Companies also must stand strong on safety and community engagement while remaining nimble to respond to volatile market
By Linda Hsieh, Managing Editor, and Alex Endress, Editorial Coordinator
Alex Archila is Asset President of Shale for BHP Billiton.
What do you see as the most critical challenges facing the upstream side of the oil and gas industry right now?
Clearly, the cost issue is front and center. Some people say that you should never waste a good crisis, but to me, it goes beyond that. The margins have shrunk extensively, and we don’t have an option but to respond. We have cut our capital program for US shale from more than $4.5 billion in FY 2013 to about $1.5 billion this year.
In these slow times, it’s also key that we don’t forget to work with stakeholders. For example, we have stepped up our disclosure regarding how we are handling frac water and greenhouse gas. BHP Billiton has very strong positions on how to engage with our communities.
How is the drilling industry maintaining recent strides in safety in the midst of necessary cost reductions?
Safety is always at the forefront, and we cannot lose sight of our license to operate. In this economic environment, we need to work together to ensure there is at least one company representative from the operator or drilling contractor to go through hazard identifications so that no one is at risk when they go and execute their jobs.
We also need to develop sustained stability and expertise. Sometimes in a downturn, the quality of staff at the rig site can suffer, and that could bring increased safety risk. Maintaining competent staff is a huge part of keeping our license to operate as an industry.
In 2015, I made a personal commitment to my workforce that I would stay close to the field. We have five fields, so I go once every month. We sit down and frequently review their risks and overall safety, and I ask them questions. Do you feel safe? What are the risks? How are we controlling them? These visits become very fruitful because I can learn about what the crews are experiencing firsthand. I watch for things like near-misses, which indicate where things have gone wrong and where we can improve.
It is typical in a downturn for people to get worried about their jobs and become sidetracked while they are performing tasks. But if you allow that to happen, you can get injured. For that reason, I ask them to continue to focus on safety. Things will be what they are, and prices are what they are. We cannot control OPEC, but we can control our health and our safety.
There is also a need for improved communication between the service contractors and the operator. Are the safety expectations clear? Are our deliverables clear in terms of how fast we want to drill and how many stages per day we need to do? There is a sense of cooperation that has already occurred and continues to occur between the service company and the company hiring them, and there’s a vast knowledge pool in the contractors’ workforce that the upstream companies can largely benefit from. I think that, as long as we keep communicating and optimizing our needs, we will continue improving our margins regardless of price.
What are the challenges specific to shale operations?
It is a higher-cost part of the portfolio compared to, say, offshore operations. At the macro-level, we need to start preparing ourselves for increased market volatility. I mention this because shale investments are very granular – you can speed them up or slow them down in response to prices if necessary. That will be a challenge for the industry because predicting prices is going to be more difficult, and we could see spikes and folds a lot more frequently. Players that normally hedge production to maintain drilling programs and completion programs may find that they cannot hedge because the risk is too high. All this is about to be seen as the world enters a new dynamic in the supply and demand relationship of oil resources.
The situation we have at our Permian asset is an example of that. Right now, we’ve gone down to two rigs in the Permian. We are drilling all of our leases, and we’re producing 30,000 BOE/day, but frankly we are waiting on better times to proceed with further development.
The other challenge is that the shale industry is young. It has only been around in full force for about 10 years. We’ve all gone through a learning curve of how to properly frac and complete these wells. We’ve also learned how to put together our development plans. In a slow cycle like the current one, all of these things need to be optimized. It’s easier said than done in the unconventionals.
In the conventional world, you have a whole field to yourself, for the most part. In shale, there are different people developing the same field at the same time. Furthermore, the shale reservoir’s performance can vary so much by factors such as local stresses, which affect the orientation at which you drill your wells, which in turn affects the way natural fractures assist permeability.
The variability of development is quite complex for a given company in a given area. There are sweet spots among sweet spots, and you can move only two miles away from a spot with condensate to find dry gas in the new spot. Your competitor’s activities add new complexities to your development when wells hit each other. The concept of optimized development in shales that is so severely impacted by prices needs to be taken to the next level, and we’re all actively working on that.
Another challenge is gas, which is facing long-term challenges. Can US gas compete with LNG in Europe? Can it compete with Russian gas? Can it compete with Australian gas? I believe the challenges for dry gas are likely to stay longer than the oil challenge. In order to compete on an international stage within the natural gas market, US operators may need to further lower the overall cost base of producing unconventionals.
Even with massive layoffs, the industry is still trying to fill the generational gap. How can we sustain the progress we’ve made?
The industry must continue to attract and train the new generation of young engineers. They think differently than people at my age thought when we joined these companies. In those years, your view was you worked for a large, major company, and you retired there. However, if you look at the young people today, they are looking to collect experiences. Very few of them really think the way we did.
I think that if we give our young professionals tools in their toolkit that are transferable, they will always find that appealing. BHP Billiton is spending a lot of effort in a program that we call Leadership Step-up. We’re finding that the skills we’re giving them in terms of engaging with each other are making a real difference for them. They know that we need to react to oil prices, but as long as we keep nurturing them, they will be happy to stay and take the risk. They don’t want to leave the industry because they like where they work and the skills we are giving them.
I think that if we all give these young professionals more tools in their toolkit to be better workers, wherever they are, they are more likely to stay in our industry than get scared by the slowdown and move.
I also think the culture of our organizations is an issue. We all need to have a culture that is clearly oriented to the bottom line. For the shale business to survive, every part of the business needs to think like owners. We all come from large organizations where functions tend to be set apart in silos. But in the shale business, we all need to think like our business is a shop.
What can the drilling industry do to come out of the downturn better off than it was before?
I think that some of the critical improvements need to come in the structural elements of the work we do that are unaffected by the commodity. If all your savings come from renegotiation of contracts with your drilling contractor or with your completions supplier, as soon as activity returns, some of those contracts will simply go back up. The structural things that I am talking about are how we innovate in our completion designs so that we need less sand or less volume, for instance. What are the elements of casing design to use so that my well is cheaper? What are the elements of reservoir engineering that I need to still get the same recovery with less completion? It is in how we do things as opposed to how much we pay for things. Clearly, they’re related, but to me, that is what the industry needs to do.
Do you think North American shale activity will ever return to the level of activity we saw it grow to in the past 10 years?
We have just come out of one of the longest periods of oil price growth. That dynamic is a once-in-a-lifetime event. For that reason, we shouldn’t judge the life we lived over the past 10 years as the benchmark. Additionally, we will continue to see more efficiency in the investments we make. I believe it is unlikely that we will see the same level of activity in shale that we saw in the last 10 years. Into the future, we need to be prepared to make quick changes in order to be profitable. That will require a technically knowledgeable workforce and a dynamic culture. It is a tough challenge, but that is what makes shale such an exciting opportunity. DC