"Technology and best practices will drive growth and improve the performance of existing assets.
We as an industry must drill better within the reservoir. Improving recovery within the reservoir is a fundamental change that is taking place." - Bruce Bernard, 2001 SPE president-elect

Let's face it. The E&P industry is a tough place to do business. The convergence of several important factors - geological maturity of key basins, increasing technical complexity and limited access to capital - has forced the industry to change course. Simmons & Co. International's latest report points out that the companies that differentiate themselves according to earnings and return performance, project execution and operational and technical leadership will be rewarded in the future.
What's clearly needed are new ways of working together where everyone wins. From the discussion at the opening plenary session of the recent IADC/SPE Drilling Conference, it was not at all clear that things have changed much in the past 10 years. It's no wonder Wall Street has shunned E&P companies when they can't even return the cost of capital to their stockholders. The Simmons report, "It's a Whole New Ball Game," succinctly points out that execution matters. As in football, those who best execute will win. It's high time to look at the drilling and production business in terms of full-cycle economics that incorporate capital costs so returns on capital employed can be measured.
At a very basic level, the E&P business is about drilling success and operational efficiency. George Sandison of Texaco said, "Drilling departments spend about 45% of all the capital in oil companies. Therefore they must start to act like businessmen and should be judged according to a new set of metrics that include well productivity, post-development net present value, well life and partnering ratings." Drilling teams should be compensated for the long-term value they produce, not just short-term savings. Capturing efficiencies and lower costs will maximize short-term returns. But growing volumes is the key to survival. The only way to win the game will be to drill more productive wells in a cost-effective manner. Best-in-class wells don't necessarily come cheap. But good producers can provide long-term earnings streams and value to the operator.
James Dodson, principal of James K. Dodson Co., said drilling trouble costs on average are at 23% to 31%. Table 1 shows a study conducted during a 5-year period for Gulf of Mexico wells in less than 1,500ft waters drilled to 10,000ft below the mud line. Total drilling costs for 528 wells were staggering: US $2.3 billion with trouble costs of $628 million.
Dodson has used benchmarking to measure competitive drilling performance as a cost-effective management tool. Rate of production and the cost per foot relative to the complexity of the drilling process as computed by a mechanical risk index can be compared (Table 2). Three thousand hole problem incidents on 1,205 wells reporting trouble time were analyzed between 1994 and 1999. Five hundred twenty-eight wells (48%) reported rig or equipment failure, 303 (25%) reported stuck pipe, 371 (31%) reported lost circulation, and 275 (23%) reported cement squeeze problems. The cost of the problem days due to hole problems was a staggering 26% of the drilling costs reported to drill a well from spud date to its final depth. The opportunities are clear.
Just looking at Dodson's study, it appears as though the industry has a long way to go. The technology exists to solve most of the problems. But with all the focus on cost reduction, I suspect we are shooting ourselves in the foot.
It's time for a new paradigm. Drilling contractors must improve rig efficiency and reliability of equipment to reduce trouble costs, and the service companies need a fair return on their business to invent the technology to build better wells. This can't happen if the oil companies only focus on the cost side of the equation. Everyone is in this business to make a fair return.
An example of an emerging paradigm is Shell's Drill the Limit philosophy. Detailed, up-front planning and analysis of complex wells has led to breakthroughs in drilling performance - in other words, getting it right the first time. Now that's productivity.
In another case - Deepvision LLC - operators, service companies and drilling contractors have formed a company to develop and profit from the development of a riserless drilling approach for ultradeepwater wells.
Perhaps the new paradigm should be sharing. Drilling contractors, service companies and operators should pool technical knowledge and financial resources fairly so that at the end of the day everyone wins. As the Simmons report points out, the stock market is separating those E&P companies that "get it" from those that do not.
Those companies that grow earnings consistently above the cost of capital will be rewarded while the others will simply go away. The industry needs business leaders who understand technology and economics. Maybe it's time to go back to school.