Low Oil Prices Make Innovation a Priority
A sharp decline in oil prices is pushing oil and gas companies to innovate to increase efficiency and prepare to meet the world’s long-term energy needs, panelists said at the International Petroleum Technology Conference (IPTC) held in Kuala Lumpur, Malaysia, in December.
Under the theme of “Innovation and Collaboration: Keys to Affordable Energy,” the IPTC attracted an attendance record 10,318 industry professionals from 68 countries. Hosted by Malaysian state oil company Petronas and cohosted by Shell and Schlumberger, the conference featured a ministerial session, high-level plenary and panel sessions, a comprehensive multidisciplinary technical program, an exhibition, a young professionals workshop, and various educational activities.
The 3-day conference was opened by Dato’ Sri Abdul Wahid Omar, a minister in the Office of the Prime Minister of Malaysia, who delivered the keynote speech about the paradox of energy affordability. One side is positive, with more affordable prices for those buying oil and gas, thus aiding consumers and the economy. The other side is negative for oil producing countries such as Malaysia, whose collections on production represent more than half of government revenues.
“Against the backdrop of weaker oil prices, companies are becoming cautious. Expenditures are cut as they optimize costs. It raises question about the viability of certain high-cost projects,” he said.
A development slowdown could magnify the impact of lower prices on the economy of oil producing countries. “It is the only industry where a change in the business environment carries a great impact not only on individual companies, but also on entire countries,” Abdul Wahid said, noting that advanced exploration and production (E&P) methods in places such as North America have added production that he said is “flooding the market.”
In Malaysia, Petronas has begun reducing spending on projects to expand production, which is a decision being faced by producing countries around the world that have seen oil prices drop approximately by half from more than USD 100/bbl.
“The daunting task facing oil producers is ensuring that energy output is continued,” Abdul Wahid said during his opening address. He talked about how the Malaysian government has worked to diversify its economy, allowing it to “ride out the current disruption in oil prices” without disrupting its economic programs to raise the living standards of its people.
At an international meeting highlighting the accomplishments of Malaysia’s energy sector, “the elephant in the room is the oil price,” said Dato’ Wee Yiaw Hin, executive vice president and chief executive officer of upstream at Petronas. “After 4 to 5 years of stable oil prices, it is a pity we are facing these problems again.”
Wee said the “major disruption” in prices will lead the industry to “look at how innovation and technology can help us face this challenge.” More efficient operations can sustain long-term projects that will be needed to supply a world in which the growing population and rising living standards will ultimately create the demand that will boost prices again, he said.
Do Not Panic
Meanwhile, the consensus among panelists at the Executive Plenary Session was that the industry should not panic because of lower oil prices and should take the opportunity to strengthen its base to prepare for the next phase of oil and gas industry development.
Speakers at the panel agreed that companies need to learn from past price declines, which showed the value of spending on continued research and development and to hold on to staffers with valuable skills.
Matthias Bichsel, former director of projects and technology at Royal Dutch Shell, said that lower oil prices are not something to panic about, referring to his long experience in the industry, during which he has witnessed a lot of panic. “Our industry is a cyclic industry, and this cyclicity of the business needs to be managed through collaboration and innovation,” he said. “Low prices are a great opportunity to work together.”
Because of the nature of the business, the industry seems to be worried about the ups and downs rather than looking for ways to deal with the cycles. “Instead of panicking, we should have thought of how to manage this business through the cycle. How can we create and narrow the band within which we can operate through innovation and collaboration?” Bichsel said. “This period is a great opportunity for the industry to work better and reshape its way of doing business.”
The leaders of oil companies need to realize that even in a difficult environment, innovation can be the most affordable option. “Affordable means within the boundaries that oil companies will operate, which also means a wakeup call for us to work on game-changing technologies that will allow us to go through this challenging period,” said Raoul Jacquand, executive vice president at CGG.
Cost overruns were a problem before commodity prices dropped. Over the past 10 years, capital expenditures are up 400% while production is up 15%, said Jeff Spath, vice president of industrial affairs at Schlumberger and 2014 SPE President. “Cost escalation is one of the most widely acknowledged issues facing upstream today,” he said.
