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CERAWeek: Shale Plays Forcing Industry Innovation

Ironically, the oil and natural gas industry's recent focus on shale plays, which was made possible by technological breakthroughs, has prompted more recent innovations, according to Jonathan Lewis, Halliburton senior vice president, drilling & evaluation.

"While there's always some level of background innovation taking place, it's invariably the technical and economic challenges of the new play types that catalyze the greatest innovation velocity. To meet the innovation requirements of these new play types in particular -- to meet what we call operator need -- service companies have traditionally focused on technology innovation," Lewis said at CERAWeek 2011 in Houston.

"But...while technology innovation will continue to be hugely important, we believe that operational process innovation and to some degree commercial innovation will increasingly play an important part in delivering the productivity and efficiency gains that unconventional shale gas assets in particular are mandating to enable our operator customers to make a fair return."

The economic challenges of shale plays are forcing the industry to question traditional ways of working, according to Lewis. "Shale gas operations today have unquestionably become something of a crucible for operational process innovation, particularly in the last couple of years. You might argue that typical margins in the oil and gas business for all players -- service companies and operators -- have allowed us to live with levels of inefficiency that would be, quite frankly, unthinkable in other industry segments. We tolerate 20-30% nonproductive time in many of our rig operations today, and we have significant downtime and very expensive assets that would not be tolerated in other sectors. The economics of shale gas assets are unable to support such inefficiency.

"We are seeing a unique focus on operational process innovation as we strive to reduce costs and make these types of assets economic. Twenty-four hour operations are the norm in many basins, and we're moving away from siloed or discreet delivery to integrated work flows that support this concept of systems thinking and the efficiency gains that come from this, particularly around the well-construction and well-completion process. This approach to innovation has driven significant reductions in drilling and completion times, particularly here in North America."

QEP Resources CEO Charles Stanley, who joined Lewis and other industry representatives on a panel discussion Tuesday, said his company has achieved a low cost structure by focusing on continuous improvement and operational excellence. QEP is active in the Haynesville Shale and Pinedale Anticline, as well as the Woodford Shale, Granite Wash and Bakken plays.

"When we started in [the Haynesville Shale] several years ago it took us over 66 days to drill a well from the surface down to about 17,400 feet. During 2010 we average a little under 40 days to drill the same well to the same total depth. This has resulted in dramatic increases in efficiency from not only just well construction but also completion efficiency, and as a result our completed well costs have come down from over $10 million in 2009 to $8.5 million in the latter half of 2010." Similarly, in the Pinedale Anticline innovations including a move to multiple well pads have cut drilling time from 60 days in 2003 to 16.8 days in 2010, and well costs from an average $8 million to just $3.9 million. "With the huge number of locations to drill here in Pinedale -- over 1,300 remaining locations -- obviously this incremental cost savings is dramatic and will ultimately drive the economics of the play."

Technological innovations will play a critical role in overcoming challenges the industry faces, including increasing energy demands, carbon management and drilling in more difficult locations, said Gerald Schotman, Shell's executive vice president, innovation and R&D.

"Many of our current industry challenges are so complex and so big that it's very difficult to do it all ourselves. We need to adopt a new model now if [we] are to have any chance, any hope of addressing the ever-growing and more pressing future challenges." The new model will be based on inclusiveness and collaboration, with investor-owned companies, national oil companies, service companies, governments and universities "working together, playing to their strengths and pushing the technology envelope to provide even more integrated solutions," Schotman said.

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