Just one short year ago, upstream executives were applauding themselves on their many recent successes as oil and gas prices continued to zoom to nearly insane levels. And then, almost overnight, the “golden era” of drilling crashed unceremoniously along with plummeting gas prices in an embarrassing heap that left the industry stunned, bruised, and in a state of shock.

Proof of concept and scalability are the first of four steps in achieving Alpha performance in project design. (Image courtesy of MTG)



Within a few short days this ugly fall from grace was complete, and these same executives became the latest generation of industry executives to learn the awful and painful lessons that had been taught to dozens of oil and gas company leadership teams over the last 100 years.

Now that the dust is settling and the damage can be more clearly assessed, it is time to go back to school on the fundamentals that should guide leaders of every generation.

It is not enough to think of a development project in terms of discrete steps that can be optimized or improved upon absent the other functional areas that touch the project. Moreover, relying on the newest machinery or technical solution will not bridge the gaps between the various functional interfaces. Teams must also question how sustainability will be a part of the process so that the project gets the necessary funding for multiple years.

A development project should be thought of in terms of four key phases that characterize the full lifecycle of a well program and that are interrelated and dependent on one another if the project is to be successful. These include proof of concept, scalability, operability, and sustainability phases. Without acknowledging how the larger pieces must fit together, a development project will more often than not be unsuccessful in meeting the goals set out by corporate or in justifying the capex investment.

Proof of concept

Every program begins with a concept and a dream of success. In business terms, every program represents a defined investment of capex dollars, all of which are to be invested in individual well projects. The basic metrics are generally to be safe, to be low-cost, to be fast to initial production, and to build reserves that can be commercially produced. The team must design an approach that not only meets or exceeds the targets, but also acknowledges certain limits that they will have to contend with over the project’s lifecycle. These include the realities inherent in the basin or play, limits to project planning and execution that exist in the organization, the talent available, and the technical limits inherent in machinery and equipment.

Proof of concept does not begin with the initial goals or expectations, but in the way the team responds. A successful proof-of-concept phase manifests itself in the ability of the team to overcome traditional models and focus on several key activities. These include establishing the right kinds of performance baselines, a higher degree of integration than has been achieved to date, and the proper strategic design that can illustrate, or begin to prove, how the team will meet those objectives.

MTG has found the “drill well on paper” or “complete well on paper” exercises to be helpful in breaking down one discrete area of the wells development process, but these exercises do not go far enough in establishing the right interfaces between all of the functional groups necessary for project design and execution. The entire team, including areas traditionally thought of as service providers such as supply chain/procurement, must be involved in the process of designing the right approach. In this way, project timelines, well design, vendor relationships, etc., are all agreed upon from the standpoint of what is best for the asset.

In having the various functional groups empowered to help the project design — including the timeline — key activities are coordinated with all necessary functions to ensure timely activities, efficient use of resources, and safe working conditions. The team should agree collectively on the target dates at which each of the various steps must be accomplished. This is critical as each functional part of the project is dependent on successful execution in the previous steps. For example, delays in location construction throw off the scheduling for the crews needed to drill and complete the well. Faced with a multi-well program, delays in the aggregate lower the production totals for the year and lead to cost overruns.

Finally, if accountability for cost control and execution is to reside throughout the entire team, each member must understand and agree to the key metrics that drive the program. Performance baselines have to be explained in terms of how the individual functional group will improve and how that incremental improvement will benefit each linked step in the wells development chain. Moreover, how a team determines excellence in its given basin is critical to driving success.

To make necessary improvements to justify continued capex investment, a team does better to engineer the program based on the “Alpha” performer standards for a given basin. For supermajors in the Lower 48, this means acknowledging that the top competitor in the basin more than likely will be a smaller independent. However, performance improvement based on a leaner model does not mean an operator will sacrifice safety. Each step and assumption in a process can be examined to determine whether it is necessary and, if so, what can be done to increase efficiency and reduce cost. Achieving better business performance do not relate to a diminished safety performance.

Excellence in safety is essential to good business performance. The proof-of-concept phase establishes the framework for the wells development plan by putting together a clear plan for cost reduction and execution improvements.

Designed for the benefit of the asset as a whole, a fully integrated team focused on defined metrics and cost reduction strategies illustrates how the team will deliver the results expected by corporate.

Scalability

Scalability, the next step of the process, moves away from pure planning and design to actual performance as the functional groups begin to translate the designs for their individual components into an integrated wells development process. The primary issue here is how the team can begin to move a wells development process for one well into a sustainable program that can repeat “X” number of times for each year of the program.

This is the point at which the assumptions used to prove the concept of the program either succeed or fail based on the commitment of each member of the team in executing the agreed-upon strategies. Project coordination mechanisms such as a fully integrated timeline are tested when put into actual practice. Furthermore, the cost assumptions or estimates will be realized to the degree that logistics, new relationships, and alternate materials and services are followed through by the team. This is the stage at which the concepts are tested as the field personnel translate the planning and design into results.

The degree to which the team and management have bought into the new wells development process is also tested at this point. As designs are moved into action, some components of the program will meet targets while others will not. It is critical that the team not use setbacks as an excuse to stop pushing for cost and execution excellence. The same can be said for management and its commitment levels to what the team is attempting to put in place. Clear accountabilities must remain to ensure that the team delivers on what it promised — failing to do leads inevitably to a lessening of the project performance standards. Making the necessary tweaks to the program design and execution takes place in the operability phase as gaps emerge between targets and the actual performance.

Proof of concept and scalability are the first steps in the wells development process and in achieving Alpha performance within the given basin. If worked properly, that an asset team can plan and design a program to meet the difficult criteria many operators are using to justify capex investment. It is important to keep in mind that the goal is not just to design the program to succeed in a given year, but also to create a program that is sustainable for each year in the long-range plan.
That is the focus of the last two phases, operability and sustainability, which will be discussed next month. Both are critical if the project is going to justify continued capex investment year after year.