It was clear that the problem was coming,” said Patrick Schorn, president of operations and integration at Schlumberger. “The lower oil price makes things a bit acute, which means there is a lot we need to do as an industry. And, with a low oil price, we need to do this faster.”
Among the things the industry needs to do is develop newer technologies, which may include extra costs. But, Schorn said, companies need to think about these technologies as an efficiency driver. “There are many technologies that have been developed recently focusing mainly on how we can operate efficiently,” he said. “If we look at the failure rate of our industry, which could be due to tools or procedures, there is a lot more that we can do to improve this.”
Technology is supposed to lower overall costs, but the opposite can happen. Tan Sri Dato’ Seri Shahril Shamsuddin, president and group chief executive officer of SapuraKencana, said, “We should set ourselves a benchmark of prices, which will allow us to innovate in terms of services, business model, and also our own financial situation.”
That raises the question of who sets the price. As oil prices increased, different participants decided to take a cut, which pushed prices higher, he said. “The solution is to set the target in a low-cost environment, and certain technologies need to be commoditized,” he said.
Technology developers at the session did not agree on the idea of commoditizing oil and gas technology. “New technology has a higher price because people need it. If they don’t need it, it will be cheap,” Schorn said.
Shamsuddin said that commoditizing oil and gas technology is possible given that the top four innovative companies right now are technology companies. “Why not in the oil and gas sector?” he said.
Meanwhile, Bichsel said that prices are set by expectations in the market, and he urged the industry to collaborate and be more transparent about the basis for costs. “Lowering cost is essential,” he said.
Datuk Mohd Anuar Taib, senior vice president of upstream Malaysia at Petronas, said that a lot of innovation comes from competition. “Collaboration needs to have a sort of competition so the business environment can flourish,” he said.
Time to Experiment
Falling oil prices offer an opportunity for companies to look for new ways to slash costs. This reversal represents a shift in what looks risky. When oil was selling for more than USD 100/bbl, the fear was that something might fail and reduce returns. However, when profits take a hit, there is a hunger for trying something better, particularly if it can lower costs.
“In my 35 years in the industry, I have seen innovation acceptance go through cycles,” said Rustom Mody, vice president of technology at Baker Hughes. “The introduction of new technology is quite different for the unconventional market and conventional market.”
Independent companies with limited resources in the middle of the costly process of figuring out difficult shale formations are willing to try new things, he said. But, in conventional formations, particularly in deepwater markets, “it is like pushing a rope” when prices are good. Sharply lower prices could change that complacent attitude.
“Our role is not to regulate the oil price or second-guess it but to adjust our operations to it,” said Zied Ben Hamad, vice president of the Marketing and Technology Production Group at Schlumberger. “It is a competitive business. There are always losers and winners.”
Lower prices, which he sees lingering for months or perhaps years, highlight a problem that did not just pop up late in the year. “Costs were too high when the price of oil was pretty high,” he said. In the spring, he was hearing complaints about rising costs and rising onshore production making deepwater development uneconomical. “Now, technology needs to make it economical,” he said.
A chart of the cost of projects by Total showed that cost inflation over the past decade roughly doubled the cost of projects. The company’s responses to that include an effort to make R&D a weapon in the fight against rising prices.
“We reshaped our research and development activities,” said Daniel Plathey, vice president of technologies for E&P at Total. The company has narrowed the focus on current developments, reduced its research partnerships based on the most productive ones, and is now measuring the readiness of the technology it is investing in to increase the odds of a relatively short trip to market.
Still, the goal is developing technology that offers significant gains. The downside is the risk that they will never be used. That makes research vulnerable during downturns.
“The first inclination is let us cut research. Research is looked on as a luxury,” Plathey said. He explained, “Investment in research is not like a light switch. You cannot turn it off and come back 9 months later and turn it back on.”
Convincing operators that they need to make a significant change requires getting their feedback and involvement with technology development. Mody said innovation is understanding the need, looking systematically for the best solution, and tying it all together to create tangible rewards.
