Technology and Innovation Key to Cost Reduction and Capital Efficiency as Companies Strive to Meet Future Energy Demand, IHS Says

As persistent low oil prices take their toll on both industry profits and spending projections, oil and gas operators are turning, in part, to technology and innovation to reduce costs and increase capital efficiency in the short-term, while aiming to meet increased future energy demand in a low carbon environment, according to new analysis from IHS , the leading global source of critical information and insight.

“Rapid changes in price, such as the halving of the oil benchmark between 2014 and 2015, naturally bring into focus the need for oil companies and their suppliers to reduce costs to maintain viable returns. Technology helps on two fronts,” said Paul Markwell, vice president of upstream oil and gas consulting and research at IHS Energy. “The first is in raising short-term production, the key denominator in the cost-per-barrel equation. The other involves attacking capital costs and operating expenses head on. Both place an emphasis on efficiency.”

Still, investment in oil and gas technology should be viewed as a long-game. Producers, Markwell said, must commit to unwavering innovation through the oil and gas price cycles if they are to meet demand safely and at competitive costs through to 2050 and beyond. Markwell, along with Judson Jacobs, director of upstream oil and gas research at IHS Energy, was a contributor to the recently published BP Technology Outlook, which features their external perspective entitled, “Prioritizing Technologies through the Oil and Gas Price Cycles.”

To meet demand and remain competitive, the IHS authors said in the BP report, operators are pursuing a range of cost-cutting and efficiency initiatives including automation and mechanization of high-cost, repetitive oil and gas activities, such as drilling. They’re also looking to apply data-driven analytics to draw key insights from high-volume data streams, such as detecting when a piece of equipment is going to fail or identifying ‘sweet spots’ in unconventional oil and gas plays. In still other instances, operators are increasing their use of mobility technologies to improve the efficiency and effectiveness of their field workforces.

These same operators are adapting technologies developed in the defense and manufacturing sectors to address oil and gas requirements, IHS said. Applications include deploying robots to inspect difficult-to-access elements such as offshore risers, and piloting unmanned aerial vehicles (i.e., drones) into areas that are dangerous for human intervention. Another area is process control optimization, which applies sophisticated modelling and simulation tools to increase production regularity and run equipment and facilities closer to their designed capacities.

IHS has identified several “pockets of technological excellence” that it believes offer the greatest potential to impact near-term oil and gas industry costs. One such pocket has been the exploitation of shale gas and tight oil resources. The phenomenal growth of these resources since the late 2000s can be attributed largely to manufacturing-style continuous improvement technologies and techniques applied to drilling and well completion activities. For example, drilling efficiency in the Eagle Ford play increased nearly 150 percent from 2010 to 2014 (see Image 1), as an increasing number of wells drilled provided an opportunity to apply these principles.

“In the lower oil price environment, we see an opportunity for producers to mirror these approaches across their broader portfolios by adapting a continuous improvement mindset to their global operations,” Jacobs said. “We believe that elements of these same manufacturing concepts can be applied in more conventional oil and gas settings. The keys for producers are to target repetitive tasks associated with well construction and other field development and operational activities with these forms of ”high-iteration learning,” and to deploy the technology (e.g., real-data systems, advanced analytical tools) that can enable it.”

Another pocket of technological excellence IHS identified involves realizing substantial CAPEX and OPEX reductions through extreme de-manning, or operating oil and gas facilities with far fewer staff than is standard today. By leveraging both higher levels of automation and robust communication networks to remotely operate their facilities instead, oil companies can reduce OPEX by up to 70 percent, and can reduce CAPEX by 3 percent to 15 percent by designing facilities upfront to reflect these lower staffing levels. IHS has documented several impressive cases of oil companies shifting toward this extreme minimum manning operating philosophy in their oil and gas assets, and sees an opportunity to apply this approach more broadly.

A common thread running through all these areas, IHS said, is the increasingly critical and enabling role of digital technologies. IHS analysis during the past decade confirms that digital technologies applied in practice can improve oilfield performance on several fronts, including increasing oil and gas production by two percent to eight percent; reducing facility capital costs by one percent to three percent, and lowering operating costs by five percent to 25 percent.

As Markwell and Jacobs referenced in the article published in the BP Technology Review, the new emphasis on efficiency places high demand on a digital infrastructure that is able to collect, transmit, analyze and act on data acquired through asset operations. It is also setting oil and gas companies on the path to becoming true digital organizations, thereby accelerating a movement that was already underway. Beyond these digital efforts, the IHS contribution noted a host of upstream technology innovations in the areas of seismic imaging, drilling, and enhanced oil recovery that will help to unlock additional oil and gas resources. However the industry will need to be nimble to prioritize different technology elements throughout the price cycle.

IHS sees the key to driving the greatest potential return on the types of technological innovations identified above is for companies to focus their efforts on the most substantial cost categories (e.g., drilling and completion, other CAPEX, OPEX) within their asset portfolios, and on those technology projects that best target them.

For operators that get it right, the rewards can be substantial. In shallow-water gas projects, IHS identified a reduction in lifecycle cost of between nine percent and 32 percent, resulting in a savings of $3 to $11 per barrel of oil equivalent (BOE). In oil sands projects, similar efficiencies enabled a four percent to 12 percent reduction in lifecycle costs, resulting in $2 to $6 per BOE savings. For deepwater oil projects, technology innovations yielded a two percent to seven percent reduction in lifecycle costs, or a savings of $1 to $3 per BOE, IHS said.

“These standout results are generating high levels of interest as companies look to dramatically reduce lifecycle costs to allow their projects to move forward,” Jacobs said, and further added, “Our analysis, coupled with actual industry case studies, demonstrates that real value is associated with technology enabled cost-management strategies. These cost savings are impressive numbers at a time when the pressure is on to dramatically lower costs in order to allow a range of upstream oil and gas projects to move forward.” But, the challenge now is for operators to apply these techniques more widely across their portfolios, to drive learning and to leverage economies of scale.