Pressure Test for E&P Innovation
Authors: Rassenfoss Stephen 
Published: January 2017

Oil prices are so low that the oil industry is having to consider doing things differently. It is a hopeful sign for the future for innovators who have been struggling to keep going and have potential customers with little to spend and a lot to worry about.

“What we see is a lot of consolidations and slowdowns now. A lot of risk-averse folks out there who do not know if their companies will survive from one day to the next,” said Chuck Matula, who is a board adviser and founder of a company called Drill2Frac, which offers services aimed at unconventional producers.

“2015 was an absolute blur. Absolutely everyone was trying to keep an oilfield operation afloat, there was so much indecision and uncertainty,” Richard Broderick president and chief executive officer (CEO) of Fountain Quail Water Management, said during a session at the recent IHS CERAWeek conference in Houston.

Demand for the water company and others has slowed as drilling and completion work plummeted in shale fields where the cost of adding production exceeds the price of oil, which dipped below USD 40/bbl in early April.

Those still on the payroll have powerful motivation to consider how to reduce operating costs or increase production enough to pump profitable barrels if oil edges toward USD 50/bbl.

Those with likely answers to that question “were getting some traction when prices where high, but not as much as they are now,” said Vikram Rao, executive director of the Research Triangle Energy Consortium. Sales are limited because “they can only make that point to survivors.”

Rao divides the market into three groups based on their financial needs.

At the top are the companies with secure financial futures—the majors and the strongest of the independents— and at the bottom are those in serious financial trouble. The rich have resources to spend, though it is limited by their drive to reduce costs; but their survival is not at stake. That is the issue for companies at the other extreme, which have no money to spend because they are focused on dealing with creditors.

In the middle are those companies with some money to spend and a great sense of urgency. Their long-term future depends on quickly lowering their cost per barrel enough to survive with oil selling for less than USD 50/bbl. And they will not be able to get there by squeezing suppliers for more discounts.

“What is happening is, basically, innovate or perish for anyone in between,” Rao said. “They have 2 years to show they can survive, and 3 years to make good.”

“They cannot keep doing things the same way and they are looking for new solutions,” said Mark Wilkinson, a vice president for GroundMetrics, which is trying to convince companies that they can better understand what is going on in the ground by using electromagnetic imaging to track water and carbon dioxide flooding, or spot missed oil reserves.

Faced with similar cost pressures, and an equally awful economic environment in the 1980s, Rao said operators did manage to quickly reduce the cost of production, frequently employing innovations from the service sector. The industry embraced 3D seismic, subsea completions, horizontal drilling, and logging while drilling (LWD).