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How are oil and gas companies lowering production costs?

Posted by: James Cant
10/04/17

Most of the world’s easy oil has now been extracted. Oil which is onshore or close to the surface is all but gone, and that which is left is largely offshore or deep underground. This means that what’s left to drill often requires unconventional methods, or even those which have yet to be discovered.

The depressed oil price over the past 2 years has been a catalyst for development and innovation in exploration; when prices were coming in at over $100 a barrel, why would energy companies waste time and money on developing new techniques?

They were just pumping as much oil and they could, as fast as they could get it. Now that the oil price is much lower, efficiency is so much more important, as margins have been stripped so oil companies need to lower production costs in order to stay effective. Production costs since 2014 have fallen by 29% (McKinsey Energy Insights, March 2017)

It’s all about getting the most oil for the least money.

1. They are using analytics to make a call on whether, and when, to drill. Oil companies are eliminating, or postponing, fields which aren’t bringing them the best returns – because at a lower oil price, if it’s not making a breakeven on $40/barrel – or even less – then it’s just not worth getting out of the ground.

2. They are looking for techniques and new technologies to allow them to get more crude out of wells – both new and existing ones, and older wells. All oil companies are focusing increasingly on R&D, which means a lot of work for process and production engineers. Here are just 2 ways they can do this:

  • Existing fields can operate for longer by injecting water or gases into the wells, to increase the pressure and encourage flow. Companies are looking into fracking wells again using updated techniques to push more out of each well.
  • New software is determining exact amounts of sand, chemicals and water to use to maximise production from a single well – without just wasting costs pumping as much as possible in, they are now able to determine the exact amount for maximum efficiency.

3. They are automating. Measurement data which can be aggregated, constantly growing, and analysed, helps us to understand production processes and ultimately to maximise them. It’s perfectly conceivable that one day one fields may be almost completely automated, and oil and gas workers will be few and far between.

4. They are favouring shale (even more!) Shale is cheap – and returns come quickly. The biggest oil and gas companies have really suffered from their dependence on huge, traditional projects – Shell had to write off several billion dollars after the oil price drop led to the company abandoning its Arctic activity – but they are now breaking even at $20 per barrel, and Exxon are spending a third of their budget for drilling on Shale (OilPrice.com, Mar 27 2017). Independents have been drilling for shale gas for years, but now Big Oil is in play, and in a much better place to throw money at it, they are able to do shale on a bigger scale.

5. They are demanding lower prices from service providers; supply chain margins are falling. And contractors and even permanent staff are no exception to this, with day rates dropping in the past two years – it’s no longer a candidate-led market except in the most technical roles. 

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