For national oil companies in Saudi Arabia and China, research efforts are critical because they are aimed at the unique challenges in countries where there are powerful social and economic motivations to maximize the amount of oil and gas produced. Saudi Aramco’s expansive work includes partnerships with research institutions and service companies, such as Schlumberger and Baker Hughes—both tenants in a Saudi Arabian research park established to allow more face-to-face collaboration—and long-term work seeking groundbreaking results.
Those projects put Saudi Aramco at the frontiers of nanotechnology and imaging methods, but are based on daily concerns in the country working to maximize its production from its fields. On Saudi Aramco’s priority list are
- Smart waterflooding using salt water where the salinity or ionic makeup of minerals is manipulated to improve output
- Deep diagnostic methods giving it an unprecedented view of rocks and fluids in the ground between wells and how they change over time
- Pore-scale physics to analyze oil production on the most basic level
“We are seeking new technology for advancement from the bottom up,” said Abdulaziz Al-Kaabi, manager of Saudi Aramco’s Exploration and Petroleum Engineering Center’s Advanced Research Center.
China is also working on ways to image reservoirs so it can see even thin pockets of remaining oil and use enhanced oil recovery methods to increase output.
“It is not an easy job for us. Most reservoirs in China are either marginal or come into high water cut,” said Liu Yuzhang, vice president at the China National Petroleum Corporation’s Research Institute of Petroleum Exploration and Development (RIPED). The company has a research budget exceeding USD 1 billion a year and employs about 3,000 researchers.
Its other major research goal is economically producing oil and gas from extremely tight reservoirs. The challenges include formations in mountainous, highly populated places that are far more complex than US shale gas and oil reservoirs. Liu said he visits the sites regularly to monitor the progress in a place that he described as “beautiful but difficult.”
“Unconventionals (in China) are now at the beginning stage,” he said. “Radical innovation is needed.”
Drawing Lessons From US Shale
As the industry is facing a challenging time, conventional oil and gas producers have to draw lessons from success stories in the US shale and apply them to their conventional oil fields because of the similarities, according to panelists at the session titled “What’s So Unconventional About Unconventional Oil and Gas?”
Speakers said that the oil and gas industry has to build efficiency in operations through technology applications and good project and supply chain management.
Matt Vanderfeen, vice president of petroleum consulting at Weatherford, said the industry has failed to do things differently during the downturn, where he urged the industry to draw lessons from the US shale market. “The surge of production in the US from unconventional resources has demonstrated that alternatives to conventional plays do exist and it is time to apply the lessons learned from the North America shale market not only to other shale basins around the world, but also to more conventional wells,” he said.
While there are many differences between conventional and unconventional oil and gas in terms of geology, tectonics, and many other aspects, there are several similarities between the two. “When it comes to well construction, production, and operations, the challenges are the same,” he said. “We have to understand the stress regime, how to minimize no productive time to mitigate risk, and how to effectively drill hole section to eliminate or reduce the incidents. All these things are part of the normal process of unconventional wells and conventional wells as well that we need to tackle,” he said.
Vanderfeen called on the industry to apply shale exploitation learnings to conventional fields to drive efficiency and gain a better understanding the subsurface. “Also, lower drilling and completion costs through process improvement and hazard avoidance, as well as through the application of best practices for services and logistics management,” he said.
Bernard Montaron, technical director for Asia at Schlumberger, said half of the unconventional wells drilled in the US are uneconomic. “Almost 50% of the wells drilled between 2010 and 2013 are uneconomic either because they were drilled in wrong place, or landed in wrong zone or poorly completed,” he said. “(Approximately) 40% of perforations in the US shale don’t produce.”
Montaron said that while geology is important, decisions also matter because companies need to get the subsurface team ahead of operations through technology and training. “Be effective by making data-driven decisions, maximizing the production outcome from every dollar spent,” he said. “Apply disciplined, integrated process to appraisal, maximizing risk, and accelerating first production.”
Overall, every play requires different technical solutions. “Simply cutting costs to improve economics has a limit, and every operator knows how to do that,” he said. “True differentiation is in maximizing well productivity through optimum use of technology, and that can have a much greater and long-lasting impact on economics,” he added.
Low Oil Prices Make Innovation a Priority
Stephen Rassenfoss, JPT Emerging Technology Senior Editor, and Abdelghani Henni, JPT Middle East Editor
01 February 2015
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