No two shale plays are the same. But that doesn’t mean they don’t present a similar set of challenges.

PwC’s US energy practice found this out by talking to a client active in the North American shale plays. The firm determined that each of the client’s functional groups was very efficient with its own set of activities, but the handoffs between functions were leading to breakdowns. “There was a lot of wait time, a lot of rework, things like that,” said Mike Matthews, director in PwC’s US energy practice. “We worked with them to develop integrated plans that crossed functions and then made the process changes, system changes, organizational changes, or contractual changes with vendors to address those broken handoffs.”

He added that the drag on the process was like “death by 1,000 cuts. There wasn’t any one thing that had a big impact, but when we put all of those things together, both we and the client were surprised by the level of improvement.” The improvements included reduced time to first oil by 30% to 40% and a reduction in cost by as much as US $800,000 per well.

This surprising result led to a conversation with the lucky client about standardizing the process for other clients. “We talked to the client principals about taking it forward,” Matthews said, “and they said, ‘Yes – if you can solve this problem, it will really help the industry.’” The group met with about 15 operators in summer 2013 and asked them if these problems were endemic in their operations.

“The response was a resounding ‘Yes,’” he said.

This discovery has led to a three-part series of reports as well as a more detailed and comprehensive industry survey of operational practices in shale plays.

The reports

The reports, all of which are titled “New conventions for unconventional oil and gas services,” outline three main steps to success – reducing the drag, optimizing the play, and gaining speed and flexibility.

“The first improvement step is reducing the organizational and administrative ‘drag’ on all of the activities required to efficiently produce shale oil and gas and get the production to the market,” the first report stated. “Although considered low-hanging fruit, the rewards of reducing the drag can be substantial.”

The key to reducing the drag is managing all of the aspects of shale development in an end-to-end, integrated way. This requires tying together key activities and resources into an integrated plan that is executed in a comprehensive manner, the report noted.

Matthews said that a lack of a holistic view of the development of the whole field as a project leads to this type of drag. “Once the drilling and completion folks get a well completed, there is a perception that it is pretty seamless getting it put on production and turning the well over to operations,” he said. “But when we go down into the metrics and begin to look at the details, we find that wells are sitting there for 20, 30, or even 40 days with the operations guys not even knowing they were available.

“There’s so much pressure, so much activity going on, that the systems and the communications haven’t caught up yet.”

The second of the three reports, subtitled “Optimizing the play to improve returns,” was published in September 2013. This report outlines three strategies for optimization – balancing supply and demand, advancing performance, and finding the efficient frontier.

The main thrust of this report is the concept of “manufactured drilling.” PwC authors take the concept of sales and operations planning (S&OP) and apply it to shale development.

“The goal is to align resources and activities so the company can optimize profits while effectively managing supply and demand constraints and fluctuations to ensure the right product is delivered to the right location at the right time with the right information and resources,” they wrote.

While shale drilling can’t really be compared to a factory workfloor, there are commonalities. The drilling of each well in a play requires a general process that is repeated countless times. “That repeatability lies at the heart of applying S&OP concepts and processes to shale,” the report stated. Still, there are significant differences:

  • Shale development is not sales-driven;
  • Operations can vary significantly from well to well;
  • Shale development has different constraints than manufacturing, such as permitting, leasing, geology, geography, infrastructure, and resource availability; and
  • Operators are managing a hybrid operating model that combines continuous processing and discrete manufacturing.

“It’s manufacturing in the sense that it’s repetitive, but it’s out in the real world,” Matthews said. “In many cases there is no infrastructure and no roads, and cellphones don’t work.

“Shale operators don’t have the sales constraint; everything they can sell goes to market. What they’re constrained by is capital and people. So it’s not sales and operations planning; it’s investment and operations planning,” he continued.

Improving financial and operational performance is guided by an increase in the return on capital employed, which is driven by capital cost, the completion schedule, and asset revenue.

“As is the case in traditional manufacturing, an accurate and consolidated view of demand can create closer, more cost-effective relationships with suppliers,” the report stated.

Finally, companies need to find their “efficient frontier.” “The efficient frontier provides a systematic, bird’seye view of the information needed to optimize the investment portfolio, which projects fit, which don’t, and why,” the authors noted. “Oil and gas companies should make these decisions in the face of uncertainty, project interdependencies, and changing economic environments.”

Matthews added, “It’s a scenario-based modeling concept where you look at the mix of the land activity, the land investment, the roads, the process facilities, and the wells you pick, and you apply your valuation methodologies to that to determine the optimal mix of investment.”

A key to all of these steps is the ability to leverage technology. This includes business analytics software that can help prioritize projects based on key performance indicators. These platforms also help provide a holistic view of project management so that different stakeholders can share a common vision.

The final report

The last report, due to be published in early 2014, will examine the concept of speed and agility using advanced analytics. Matthews said that this will be the culmination of the suggestions outlined in the first two studies and will provide the ability to analyze the changes that have been made and identify further adjustments that might be in order.

“It’s about how you now take this information and start to actually derive more business value from it through advanced analytics,” he said. “The companies that do well are the ones that know how to adapt and change their plans quickly.”