Saturday, June 17, 2017

Responsible share ownership and drill cuttings in oil and gas wells


In the current economic climate, oil and gas operators do everything to cut costs – sometimes to absurd levels. The horizontal well multi-stage fracking revolution has many think that geology is not that important anymore and that statistically drilling will do the job.  So now, a number of operators are drilling wells with no cuttings sample collection and no geological supervision. After all, the reasoning goes, you really don’t need to know your reservoir you just apply a mega-frack and out come the hydrocarbons. This is especially true for the Montney play on the Alberta/BC border.

Statistical drilling works only where it works. What I mean is that if you do have a development play, yes you can drill it out like a factory spacing horizontal wells out every 200 or 400m and drilling them over as long a distance as production remains economic. In the Montney that means that the ‘lateral leg’ may be 2000 to 3000m long. Operators think as long as you meet the ‘type curve’ with your production you’re doing fine. Type curve is the average production forecast of a well in a certain formation and you can drill when the economics of a well that produces like the type curve are satisfactory, i.e. meet corporate profitability criteria.

In the stock market, everything is based on financial ratios and although these ratios differ by industry sector, investors don’t think typically much farther. So many corporate management teams don’t think much farther either (as they are often compensated in shares and options) and since many don’t even understand the technical aspects of their own oil and gas assets except in the broadest terms nearly every decision is based on those corporate ratios. How much production does an asset have and what do we pay per barrel of oil Montney production? It is often not much based on a true technical evaluation of an area’s geological potential. Thus, who cares about collecting data we have a ‘gas or oil’ manufacturing operation!  In other words, other than financial engineering and reducing operation costs management does not have to use its brains and technical staff is encouraged to think less and less in terms of how to properly manage the asset not only for the future but also for understanding the variable production behavior that exists from well to well within an oil and gas asset because ‘as long as we meet type curve’ we’re doing fine and if we don’t produce enough we just make more frequent and bigger fracks.

Apart from what this kind of thinking does to the oil and gas industry's social license this is not how we should manage these valuable assets. We optimize our short term recoveries at maximum profits but at the expense of our overall recoveries and profits from the asset. Today, the target within the asset is often only one small interval in a huge geological column of rock and we don’t even have the data to determine what that target’s real potential is.

Some companies tell their owners (shareholders) oh, in the Montney we have multiple zones of production. We can drill at one location horizontals that access pay at several depth intervals. Yet, they don’t know whether that is true for their asset without a proper evaluation and they have no idea what the final recovery from each zone is.  Yes, they estimate the ultimate recovery from a well after they have some production history (e.g. a year); this is called EUR.  But really, the EUR is determined by many factors including the reservoir properties but also to a significant degree by the drilling, completion and production practices applied to the play. Ironically, the horizontal multistage fracking technology is an obvious example of that. 

Your EUR is mostly a function of, economics, technology and reservoir quality. What we are doing today is focusing on our immediate technology and economics while completely ignoring the third factor: reservoir quality. Most companies have a general concept of their reservoir which is often based on extrapolation of concepts from adjacent operators. “Our land lies on trend” or “We are producing from high TOC rock”. The latter is often just assumed because someone published a technical paper 200km away from their holdings; sometimes a paper half a continent away.

My company Eucalyptus Consulting, has recently performed a regional Montney study in Alberta and we found that there are a wide range of play and reservoir types within the Montney. Most are what is euphemistically called ‘Conventional’ oil and gas plays and have little to do with production from source rock which is often considered ‘Unconventional’.

With a better reservoir description, we can often explain why one horizontal produces better than an adjacent one. We can determine where in the reservoir the wellbore was placed and with that we can design the appropriate size and type of a ‘fracking program’.  Reducing frack size and preventing formation damage by the selection of appropriate frack fluids may result in major cost savings but industry has really given up on this and is just interested in larger and ironically, in cheaper fracks using ‘economy of scale’.

With a better reservoir description, we can plan for extending the life of a well and even consider enhanced recovery schemes. This may not appear economic now and, I guess, with the world expecting a switch from fossil fuels to renewable endless energy any moment now, who would care about such future recoveries. This was meant to be sarcastic. Because it is ironic that we are treating our hydrocarbon assets with so little thought in this so-called time of sustainability and environmental concern.

If the economic life of a 4 to 10 million dollar well is not much more than 4 to 7 years than we must have a truly endless supply of oil and gas. After that we shut-in the well and hope to have to pay for its abandonment far into the future when according to our economic standards that money is worthless. I wonder whether the people living in that far-away future would think the same when they end-up paying for these abandonments and when the original owners of the play are long gone?  

With extending the life of a well, companies have another lease on life. That is often overlooked in favor of immediate cash flow – something demanded by the stock market but is that about running a good business or about being ‘robber barons’ or flight-by-night operators.

Reality is that stock market investors want investments that provide fast returns and many of the institutions that manage your legacy funds invest on that basis in our industries. We need fast growth and high returns; once the growths flatten we dump the suckers and move to our next 'investment'. This attitude seems in particular to exist in commodities and ironically in high tech. When the ownership has this attitude how can we expect that our assets are managed other than as ‘Pump and Dump’ schemes. But that is what we’re seeing, loud and clear, in today’s oil and gas industry. Isn’t it ironic that in this era where we all standing on our high environmental horses and point to anyone except ourselves that our investment attitudes promote exactly what our mouths claim we abhor?  Well, fellow investors and fellow oil & gas workers, you will reap what you sow. There is a difference between making a quick buck and owning a good business. If we really want to do what we preach then start with responsible ownership. And you thought this was about collecting cuttings!
This posting is not to blame the oil and gas industry. It is to point out your role and your attitudes when investing and the consequences thereof regarding how your assets are managed. What I describe here about my industry of which I am generally very proud, happens in many other sectors as well.
Ultimately, you the consumer demands the products delivered at the cheapest possible costs and your investment habits have a direct impact how that is done. No wonder industries act the way they do when you dump your holdings at the first quarterly report miss. What I am asking you to do is to better look at what you own and how you manage your assets. I think this may be a topic for multiple postings where I will explore a more responsible way and a better way of investing. I hope you join me in this exploration and develop a better more sustainable investment strategy not by sitting on a high horse but by becoming more aware about what we are doing and how that goes down the chain all the way to the workers in our assets.  Your ideas/input are very welcome.
I am proud of my industry and all the good it is doing to our society and I am grateful for investor funding that enables our industry to find that energy. I also think that oil and gas will be part of our resource mix longer than most of us believe.  Look no further than coal - it is still an important commodity a century after oil and gas became mainstream.   
Oil and gas is and will remain, together with many other resources and other industries key to Canada's well being. We may find ever cleaner and efficient technologies. Even coal can be used in a cleaner way. Think of new scrubbing technologies; generation of hydrogen from coal. 
It is wrong to blame or point to one sector in our economy and use it as scapegoat for our social problems, real or imagined. We should all take responsibility for our lifestyle and investment habits. Maybe a greater awareness about our own attitudes may show the way to a more sustainable life.

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