To gauge how much things have changed in the oil and gas industry over the past 20 years when it comes to auguring the future, one need look no further than the service company sector (also known as oilfield service, or OFS) in North America. While operators in the unconventional plays have, with the help of their OFS partners, drastically reduced their breakeven prices in light of the downturn, and while prices have seen a modest increase from their 2016 tank, the OFS companies are still struggling in this lower-for-longer environment despite small tidings of joy such as returning more fracturing crews to service and rehiring former employees who lost their jobs in the worst of the recession.
In the Stratas Advisors report, “The State of the Service Sector,” analysts noted the recent (as of June 19) dip in West Texas Intermediate prices is reintroducing “significant volatility” to not only the E&P sector but the OFS sector as well. “As the turn of 2017 brought positive change in oil prices …, many service companies saw the light at the end of the tunnel as a sign that they could lift some of the heavy discounts many operators were taking advantage of during the supply glut,” the report noted. “However, these bullish possibilities are now at risk once more as shale production from the Lower 48 states continues to grow through first-half 2017.”
While the major service companies posted positive gains in first-quarter 2017, many of them have made moves to alter their service offerings in the new environment, the report stated.
Editors with E&P and its sister publication, Oil and Gas Investor, sat down with key decision-makers at two of the largest OFS companies, Halliburton and Weatherford, to get a snapshot of the challenges facing this market in continuing uncertain times. We talked to Eric Carre, executive vice president, global business lines, and chief HSE officer for Halliburton; and Mario Ruscev, executive vice president, president of product lines and CTO for Weatherford.
E&P: Is the downturn over?
Carre: I think you have to distinguish what’s happening in North America and what’s happening in the international part of the business. If you look at North America, we hit bottom sometime in Q2 of last year. We’ve been on the rebound since then.
It’s been a bit different in the international sector, where we’ve only hit bottom in terms of activity in Q1. The international sector still remains very challenging in terms of pricing.
Ruscev: It really is very simple: The oil price will go to a certain level, people will start pumping like crazy and the oil price will get depressed again. It will continue like that with ups and downs. I don’t really know what the right level is.
We lived through a bubble from 2002 to 2014. Those prices are not coming back, ever. I believe that the price of oil will be limited by the cost of extraction of unconventionals. What saves us is that unconventional production is still quite expensive.
E&P: The industry is notorious for overproducing during price spikes. How do you adjust to those swings?
I don’t think the swings will be the size that we just went through. In the ’90s we could take swings of 20% to 30% very easily, but we were different then. I don’t think we’ll go back to that, but we’ll have to adapt to be at least as agile.
E&P: What did you do to improve your business during the downturn?
Ruscev: First, like everyone else, we had to make cuts to our budget and workforce. It was unfortunate, but it had to be done. Then we had to choose what we want to focus on. We are not the biggest; we cannot fight every battle. We have to choose where we want to be the best and where we want to grow.
We decided that we want to be best in two areas. One is well construction from drilling to completion, because a well without the completion is just a hole. We have a lot of history, and we’re very strong in that. The other one is production optimization. It’s more than just artificial lift; think of it as making old wells more producible. We have wonderful wireline tools that can diagnose whatever needs to be done to a well or to a set of wells to be revamped and rejuvenated.
E&P: Which of your business sectors are most active now?
What’s different with the completion part of the business is that the intensity of completions is so much higher today than three, four, five years ago. On 900 rigs we are actually seeing a much higher level of activity in a business like hydraulic fracturing, for example, than when we were running 2,000 rigs. That’s because we drill much longer laterals, we do a lot more stages per unit of reservoir length and we have stages that are more intense in terms of volume of proppant pumped.
E&P: What’s happening with pricing today? Are you able to drive margins at $50 oil?
Ruscev: We’ll have to adapt to drive a margin at $50, and we are doing that. We’re not there yet, but we are in the process, and we will get there. We have no choice. Supply and demand drive the price in the long term.
Carre: Pricing is improving, in particular on the completion side of the business. We’re seeing fairly healthy price increases in hydraulic fracturing, much less on the other businesses, but it’s starting to happen as well. We have a long way to go before we get back to price levels that are sustainable for the service sector.
E&P: Did you slow down your R&D during the downturn?
Ruscev: Oh yes, we slowed down everything; we had to survive. Everybody has cut down their R&D budget. But we were selective of where we slowed down. We made sure we kept going 100% on some technology, and we slowed down on some other technology.
The nice thing is we have a lot of projects in the pipe. I think the industry needs it.
E&P: For instance?
Ruscev: Think of offshore. The cost of operating offshore is expensive and not just because building the well is expensive but also the amount of money spent after that, even on very simple things. For example, changing out an ESP [electric submersible pump], depending on the price of the rig, is probably $30 million. We have to design things that will live a long time. That means metallurgies, sensors and equipment that will adapt to the changes of the reservoir. As you pump, the thermodynamics change.
