Executive viewpoint

As much as shale oil and gas production has already transformed the industry, and the U.S. economy, the shale business is still very much in its infancy. As good as it is now, it is going to get much better, as the industry applies a manufacturing process to field development—essentially a repeatable, assembly-line approach to drilling—whose application will boost productivity.

During the early 1990s, I spent a considerable amount of time working in California’s heavy oil fields, where I learned firsthand the value that an efficient manufacturing approach can bring to oil production. We drilled thousands of wells, built water plants, and installed the steam generators required to effectively steamflood the reservoir. In the process, we drove down the cost curve dramatically.

The very tightness and complexity of the various shale reservoirs will require the optimization of a manufacturing process for ultimate success. The scale and expense of horizontal drilling and hydraulic fracturing are simply too great without significant productivity gains over the long term. This is why, with shale, we must get the technology and geoscience right before we can successfully shift to large-scale, repeatable production, i.e., manufacturing.

Greatest potential. At BHP Billiton, we see the biggest upside around completions technology—frac fluids, proppants, diverters—and that’s where we’re focusing our attention. We are spending considerable time studying the rock, itself, to really understand the water saturations, clay content, depth and pressure—all the things that matter around how easily the formation can be fractured, and how the shale reacts to fracing. Once we find the correct solution to that problem, then we can launch the manufacturing process.

Continuous improvement in equipment and technology, a hallmark of the oil and gas industry since its inception, is essential. Our technology can’t compete with smartphones in grabbing the public’s imagination, but the sheer scale and sophistication of computing power needed to understand the geophysics and geochemistry of rocks and hydrocarbons, miles within the earth, far exceeds any other commercial enterprise.

When we are able to put it all together in an efficient, repetitious manner, we will achieve an economic manufacturing approach that will boost drilling performance, reduce costs, and accelerate the time from spudding wells to the time we sell the products.

Maximizing value. We have made a clear shift in our focus to value over volume. With over 1.5 million net acres across four shale plays—the Eagle Ford, Permian, Haynesville and Fayetteville—we have the ability to increase volumes for many years. As a publicly owned business, however, we must make investment decisions based on maximizing shareholder value. We are, therefore, accelerating our highest-return opportunities while preserving the value of other opportunities for future investment. We have made liquids development our top priority in the near term. Unlike conventional developments, investment in shale carries on for a much longer period of time, depending on the size of the acreage position held, since it involves a collection of hundreds of individual investments that build upon each other. The business becomes self-funding, when critical mass is established, meaning that the stock of producing wells is generating sufficient revenue to fund the ongoing drilling and completion program.

As a long-term investment, the opportunities to add value through continuous improvement and productivity are substantial. Technologies can be employed during Year 5 that may not have existed in Year 1, and they can be incorporated easily into the process. The program can be accelerated or deferred, so long as acreage is held, creating a great deal of flexibility, in order to invest for value.

So, unlike a conventional investment profile, progressive development of a shale play delivers steady growth in production and free cash flow over many years. With a portfolio of opportunities, this profile can be extended, potentially, for decades. This is the repeatable business model that resembles factory production in many respects. And it is perfectly suited to our productivity agenda.

Productivity improvements. BHP Billiton has identified three areas where productivity improvements present an opportunity to add significant value to our shale business. First, with thousands of wells still to be drilled, the prize associated with reducing drilling costs is significant. We have been able to reduce drilling times by as much as 30% in the past year, but given that a large component of drilling cost is not time-dependent, we need to make similar gains across our supply chain.

Increasing ultimate recovery per well through completions optimization is an even larger opportunity. In some cases, production from individual wells has increased by as much as 50% over their expected average.

Finally, we have an opportunity to accelerate revenue by compressing the end-to-end time that it takes to ultimately get a well onto production. This requires flawless execution across multiple work fronts, effective well inventory management, and pad drilling optimization. We have already made significant progress in this area, but we continue to see opportunities for improvement.

The upside associated with productivity improvements in shale is significant. The potential prize is enormous. To date, the shale phenomenon has been confined largely to the United States. We know there are great quantities of oil and gas in shale formations around the world, but a global industry has yet to emerge. Those who get the geoscience right, then perfect a manufacturing system to capture the hydrocarbons, will reap tremendous rewards.