Keeping US shale afloat
Improving drilling and completion efficiency is crucial for the industry to accelerate cashflow and remain economically viable
Unconventional drilling has come of age, and US independents are more effective than ever. Average feet drilled per day has risen by nearly 20pc since 2015, a testament to the technical advances fuelling the shale revolution. Yet unconventional E&P companies have consistently suffered negative cash flow and weak balance sheets, even during price upswings.
To achieve financial sustainability, companies need to focus on capital efficiency across the value chain. The recent collapse in oil prices brings a sense of urgency to this endeavour. Here, we will consider how to embed capital efficiency in well delivery and suggest tactical improvements for independents to adopt.
Creating value in well delivery
Drilling performance varies considerably from one operator to another, with broad spreads possible within even a single basin—suggesting that inefficiencies in equipment, technologies or operational practices are major factors.
Operators have four main levers they can pull to improve returns:
- Accelerate production. Better planning or operational performance can improve spud-to-sales time. The benefits from an individual well may be small, but they can add up to significant value across a portfolio, especially for operators with a high cost of capital.
- Optimise cost of carry. Better planning in areas such as rig-to-frack spread rate and scheduling can allow operators to reduce the number of drilled-but-uncompleted (Duc) wells needed to ensure smooth well delivery, thereby also reducing the amount of capital tied up in inventory.
- Reduce input costs. Instead of applying the same standards for equipment and services across the board, operators can adopt fit-for-purpose specifications and confine high-spec equipment to uses where it is needed for technical or safety reasons.
- Elevate operational performance. Eliminating long-tail wells by improving reliability, reducing non-productive time (NPT) and so on is key to performing more consistently. Having a small number of outliers—wells with a mean development time 50pc longer than average—can inflate unit capital costs and reduce capital throughput.
Drawing on our experience of supporting independents in their performance-improvement efforts, we have identified the three actions that can deliver the greatest impact: improving drilling efficiency, optimising well design and strengthening back-office functions. We will examine each of these in turn.
Reducing days from spud to sales creates value by accelerating production and improving operations performance
Improving drilling efficiency
Reducing days from spud to sales creates value by accelerating production and improving operations performance. To tap into this value, companies must improve planning and scheduling, reduce NPT, increase operational efficiency and adopt simultaneous operations.
The wide range of drilling performance across operators within a given basin demonstrates that most operators have considerable room for improvement. In a survey of nine small operators in the Stack play in the Anadarko basin, average drilling rates ranged from 20ft/hr to 47ft/hr. For a well 15,000ft deep, that translates into a difference of 23 days in spud-to-rig release, providing slower drillers with a major opportunity to cut costs and accelerate cash flows.
Even top-quintile operators can reduce rig days per well by more than 20pc. Our experience indicates that operators should pay particular attention to the following:
- Technical advances. Top operators constantly pilot new techniques involving agitators, dissolvable plugs, wellhead cement hangers and the offline make-up of bottom-hole assemblies. As well as solving problems in slow outlier wells, they focus on improving the overall speed and consistency of well delivery.
- Relationships with service providers. Operators that align service providers’ incentives with their performance goals achieve faster drilling and completion times. They cultivate long-term relationships with providers that can offer strong performance management, use performance-based contracts with defined incentives or adopt contracting structures where the service provider shares execution risk, with appropriate financial penalties.
- Simultaneous operations. In an environment of high-pressure hydrocarbons, simultaneous operations can be a risky endeavour, but with the right approach, it can improve the timeline for bringing a well to sales. Simultaneous operations can almost double the completion efficiency of a frack crew, reducing the number of Ducs required, cutting completions costs and accelerating production.
Optimising well design
Using design-to-value principles reduces input costs and improves operational performance. Our work with independents indicates that even top-quintile operators can reduce their drilling costs by 20-25pc by adopting clean-sheet designs based on the minimum specifications required to deliver wells safely. The first step should be to eliminate overspending on high-spec equipment by considering the choice of equipment and services afresh.
Other cost-saving opportunities may emerge that are specific to an operator’s acreage. These may seem too small and insignificant to justify the time and effort involved in adapting a design to a particular well, but they add up over time and have a material effect at the portfolio level.
Strengthening back-office functions
Unconventional E&Ps born in boom times have built their organisations around technical and operational capabilities that deliver wells while minimising overheads—in the sense of any and all corporate functions. Wanting to stay lean to survive downturns, many operators expanded their operations without scaling their logistics and procurement. However, today’s cost leaders empower these functions and ensure that they collaborate closely with well-delivery teams to reduce input costs, improve operations performance and accelerate production. Two areas in particular need attention:
- Procurement excellence. Leading independents deploy specialised procurement professionals with the expertise and capacity to optimise supply chains and negotiate better outcomes. These operators also set up cross-functional negotiating teams of engineers, operations staff and procurement professionals to drive cost savings through product bundling, lean operations or specialised service agreements.
- Supply-side hedging. The use of financial instruments is not the only way to de-risk commodity exposure. Many oil companies purchase water rights and drill water wells for stimulation; other companies trade drill bit for shovel and integrate sand production into their business. Commodity risk can be further mitigated by using hedges for steel and cement as well as the more common hedges protecting oil, gas and NGL production.
20-25pc – Potential drilling cost reduction
To empower corporate functions while staying lean, operators need to strengthen their talent management capabilities by adopting value-based principles from other industries. For example, they can use dynamic talent allocation to shift resources from drilling and completion during high-price cycles to production maintenance in low-price cycles, thereby helping to develop and retain their best talent.
The common thread linking drilling efficiency, optimal well design and stronger back-office functions is that deploying engineering and corporate resources delivers value—in the form of cash acceleration and the compounding effects of inventory expansion—that exceeds the costs directly incurred. Companies may hesitate to spend money and time on lookback analyses, technology evaluations and procurement studies, but the return on these investments can be high.
To achieve positive free cash flow, independents must take all the steps at their disposal, even in areas of perceived strength, such as operational efficiency. By following the recommendations outlined, they can improve their returns on invested capital, accelerate cash and unlock their lower-tier inventory.
Robert Belanger, Jeremy Brown and Zach Kimball are consultants at US management consultant McKinsey, where Tom Grace is a partner.