Dreaming of the future, I see completions that are made of intelligent metal that measures the pH and shuts down by itself when the pH changes. You don’t have to do it manually. If we want to be able to produce these offshore assets 10, 15, 20 years from now, these are the kinds of things that need to happen.
E&P: Eric, how did Halliburton’s R&D fare during the downturn?
Carre: I think we behaved similarly to the rest of the industry. We try to affect our technology spend as little as possible through downturns, but the downturn here was so significant that we had to reduce some of our technology investments. We did reduce the amount of dollars spent on technology, but as a percentage of revenue for the company, the spend was about the same as in the upcycle.
E&P: There’s been a lot of talk about how much more efficient operators have gotten in the shale plays. Do you consider that an efficiency gain or a result of enhanced completions?
Carre: You hear efficiency defined in different ways. From an operators’ perspective, per dollar of investment they are getting a lot more production out than they did a couple of years ago. We tend to put that in three different buckets. No. 1 is the service cost. It is a lot lower than it was a couple of years ago. Unfortunately, we’ve been at the end of the stick on that one. The whole service sector has been operating underwater for a couple of years because of that pressure in pricing. That’s been one of the main contributors to the efficiency.
Second, activity has been reduced. As you go from 2,000 to 400 rigs, you obviously keep the best rigs, you keep the best crews and you drill in the most productive areas. You have the best of everything, which contributes to increased efficiency as well.
Third is true efficiency improvement. As an industry we are operating in a much more efficient way than we were before. We drill and frack more quickly, and the whole intensity of how that works is much better than years ago, with improvement in technology, improvement in processes and improvement in work methods.
E&P: In terms of driving efficiency, could you point to an example that Weatherford is doing?
Ruscev: We’re drilling longer wells—recently we’ve broken a couple of records in the Eagle Ford. But now most of the cost is not on the drilling side; most of the cost comes during completion and production. So the next big win will be about better [reservoir] characterization, making sure that we really optimize the completion, we really understand the production, we use more data and we’re able to analyze more data.
The next big challenge will be to better understand the flow based on better reservoir characterization to pinpoint exactly where to frack. This can be achieved through modeling. That’s probably the next revolution.
The industry has made significant strides in improving drilling efficiency but will need to focus as well on completions and production. (Source: Weatherford)
E&P: What are the biggest technical challenges the E&P side is facing, and how are you addressing those?
Carre: The efficiency improvement in terms of drilling and well construction has been tremendous, but the biggest gains that remain to be generated are in production and recovery. If you look at unconventional recovery rates, the consensus is they’re still in single digits. If we could get up to 15%, that would truly be a game changer. There are a whole slew of technologies that we’re working on in terms of better understanding how we design hydraulic fracturing jobs and how we place wells.
What we are becoming better at is learning from other industries and applying that to our own. There’s a lot of discussion now around digital, what we can do with automation [and] what we can do with analytics. This is going to make a difference in how the industry functions over the next five to 10 years.
Ruscev: The consequence of the bubble we just came out of is that we stopped being creative because we were all well fed. I remember a few years before the downturn I would say to an operator, ‘We need to do something different to be more effective.’ Usually they said, ‘You know, I have 200 wells to drill in the next two months.’
Now, we are in a situation where you really have to be effective in order to make money at $50 per barrel. In the next few years—because it will take time until people get back into the swing—we will see much more technology coming.
E&P: If you could point to the best technological improvement that your company is offering to your customers in 2017, what would it be?
Ruscev: It’s like picking a favorite child, and I have so many favorite children.
We have 160,000 wells in the world that are monitored by our life-of-well information software called LOWIS, which is a great software product, but we took the opportunity to revive it for this new era. We’ve totally repackaged it, making it a modern software that is part of ForeSite, a total production optimization platform. We’ve linked it to our analytics tools. Bringing all of the data together will enable users to predict when [field] hardware is going to fail. That will allow customers to completely change the way they do maintenance service.
E&P: What’s your outlook for U.S. onshore for the remainder of this year?
Carre: A few months ago I would have said, ‘Very positive. Activity is going to continue growing, and we will probably break the thousand rig mark by the end of the year.’ Today the situation is different. Commodity prices have come down 25% in the last two months, inventory levels remain extremely high and the risk of an activity correction in U.S. land exists.
Ruscev: The demand is here now. I was giving a talk in Oklahoma recently, and people asked me, ‘How do you feel about the rig count at 800?’ Frankly, I would feel better if there were 600 rigs, not 800, because with fewer rigs, I’d be more confident that we would not overproduce and kill the price. It’s a hard balance to achieve. This is the land of the free, and we’ll shoot ourselves in the foot by overproducing. It’s bound to happen.
But unlike the last swing, it will be little adaptations— the price will go up and down and up and down. I still believe as an industry we need to accept that this is a new world, and we need to adapt.