Weekend shale read… The Red Queen for offshore…

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else—if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Alice in Wonderland, Lewis Carrol

Applied to a business context, the Red Queen can be seen as a contest in which each firm’s performance depends on the firm’s matching or exceeding the actions of rivals. In these contests, performance increases gained by one firm as a result of innovative actions tend to lead to a performance decrease in other firms. The only way rival firms in such competitive races can maintain their performance relative to others is by taking actions of their own. Each firm is forced by the others in an industry to participate in continuous and escalating actions and development that are such that all the firms end up racing as fast as they can just to stand still relative to competitors.

THE RED QUEEN EFFECT: COMPETITIVE ACTIONS AND FIRM PERFORMANCE

Derfus et al., 2008

 

Stressing output is the key to improving productivity, while looking to increase activity can result in just the opposite.

Paul Gauguin

 

The IEA has done a review of shale companies financing and for those hoping that they represent some sort of ephemeral phenomenon that will pass as soon as the junk bond market closes, well rates decline, or some other exogenous event arises, they are likely to be disappointed. It’s a short read and well worth the effort. I called shale an industrial revolution the other day and the IEA post is a good short precis on how this came about in financial stages.

SPE also has had some good articles recently on the constant productivity the shale industry is using to drive down costs. This one on Equinor for example:

One of the drawbacks of the status quo is that it requires small armies of field personnel to interpret SCADA data and then adjust set-points to get pumping units back into optimal operating ranges. This manual process can consume half-an-hour per well to complete; downtime that quickly adds up in a field of hundreds.

“What we are talking about is having the machine do that entire workflow,” Chris Robart, Ambyint’s president of US operations said…

The Bakken project comes after a pilot that included 50 of Equinor’s wells, which saw a net production increase of 6%—considerably larger uplift figures were seen from those wells suffering from under-pumping.

Or this one dealing with Parent/ Child wells, which a few months ago seemed to be the latest reason to explain why shale wasn’t a sustainable form of energy, but the industry has solved part of this problem through “cube development”:

But the prize for coining the term cube development goes to Encana Corporation, which says the strategy has increased early well productivity in one of its Permian fields by 70% over the past 2 years. Despite the term’s growing popularity within engineering circles, some companies continue to use different terms such as QEP’s “tank-style completions” for what is seen as the same general practice.

I don’t understand the technology but I have faith that day-in day-out new techniques are being developed that will drive down the costs of extraction and production in the shale industry. You need to be a technical pessimist, which in this age is hard, to believe this productivity direction cannot continue (see Citi here).

Over time the offshore industry will change to compete with shale. The economic force of competition will ensure this. But in order to compete it will need to reduce the cost and time of being offshore dramatically and focuson on high-flow low lift cost projects. Something well underway in the Gulf of Mexico at the moment.

There are huge moves in offshore to improve productivity: all righty focused on spending lowering cost and reducing time to first oil. Some, but by no means all, contractors focused on engineering are starting to see improved profitability. But the sunk investments made in offshore vessels, jack-ups, and rigs have largely had their equity wiped out in the last few years and this is enabling the offshore industry to compete on price and risk in terms of capital allocation from E&P companies. For as long as that is it’s only, or major, competitive advantage all that beckons is an industry that slowly runs down its capital base until project cost inflation can rise. Something that becomes ever more distant the more competitive shale becomes. I realise it’s a bleak prognosis but there isn’t much else on offer.

One thought on “Weekend shale read… The Red Queen for offshore…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s