I used to be a pure red blooded driller. Red, the colour of fire and blood, associated with energy, war, danger, strength, power, determination as well as passion, desire, and love. And all of that hot emotions was for my passion to drill. I did not care about anything else other than well length, cost, time, and how great I was at selecting the right tool, using it and of course telling people about my accomplishments. And in Feb 2004, I reached the very pinnacle of being a drilling engineer. I drilled, single handedly (that shall go in my future memoirs), the longest well in Malaysia. At 6313mMD, I, the lead drilling engineer, held the Malaysian record for longest well ever drilled.
Unfortunately that intense self admiration and jubilation was short lived, when in a few weeks that record was broken by another operator. My ego deflated, my self worth diminishing by every mention of the other well's length, I banged my forehead whenever I thought of them who beat my record by a measly 50m. And of course, being a red blooded driller, the only lesson I learned was to just to drill longer next time. If I ever drilled another record breaking well, I will make sure I just put in some contingency shale drilling of about ~60m, so that I never get beaten again -_-
Sadly, I have never had a chance again, because since 2004, there have only been a handful of ultra ERD wells drilled. To put this into perspective, the longest well currently in Malaysia was drilled in 2014 to ~6700m, which is a laudable achievement, but exemplifies a slow progression over 10 years. As a driller, I feel that it is my responsibility to revive the interest in ERD and invigorate the passion for world class records which has since waned in the Malay Basin.
But now I've since gone to the Dark Side (Star Wars trademark), the side that bleeds hydrocarbon, I realise that my previous infatuation with drilling KPIs just seems so irrelevant in the grand scheme of things, when the oil business bottom line are production and profits, and doesn't really give a hoot on how long a well is. To stay profitable, and as reserves become even smaller and difficult to access, it has becomes an ever-more important to focus on looking at several concepts with enabling techniques, to be able to select the right solution to exploit hydrocarbons. As a driller, nothing is sexier and more elegant than suggesting extended reach drilling. While its the most straightforward option which allows the ability to explore and produce further and deeper, and minimise facilities installation, it does come with added risk and possibility of failure.
Any solution proposed requires capital expenditure. And capital expenditure proposals must be sufficiently specific to permit their technical and commercial justification, with sufficient risk assessment, for exploration and production operations, not just for the immediate fiscal year, but the life of the production sharing contract or field. In the economic phase of evaluation, oil management may find that it has more investment opportunities than capital to invest, or more capital to invest than investment opportunities. Whichever situation exists, oil management needs to resort to some economic criteria for selecting or rejecting investment proposals. Management’s decision in either case is likely to be based largely on the measures of financial return on the investment. In the current depressed oil price climate, how do we make extended reach drilling a viable option?
I won’t pretend that I’m an expert at economics like Wally in the Dilbert strip above, but let’s try to simplify the concept for the purpose of this article. Lets just say, all of the KPIs of a well, production, cost, schedule, IRR, ROI, terms of PSC, can all be rolled into a variable limit, the economic threshold of the project.
This chart represents the likelihood of costs in a normal Monte Carlo S-curve spread, where the cost of a project is typically quoted as the P50, with a range given for sensitivities. In layman's terms, the mid case is the P50 (50% chance having costs below that threshold) and P10 and P90 is the low and high side respectively. The range of costs are given so that the project can be carefully evaluated against the returns for any given scenario.
However, most projects focus on the most straightforward approach, which is trying to reduce base cost ('What we plan for' curve), in an attempt to get closer to the low side, and hope that nothing goes wrong to upset the cart and skew to the upside. To shift the whole S-curve downwards, the team will negotiate contracts, purchase cheaper tangibles/consumables, reduce the technology, and try to get the work done with a lean operation. However, as we lower down our price point, we will inevitably be introducing creep, compromising quality and safety. Post experiencing a trainwreck, the looming result is cost inadvertently passing the economic threshold ('What will actually happen' curve).
A prudent project manager should try to visualise, manage and contain all of the outcomes, trying to put a cap on the risk and exposure of the upside, while making the likelihood of meeting the P50 expectation more likely, even if it means increasing the mid-case, and forgoing a more aggressive P10 ('What we actually need' Green curve). To put it simply, don't lose the farm while trying to save every single dollar.
If you are planning to justify a new technology, a new technique, or a risky proposition such as extended reach drilling, there are 5 key elements that you need in your proposal, to emulate the 'What we actually need' green curve:
Key 1: Collaborate and Build the knowledge of your team: Collaborate as much as possible internally, and externally with partners, host government, increase data trade transactions, and engage professional networks in order to learn as much as you can on the venture you are undertaking. In this environment, you will be pleasantly surprised that others might actually be interested to learn from you to. In my previous life, I was part of an assurance team, called upon by our partner in Western Australia to look at their concept work. They were down to two options, where they were weighing a 10km ERD well versus a subsea development, where the costs of subsea were 50% higher. The upside costs presented by the drilling team for the ERD looked reasonable, with their P90 costs about a wash with the subsea well. So on paper, ERD looked to be the right selection. However, the Drilling Manager confessed that despite the economics and his attempt to show the risks, he believes that his team does not have the capability to carry out the work, in other words the drillability due to the capability was questionable. The ERD well was dropped in favor of the subsea well, and everybody agreed that was the right call, because regardless what the evaluation on paper shows, there was no confidence in the team that was to carry the work out. Pity.
Key 2: Cap your upside costs: Gone are the days when people say, "A well is going to cost what its going to cost". Have savvier contracts, such as with lump sum capped, performance incentivised, meterage measured or even turnkeyed contract. We should no longer be dependent on time based contracts, just because the supplier says so. Determine the cost structure which fits your project and design your contracts to meet what is required
Key 3: Increase your execution reliability: This doesn't mean not having problems. What it means is being able to deliver what you promised. So if the design is complex, and on average non productive time is high, design the lower complexity aspects of the project to absorb the possible problems that you will eventually have. Sometimes you have to accept that your planned costs would have to be higher to increase reliability. Justify the increase and plan for success, but be ready for failure.
Key 4: Have contingency plans for everything, even failure of your base plan: It goes without saying that risk assessments are the support system for a project, but without closing out and implementing any of the mitigation plans, the risk assessment are just a waste of time. An always think of what would happen if the primary plan fails? Do you have a fall back plan to still retain value or limit exposure? An alternative target, perhaps? A ready for deployment sidetrack assembly?
Key 5: Increase the value statement of your design: During detailed design, a D&C team often gets carried away on focusing too much on 'getting the job' done versus remembering why the job was done in the first place. Reaching an objective is just the means to extract the value from the project. Design the well in order to increase the returns on the project, and increase the economic threshold. Drill better wells, which doesn't necessarily mean drilling longer or more wells.
Hopefully the keys above will assist the reader in creating more palatable ERD proposals. Every single project, every single team, and every single company will have a different approach in creating value, but I do hope that maybe in some minute way, I managed to jog some life back into excitement about drilling and ERD in Malaysia. Stay savvy, people.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions