Operators working in shale and tight oil plays are no longer chasing growth at all costs, shifting to scale by drilling sections instead of wells with compressed paybacks at the lowest possible cost, according to new research.
As targets in onshore basins continue to mature, exploration and production (E&P) companies are finding ways to optimize operations, improving efficiencies “to win back investor confidence,” Wood Mackenzie’s team said Wednesday.
Some E&Ps have adopted cube developments, a three-dimensional approach to section drilling, to capitalize on cost savings. The technique initially was pioneered by independents like Encana Corp.
“Cubes won’t work for every company,” said principal analyst Ryan Duman, who oversees the consultancy’s Lower 48 upstream unit. “That said, they offer big benefits if executed to plan. By our models, if an operator can drill each well 10% cheaper than they would via a traditional row development, the cube has superior economic metrics.”
On how much better the metrics are for cubes, look no further than the Permian Basin’s myriad formations, where most Lower 48 activity today is centered.
“We see well executed cubes increasing present value (PV) by 30% for a full section of Wolfcamp and Bone Spring drilling,” Duman said.
Research indicates there also has been a shift in how tight oil operators view their assets. Rather than optimizing production from a single well, many now aim to realize the full potential of a section, which is where cube development shines.
Along with Encana, Devon Energy Corp., Concho Resources Inc. and QEP Resources Inc. “were some of the first companies to test cubes,” Duman said. Permian pure-play Pioneer Natural Resources Co. also “is transitioning” toward cube development, along with supermajors Chevron Corp. and ExxonMobil.
“The large upfront capital cost associated with cubes cannot be ignored, and this will screen out some companies,” said the Wood Mackenzie analyst. Cubes originally were used as a way to save estimated ultimate recoveries (EUR) and limit parent-child well interference, “but as recent high profile cubes have shown, the EUR benefit is far from guaranteed.
“Cost savings and efficiency gains are the key benefits and should be the main drivers for switching from traditional row drilling.”
In traditional row drilling, development is focused initially on producing the most economic zones, an approach that worked well when operators were working to establish the highest type curve internal rates of return.
“Row development can increase production per section by as much as 15% because the best formations are always fully developed first,” Duman noted.
If operators are able to achieve at least a 10% cost savings per well, cubes may improve net present value, i.e. NPV, per section by more than 70%, according to Wood Mackenzie research. In addition, capital efficiencies may increase by 15%.
There are caveats, Duman noted. Cubes may “offer higher NPV and better capital efficiency,” as total capital expenditures per section are “less for cubes than row development because of the scale and speed benefits. However, cubes concentrate the spend up-front and decrease flexibility. In fact, if well spacing on a cube is wrong, cash flow can actually be impaired.”
He said investors “need to be aware that the cube approach concentrates geographic and subsurface risk. And it doesn’t completely eliminate the risk of child wells,” which are developed from parent wells.
“Producing wells simultaneously can actually be more costly on a unit basis if the wells are not as productive as expected from overly dense spacing. If executed correctly though, investors receive the compounding benefits of cheaper wells and faster spud to sales time for the entire pad. Both support healthier cash flow metrics.”