Permian operators cash in ... by thinking inside the box
As the tight oil sector continues to mature, producers are looking for ways to optimise their operations, improving efficiency of both production and costs. It's a battle to win back investor confidence.
New research from Wood Mackenzie underscores the fact tight-oil operators are no longer chasing growth at all costs.
Development strategies have firmly shifted to focus on scale: drilling sections instead of wells, with compressed paybacks, at the lowest possible cost.
Many are favouring a “cube” development strategy, viewing it as the most efficient way to capitalise on cost savings.
Ryan Duman, principal analyst, Lower 48 upstream at Wood Mackenzie, said: “Cubes won’t work for every company. That said, they offer big benefits if executed to plan.
“By our models, if an operator can drill each well 10% cheaper than they would via a traditional row development, the cube has superior economic metrics.”
He added: “How much better are the metrics? We see well-executed Cubes increasing present value (PV) by 30% for a full section of Wolfcamp and Bone Spring drilling.”
Wood Mackenzie’s research indicates there has also been a shift in how tight-oil operators view their assets.
Thinking in 3D
Rather than optimising production from a single well, many now aim to realise the full potential of a section, which is where cube development comes into its own.
As the name implies, a cube is a three-dimensional approach to section development.
Mr Duman said: “Encana, Devon, Concho, and QEP were some of the first companies to test cubes. Pioneer is transitioning, as are Chevron and ExxonMobil.”
He added: “The large upfront capital cost associated with cubes cannot be ignored and this will screen out some companies.
"Cubes were originally described as a way to save EURs and limit child well downgrades, but as recent high-profile cubes have shown, the EUR benefit is far from guaranteed.
"Cost savings and efficiency gains are the key benefits and should be the main drivers for switching from traditional row drilling.”
Working with tradition
Traditional row development puts a focus on developing the most economic zones first. This approach worked well when operators were working to establish the highest type curve internal rates of return.
“Row development can increase production per section by as much as 15% because the best formations are always fully developed first,” Mr Duman said.
WoodMac’s research indicates that if operators can achieve at least 10% cost savings per well, then cubes can improve NPV per section by over 70%. Capital efficiency can increase by 15%.
“But cubes offer higher NPV and better capital efficiency. Total capex spend per section is less for cubes than row development because of the scale and speed benefits.
"However, cubes concentrate the spend up-front and decrease flexibility. In fact, if well spacing on a cube is wrong, cash flow can actually be impaired.”
And what about risk?
Mr Duman added: “Investors need to be aware that the cube approach concentrates geographic and subsurface risk. And it doesn’t completely eliminate the risk of child wells.
"Producing wells simultaneously can actually be more costly on a unit basis if the wells are not as productive as expected from overly dense spacing.
"If executed correctly though, investors receive the compound benefits of cheaper wells and faster spud-to-sales time for the entire pad. Both support healthier cash flow metrics.”