Drilling advances: How to make the pie bigger

FORD BRETT, CONTRIBUTING EDITOR 

So far, we’ve shown that since 2008, U.S. drilling has shown lots of improvement—feet per day have advanced 230%. That’s good. Unconventional production would certainly not be nearly as big without these advancements that make much of the resource economically possible.   

On the minus side of the ledger, during that same time, there was a reliable regression in drilling performance (and safety) when activity picked up. These regressions, which I have been calling “performance twist-offs,” have cost the industry somewhere between $11 billion and $22 Billion. To add perspective, these twist-offs have cost the industry—using an average of $10 million per well— between 1,100 and 2,200 wells that could have been drilled and production that could have been sold. So, the loss is not just cost; it’s also lost opportunity.   

Refer to my last column, Is it always only about people? and prior columns, if you are interested in the complete story and all the data supporting the above summary.  I try to make each of these helpful as stand-alone missives, but there is a red thread running through them all, and prior columns might be useful for new readers. 

In past columns, we’ve briefly looked at the role of technology, business practices, and skills/competency as drivers of improvement, and how these same levers could be used to prevent future Performance Twist-offs. The purpose of this column is to investigate what I think must be a fundamental driver for business practices to be a dependable driver of improvement and how it might be able to prevent these costly twist-offs.  

Follow the money.  

The idea described here is simple, but sometimes the simple things are lost in the details. This simple idea is that to truly add value (i.e., make the pie bigger, so that there is more for everyone involved to be better off), you cannot focus on the operator’s drilling expenses. What the well costs an operator is not relevant to adding value to the industry—and neither is the suppliers’ revenue. It has loads to do with adding value to the operator, but not the industry as a whole.  

Because operators need suppliers, and suppliers need operators, sustainability means that the entire industry needs to add value.  

The following discussion will show why it is changes in the suppliers’ expenses and the operator’s revenue that determine if the pie is bigger. Seems funny, but as in crime movies, let us “follow the money.” 

• The operator’s perspective:  It is, of course, to make profit be as large as possible, Fig. 1. The operator makes an investment, has expenses, sells production to create a profit. One obvious way for the operator to increase profits, as shown in the figure, is to reduce expenses.  
• The Suppliers’ perspective: The drilling contractor, service companies, and tangible suppliers have an identical profit motive, Fig. 2. They make investments, and have expenses, revenue and profit. They, like the operators, want more profit; increased revenue is the obvious way to get that to happen.  

Fig. 1. The operator’s perspective.

Fig. 2. The supplier’s perspective.

There’s nothing really novel with this concept; all simple. Maybe, it is too simple to even comment on, but this basic approach creates a tension that can work against adding value.    

The operator wants reduced expenses, the supplier wants increased revenue. This creates a tension that predated the oil business by several millennia. This tension is not always unhealthy. Competition drives suppliers to improve. Suppliers ensure their revenue is high enough to make a profit to sustain operations and invest in getting better.  Profits provide both operators and suppliers with signals on how to allocate their resources more efficiently.  This mechanism is why free enterprise has always won over command-and-control economies.  

But this tension does mean that when one party wins, the other loses, Fig. 3. This creates a funny or maybe a sad dynamic: Focusing only on the operator’s expenses (which is the supplier’s revenue); when one party wins, the other loses, Fig. 3. One dollar more in supplier revenue is one dollar less that the operator will have and vice versa. As I mentioned above, this tension isn’t all bad, because it motivates cost control, innovation and efficient allocation of resources. Yet, in a funny way, the flow of funds between the operator and supplier doesn’t determine whether the pie is bigger.   

Fig. 3. Focusing only on the operator expenses: if one party wins, the other loses.

How to make the pie bigger.  

Clearly, the operator can make more money, if he pays the suppliers less; and the supplier can make more money, if he charges the operator more. The ONLY way for there to be a bigger pie—for there to be more value created by the endeavor—is for the entire project to Do More with Less.  Do More means increasing production and the operator’s revenue. With Less means reducing the supplier’s expenses.   

Figure 4 shows the simple point that sometimes is lost in the details. Like chemical engineers, put a “control volume” (a fence) around the entire well’s financial system. Money comes into the system by the operator selling production, and money goes out via suppliers’ expenses. The only way for there to be more money to leave the system in the form of profits is to Increase the operator’s income, reduce the supplier’s expenses, or both. The flow of funds between the operator and supplier WILL determine who gets the profit, but it is irrelevant to how much money can leave the system in the form of profits.

Fig. 4. How to make the pie bigger.

What does this mean about how to add value, how to make the pie bigger? 

Operators do a good job of thinking about how to increase production and control their expenses.  Suppliers do a good job of thinking about how to get more revenue from operators and manage their expenses.  If there was something “easy” for one of them to do to make profits bigger, they would already be doing it.  What needs to happen to make the pie bigger for everyone is the operators need to help suppliers reduce their expenses, and suppliers need to help the operators increase their revenues. We don’t normally think about the problem in this way, but to add real value—to make the pie bigger—that’s what needs to happen. 

Some simple things that operators can do to help suppliers reduce expenses is give them more lead time to respond to requests, longer contracts, more information about upcoming requirements to let them plan further ahead, and sometimes just ask the suppliers what they could do as operators to help them lower their costs.   

Some simple things that suppliers might be able to do to help the operators increase their revenues is to be sure that they understand what the operator is trying to accomplish while drilling the pay zone and completing the well. They need to be sure that they make that happen, even if it costs them a bit more. This includes reducing cycle time, if operators are able to value from accelerated production.  

If we do not make the pie bigger—do more with less—we will not really build something that’s sustainable.  In future columns, we will explore ways to do more with less by improving:  

• Technology: better downhole tools and surface equipment move the technical limit forward.   
• People: ensuring that everyone has the knowledge, skills and behaviors to replicate the best of what has been done.   
• Process: defining how we work together, and the DO’s and DONT’s that aim for operational excellence to help us eliminate loss and waste. 

As I have said before, drilling is a “Team Sport” on two levels. The Drilling Team organizes to build wells safely, effectively and efficiently. The larger project team—which includes our brothers and sisters in the geosciences, production, facilities, and business disciplines—work together to add the most value from the project as a whole. We all mix Technology, People and Processes together while we get our jobs done. I am not sure how to do better, but I do know, if we don’t try, it won’t happen by luck.   

In the meantime, I hope to start a conversation with any of you on how we can all help Drilling Advance.  Please email me at ford.brett@petroskills.com, and I promise I will respond.