Oil industry dials in efficiency as prices plunge

December 21, 2014

Calgary-based Packers Plus Energy Services Inc. is facing some tough months as oil producers slash budgets to cope with lower prices, but the well-completions company also sees opportunity as its customers look to extract more oil for less cost.

Throughout the oil fields of Canada and the United States, companies are shifting quickly from a growth-at-any-cost mentality to focus on productivity, and Packers Plus chief executive Dan Themig believes the trend plays to his firm’s strength. It provides custom hydraulic fracturing and well-completion services that it promises will boost production per well and thereby cut barrel costs.

“If you want to reduce costs, you have to look to new technology and 80 per cent of the market is using inefficient methods” for drilling and completing wells, Mr. Themig said in an interview. “We have the technology that oil companies can turn to increase productivity and decrease costs.”

With crude prices down 47 per cent since June peaks, producers across North America – and across the globe – are cutting their 2015 capital budgets, deferring large projects and reducing drilling programs. But they are also looking to get better results for the capital they do deploy, and several analysts expect significant productivity gains in the North American tight-oil plays and in the oil sands, which could significantly lower break-even thresholds even after prices recover.

To the degree they succeed, the market adjustment sought by Saudi Arabia and its Gulf state allies in OPEC will take longer than expected, and prices will find a new equilibrium level lower than that which would have been justified prior to the slump.

By refusing to cut production quotas in late November, the Saudis targeted high-cost producers, and the booming U.S. shale sector is seen as the new “swing producers” – with both high costs and a need for constant drilling to maintain production growth.

But the shale sector is more resilient than OPEC seems to believe, said Eric Lee, commodities economist with Citigroup Financial Markets Inc. He argued the sector will undergo a shake-out in which weaker companies will fail, stronger ones will pick up cheap assets, and the industry as a whole becomes more efficient. Productivity gains will drive break-even thresholds lower, and Mr. Lee predicted a “productivity spike” next year.

“Over the longer term, stress should beget strength in the shale patch as productive assets fall to better capitalized firms and productivity gains accelerate,” Mr. Lee wrote in a report. “Thus, OPEC is in for a much longer-term challenge than it may anticipate. Creative destruction in the next few years should mean greater volatility for prices and pain for some producers, but the sector should emerge an even greater challenge to OPEC over the long term.”

Canadian producers, especially those in the high-cost oil sands, will also have to drive efficiency and productivity gains to remain competitive in an international industry where oil executives were focusing on “capital discipline” even before prices started to slide in June, and have now made that phrase a mantra.

“Our companies are going through and doing a significant re-look at their capital spending and new projects,” said Greg Stringham, vice-president at the Canadian Association of Petroleum Producers. “But they’re also looking at current projects to make those more efficient.”

Companies are looking to boost productivity by improving engineering practices and project planning, and to reduce supply-chain costs by broadening their supplier base via deeper relationships beyond the high-wage provinces of Alberta and Saskatchewan, Mr. Stringham said. There will also be pressure on rates for oil-field services and contractors’ compensation.

Consultant James McLean, of PricewaterhouseCoopers LLP, advises oil companies on how to improve their productivity, and has seen a surge in interest as crude prices fell through the summer and fall.

“We’re spending a lot of time talking to clients about how to set themselves up to be fit for a $50 or a $45 oil price,” Mr. McLean said in an interview. He said the best companies are driving internal efficiency rather than simply deferring projects or looking to force their workers and suppliers to shoulder the cost reductions.

A key approach is to adopt a “lean manufacturing” mindset that involves identifying certain operations that can be systematized and working with suppliers to identify efficiencies. In the U.S. shale plays, companies can also “high grade” their spending by shutting down the drilling on more marginal or early-stage projects and focusing their spending on the best performing wells – though that strategy can only carry a company for a year or so until its pipeline of new projects begins to dry up.

The shale industry was born through the application of technology to resources that were known to exist, but were difficult to extract. Now the drive for greater well productivity is taking on new urgency, said Fraser McKay, analyst with Wood Mackenzie consultancy in Houston.

“Desperation is the mother of invention at times like these,” he said. Major service companies like Halliburton Co. and Schlumberger Ltd. are already slashing jobs as producers cut capital budgets. At the same time, they are being pressured to deploy ever-more-sophisticated technology – such as microseismic sensors to monitor fracks a kilometre underground – in order to boost production.

Mr. Themig, who competes with those giants, said Packers Plus plans to remain nimble and may even add staff to take advantage of the sudden ’availability of highly-trained talent. “I’ve seen more résumés in the last four weeks than in the previous six months, and they’re all top grade people,” he said.