Ways to Boost Economics of Unconventional Gas

In response to low natural gas prices, and the economic challenges this is causing in Western Canada, the industry must examine and implement improvements that will effectively lower development and operational costs, according to a new study released Wednesday.

The technical study, produced for Productivity Alberta by authors Mike Dawson, president of the Canadian Society for Unconventional Resources, Peter Howard, president of the Canadian Energy Research Institute, and Mark Salkeld, president of the Petroleum Services Association of Canada, was put together to highlight possible operational practices and protocols that will improve the productivity of operations to help in the economic development of unconventional gas projects.

“The concept of project development and employing the multi-well concept can accommodate many of the processes identified,” the report stated.

It noted that while some of the larger companies have embraced a number of the processes, there are a large number of operators that are still conducting exploration based on the one well, one location mindset.

“This approach does not enable cost savings to be achieved and in many cases relies on a drilling window approach for services,” the report said. “Many junior companies, who may have a limited inventory of well prospects and a limited exploration budget, rely on acquiring their service providers in small windows of opportunities when the equipment comes available from larger projects.”

In this scenario, often the oil and gas company that is relying on this window to drill and complete their one well will not only be time constrained, but also will not realize the cost savings of a multi-well drilling program, the report said.

“We all recognize there are some significant challenges in the oil and gas sector right now, particularly in the gas sector,” Dawson said during a presentation, introducing the study at the Calgary Petroleum Club. “We see it in terms of prices, we see it in terms of companies shifting their focus away from dry gas opportunities.”

While the industry is looking at global opportunities through liquefied natural gas exports off the West Coast, he pointed out that realistically won’t happen until 2015 or 2016 at the earliest.

“What can we do to try and improve or help the industry, particularly the gas industry, in the short-term, over the next three to four years? That’s what this study was looking at,” Dawson noted.

In response to the new reality of lower North American prices, the natural gas industry is responding in three directions: one is seeking an improvement in production rates; second is trying to improve ultimate recoverable volumes; the third strives for an improvement in operations and efficiencies to lower finding and development costs.

“The third point is the focus of what our terms of reference [were] for this study that we undertook,” Dawson said.

The document laid out four recommendations based on processes that were identified in the report.

“The recommendations … should be considered as opportunities that many small- to medium-sized companies should consider, particularly in the current environment of low commodity pricing and a looming shortage of equipment and manpower,” the report stated.

The first recommendation encourages economies of scale and the bundling of services.

In circumstances where two exploration and production companies have invested in adjoining land and subsurface development properties, it could be conceivable to drill and complete individually from a multi-well pad, the report stated.

By doing this, costs associated with road and pad construction, transport of materials and equipment, as well as infrastructure development and pipeline tie-in could be shared, resulting in lower overall costs.

“There are hurdles to be recognized and overcome with regards to timing of equipment, difference in preferred service providers and even fluid blends for well stimulation,” the report stated. “A co-operative practice as recommended has the potential for the producers to leverage economies of scale related to construction, completion processes and supply chain management initiatives.”

The report also recommended the formation of “strategic alliances” although it noted that this may be difficult between competing companies who have adjacent mineral titles, due to the perceived competitive advantage.

“In light of current pure gas prices, with no significant indication of price recovery or stability in the foreseeable future, corporate strategic alliances should be considered,” the report said. “Strategic alliances formed to take advantage of supply chain management processes and economies of scale make particularly good sense, especially in the more remote operating areas.

“Setting up product and supply consolidation and staging areas for ease of access and sourcing locally can not only be applied through a strategic alliance between E&P customers and service providers but so to … between E&P companies.”

Thirdly, it was recommended that the use of professional supply chain management with regards to materials management efficiency be implemented to manage processes, assets and flows of material and information required to satisfy drilling and completion needs.

“Supply logistics and related costs can account for possibly 15 to 20 per cent of a typical firm’s total cost,” the report stated. “On the revenue side, the supply chain decisions have a direct impact on market penetration and customer service.”

Globalization of the economy and electronic commerce has heightened the strategic importance of supply chain management and created opportunities for using supply chain strategies and planning as a competitive tool, the report stated.

The fourth recommendation called for the vertical integration of services. The authors noted this is not applicable in every circumstance for every producer, whether they are small cap or large.

“It is recommended that an application of integrated services that can encompass aspects of vertical integration be examined when companies are looking for long-term exploration and development projects,” the report stated. “The scale and duration of operations will dictate as to whether vertical integration makes economic sense.”

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