As a response to the fall in crude prices, there have been announcements of layoffs (e.g., Schlumberger cutting 9,000 jobs), consolidation (e.g., Halliburton acquiring Baker Hughes) and cuts in capital expenditure (e.g., Marathon 20%, ConocoPhillips 20% and Continental 40%). There is an expectation that a lot of high-margin production will disappear out of the market. So far, US tight oil and shale gas production has not fallen. This is partly because many operators have hedged their 2015 production before the oil price drop, but also because the industry continues to improve, drilling fewer wells faster and using few rigs to achieve more production. This industry is regularly improving the efficiency and output of its tight oil and shale gas wells. Also, as oil prices fall, input costs are also decreasing, with lower services and energy costs contributing to the lower breakeven price.
It is well-known that costs can vary considerably across basins, and the break-even oil and natural gas prices across basins have been published. However, what is less known is that, within a basin, there are huge variances across operators in how efficiently they drill and complete wells and in the level of productivity. This variance means that in this low oil price environment, within a basin, the higher performers will get stronger while the weaker ones will not survive. Unconventional operators in the United States that have been able to build fundamental efficiencies into their operations—largely through adopting a “manufacturing approach” to their exploration and production processes—are showing some resistance to oil price declines. For example, both ConocoPhillips and EOG Resources1 have stated that they can make a profit on US shale as long as oil trades higher than $40/barrel.
So where should unconventional operators focus to further improve efficiencies? Our study, Achieving High Performance in Unconventional Operations, found oil and gas operators can reduce the costs of constructing, drilling and completing unconventional wells, as well as the overall time it takes, by up to 40 percent, through better planning, and management of logistics, contractors and materials.
Now, more than ever, achieving this level of efficiency will be critical for the survival of unconventional operators running higher cost assets.