The most important innovation in the past 20 years with regards to GDP is the combination of hydraulic fracturing and horizontal drilling, better known as fraccing or fracking. According to IHS, 2.1 million jobs were generated due to unconventional oil and gas production from 2009 -2014, shaving 1.4 percent off the U.S. unemployment rate and contributing at least half a point to U.S. GDP. During that same period, production of crude oil in the U.S. almost doubled from 5 million to nearly 10 million barrels per day, with just about all of the incremental production resulting from fraccing. While fraccing is a more expensive extraction technique than conventional production, a combination of artificially high oil prices, propped up by OPEC and China, and American ingenuity thrust this new manufacturing process into the mainstream.
"The promise of big data, predictive analytics, and the Internet of Things can unlock unlimited possibilities in driving down the cost of operations"
Fast forward to today, the U.S. oil and gas industry is at a crossroads. The crude oil price floor put in place by OPEC's production quotas and China's inflated spending on resources has been lifted. As a result, the world is producing more oil than it can consume, resulting in a crash in its price. In response, U.S. producers and their service companies have reduced drilling activity from 1609 active drilling rigs to 594, resulting in almost 200,000 direct layoffs. With OPEC keeping the spigots open and China's economic outlook looking more tenuous every day, the U.S. producers have a very difficult choice to make. They can either drill in only the most selective locations or cease drilling altogether until the price of oil returns to a profitable level.
However, there may be a third option that gives the oil producer ultimate control of its costs, securing sustainable profits even at today's oil prices. While oilfield service costs have come down considerably the past year, there is still much more room to go. In the past couple of years, the average cost to drill and complete a well has dropped from $9 million to $5 million and the time from 21 days to 13 days. However, adopting innovations from industries outside oil and gas would be a game changer in accelerating the reduction in costs to drill and produce oil. So significantly, U.S. - based producers would be encouraged to cross last year’s record pace.
As we see the continued collapse of big iron in the Exploration and Production (E&P) sector, digital transformations will accelerate the next wave of operational efficiency. The promise of big data, predictive analytics, and the Internet of Things can unlock unlimited possibilities in driving down the cost of operations. Traditional oilfield services companies such as Halliburton and Schlumberger have moved in this direction offering drilling automation and production optimization solutions using proprietary software. However, software companies are now introducing Platform as a Service (PaaS) to the E&P sector where the convergence of social, mobile, cloud, big data, machines and applications will result in radically improved operational and asset efficiencies, while reducing the downtime and accelerating profitability.
As oil and gas becomes increasingly digitized, large amounts of data are generated across the operations. Data coming from sensors on drill bits, pumps, and other machinery collect millions of data points including depth, temperature, flow rate, etc. However, as these operations are often disparate, the data generated is siloed and not integrated. As such, creating a clear picture across the enterprise becomes a challenge as the data is inconsistent and, often times, contradictory. PaaS allows producers to use data collected from the oilfield more quickly and efficiently, including data from across its partner ecosystem, saving billions of dollars per year. In the oilfield, this helps operators predict failure rates, locate optimal drilling locations, and deliver the optimal mix of chemicals, water, sand, and pressure for fraccing.
Large IT companies such as IBM, SAP, and Microsoft and a handful of Silicon Valley start-ups have recently introduced PaaS to the E&P industry. However one company you may be surprised to see as a leader in this space is GE. Through its San Ramon, CA-based software arm, GE Predix helps its customers analyze and store data in real-time with a closed community secure model. One of its customers, BP, recently announced a pilot to connect 650 of their oil wells to GE's Predix platform by the end of 2015. Each of the wells is equipped with 20 -30 sensors that will generate millions of data points every minute into Predix. This will allow BP to view each well's performance including the quality of the flow of oil and gas coming out of the well. Eventually it is helping BP to proactively manage its own production.
In the next several years, many PaaS solutions will enter the E&P sector as pilot projects. Expect to see fruitful results from these field studies, however, at some point the pain of bleeding cash will force producers to take a chance and fully implement these platforms. The reluctance of the oil and gas industry to adopt new innovations from Silicon Valley has been well documented. However, by breaking down silos of data, oil and gas producers will be able to analyze asset performance across the enterprise, eventually eliminating non-productive time. This may help bring the production costs down to a level where the U.S. can continue its dominance in production growth and put pressure back on OPEC.
2016 will be a year of reckoning for much of the US oil and gas industry. CAPEX cut backs will be even more severe than 2015. The hedges that allowed many of the producers to sell oil above $85 for much of the year are now gone. Expect many small producers to declare bankruptcy (8 in 2015 so far) and continued consolidation in the service and equipment sector. The price of oil is expected to remain volatile for the foreseeable future. Many E&P companies believe their only choice is dramatically cut the costs of operations by expanding layoffs, mothball rigs, and even put a moratorium on college recruiting. I see it a little differently. Not only can U.S. producers survive, I actually see them thriving in a 40 -50 dollar oil environment. What's needed is accelerating the partnership between U.S. producers and PaaS providers. While many companies will offer the service in a pilot fashion, expect 2-4 dominant ecosystems to secure a foothold. Will it be a traditional oilfield player or will it come from Silicon Valley?
20 years ago, George Mitchell introduced the combination of hydraulic fracturing and horizontal drilling to the plains of North Texas. Fracking 1.0 has shifted the balance of power back to where the petroleum industry started. Fracking 2.0 will be required to maintain this balance.
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