rise. Some already have – Halliburton and Schlumberger, for example, have already begun pushing up rates for onshore services.
There is optimism about managing costs over the long term, citing technology as a key area of development where costs can be reliably managed. Abbate noted some particular examples, the first of which is ‘Refracking,’ a trend becoming increasingly popular as operators revisit formations that were previously fracked to apply newer fracking methods and technologies. So-called ‘well scouring’ also involves adding a specialised nutrient mix to water floods. This introduces microbes that attach themselves to hydrocarbon molecules, causing them to dislodge from the formation and flow to the wellbore. Microbial enhanced oil recover (MEOR) is therefore one technology which may see greater uptake as operators form their development plans over the coming years.
“Success will ultimately come down to having the right approach, the right people and the lynchpin of trust,” Lloyd’s added. Establishing this quickly, and building understanding between specialist technology suppliers and operator will be fundamental to achieving it. This calls for a range of exemplary ‘soft skills’, along with outstanding technical expertise.
More for less While marginal development is being considered by operators across the US, it is difficult to predict which area(s) will be most active, as the variables that drive development decisions are dynamic. Beyond the breakeven costs, variables such as prevailing royalty terms, production profiles and hydrocarbon splits all have an impact on total cost, Lloyd’s noted.
Despite being slightly more expensive to produce than conventional resources, US shale plays have been the focus of significant improvements in production efficiencies over the last 12-18 months. EOG Resources is just one example, but shows the scale of this overhaul: in 2016 the company posted a <1% decline in production, despite a 42% reduction in capex. It accomplished this through driving massive reductions in completion and production costs.
Lloyd’s Register data suggest that other operators such as QEP Resources and ConocoPhillips have similar lead cost positions in the Bakken and Eagle Ford Shales respectively.
There are plenty of other factors too and there are many technical tasks to perform. Dedicated technical specialists undertake studies in areas that include seismic interpretation, geological modelling, petrophysical evaluation, reservoir modelling, well modelling, system modelling and production optimisation. Maintaining production for as long as possible becomes the overarching goal, with a relentless focus on production optimisation and operational efficiency.
“One thing for sure is that the US$100 play book that has been used for the last 10 years is no longer helpful,” the Lloyd’s team noted. “A successful development will depend on the skills, experience and expertise of the team involved in its development.”
Jason Knights Head of External Communications and Media Relations Lloyd’s Register Jason.Knights@lr.org T: +44 20 7423 1741