A technological revolution in Houston…

[The graph above show US Auto prices hedonically adjusted for quality over the period 1906-1982. NBER].

A couple of great stories from the Houston Chronicle recently on shale production. The first questions whether watching rig numbers is a valuable activity given the increase in productivity?

For example, the number of frack stages in a well are expected to increase 14 percent this year to an average of 28.5, more than double what explorers were able to do in 2014. And the total amount of sand crammed into wells this year is expected to grow 20 percent to more than 100 million tons…

At 7,500 feet, the average lateral length of a well is 50 percent longer compared to three years ago. And a rig can drill 25 wells a year, compared to 15 just two years ago…

And then this on Big Oil displacing Wildcatters, but is really about the how large E&P companies are turning shale into a mass production technique:

Chevron’s frack factory is a choreographed exercise in efficiency. Computer algorithms identify drilling sites. Geologists map out well lengths and locations. Teams of contractors, roughnecks and engineers mount 800,000-pound drilling rigs that cost tens of thousands of dollars a day.

The rigs drill one 10,000-foot lateral, slide over a few feet, and then drill another. Computers automatically chart progress, and drill operators, sitting in a glass box on the rigs, constantly monitor the process, watching for the first indication the pipe is straying out of the shale sweet spot.

Every 12 hours each drilling team reviews its work, comparing progress to the most efficient performances in Chevron’s fleet, and makes corrections to their own drilling, to catch up.

At Shell, the process is so digitized and automated, geologists and engineers guide Permian rigs from the 11th floor at Shell’s Woodcreek campus in Houston, allowing them to drill and monitor 24 hours a day, seven days a week. They didn’t even stop when Hurricane Harvey hit this summer.

Shell’s future, Gerges said, will increasingly rely on automation and mechanization: wireless sensors to check well levels, pressures and temperatures; drones to travel to pipelines, pump jacks and drill pads. Such technologies would automatically report broken equipment, and match contractors to jobs, much as ride-hailing services match drivers with passengers.

I am clearly not a geologist but I repeat here that it seems clear this is an industry undergoing a huge investment cycle that is leading to rapid technological change and productivity enhancement. This is not a new phenomenon of the modern American economy, indeed writing in 1990, at a time when the US was insecure about its economic position Gavin Wright looked at the origins of American industrial success and noted “whether resource abundance reflected geological endowment or greater exploitation of geoglogical potential. It was mainly the latter”.

Shale isn’t going to be all conquering but it is going to be a constant and important part of the energy mix. For offshore there is no comfort in saying shale is “uncompetitive” and cannot produce the volumes required as the entire economic model has changed now E&P companies need less reserves and have more available sources of short-term production increase.

Offshore needs technology and innovation to lower unit costs and compete with short cycle production: not just for production levels but for capital allocation from E&P companies. Greater standardisation, lower cost components, less asset intensive installation etc will all form a part of it which will make it more attractive as E&P profit margins increase to reflect the length of the investment cycle. Offshore industry recovery ,with straight volume increases that lead to higher day rates and utilisation, might well be part of the story but to pretend they are all of it is ignoring the scale of change undergoing in the shale industry and E&P company thinking (and ultimately capital allication). The days of building more assets, at ever higher numbers, as the price of oil increased have gone for good.

3 thoughts on “A technological revolution in Houston…

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