OTC 19163

Toward Low Costs for High Cost Resources

David Bairrington, Conoco Phillips; Brad Bodwell, CRA International; Jim Farnsworth, Cobalt International Energy; Tim Parker, Highmount Exploration & Production, LLC; Chuck Pierce, Chevron International Exploration; and Chris Ross, CRA International Inc.

Copyright 2008, Offshore Technology Conference

This paper was prepared for presentation at the 2008 Offshore Technology Conference held in Houston, Texas, U.S.A., 5-8 May 2008.

This paper was selected for presentation by an OTC program committee following review of information contained in an abstract submitted by the author(s). Contents of the paper have not been reviewed by the Offshore Technology Conference and are subject to correction by the author(s). The material does not necessarily reflect any position of the Offshore Technology Conference, its officers, or members. Electronic reproduction, distribution, or storage of any part of this paper without the written consent of the Offshore Technology Conference is prohibited. Permission to reproduce in print is restricted to an abstract of not more than 300 words; illustrations may not be copied. The abstract must contain conspicuous acknowledgment of OTC copyright.

Abstract

Oil and gas companies are being driven to find and develop resources that are intrinsically higher cost than those that were accessible a decade ago. They must face the challenge of lowering full cycle costs so that they can provide their shareholders with the returns that they have become accustomed to in an environment of volatile and unpredictable commodity prices. In this paper, we draw on the experience of practitioners in US and international deep water exploration and development and unconventional resource plays as well as consultants active in developing strategies and performance improvement programs for high cost resources, to uncover common themes in moving toward low costs for high cost resources.

In the view of the authors, three key themes emerge in the effort to lower costs: scale, excellence in execution and controlled experimentation. Scale is a prerequisite for lowering unit costs and leveraging lessons learned; excellence in execution extracts the full value embodied in scarce skilled employees; controlled experimentation is by definition necessary to continuously rewrite the rules of the game in producing high cost resources and progressively drive costs down. This system, once created, can be deployed in new fields and basins to build profitable growth from high cost resources (See Figure).

Toward Low Costs for High Cost Resources

Creating scale requires the patience, selectivity and conviction to capture large resources; the ability to leverage economies of scale and of learning; and the ability to define tasks as programs of work embodying continuous improvement rather than a series of independent projects. Excellence in execution requires the design of processes and business models to let "the right people do the right things;" the application of performance management practices to solidify gains; and a commitment to learn from Supply Chain Management (SCM) best practices across industries. Controlled experimentation relies on transparent information throughout the supply chain coupled with objective, clear decision rules and an emphasis on innovation through applied know-how more than proprietary technology to minimize risk.

There is no silver bullet that will bring down the cost of exploration, development and production; a sustained effort across the supply chain and the industry is necessary. Critical to that effort will be the ability to get the most from the scarce resource of skilled personnel - by clustering them in centers of excellence to stimulate innovation, by deploying them as coaches and teachers for the emerging, more diverse next generation, by augmenting their experience and knowledge with strong information systems, and by leveraging them with well organized, well trained supplementary workers. Technology has an important role to play in each of the sectors represented by the authors; although the specific physical technologies of importance differ for each type of asset, the emphasis in each case is on innovation through application and adaption by skilled personnel.

Introduction

Increasingly, oil and gas companies are obliged to find and develop resources that are intrinsically higher cost than those that were accessible a decade ago. This transition has been forced by the maturation of the basins that sustained world oil and gas supply growth through the 1990s, exacerbated by intense competition for conventional resources from internationalizing national oil companies. In addition, a tendency towards resource nationalism is reserving some prolific basins for the local national oil company or resulting in fiscal terms that threaten economic viability. As a result, international oil and gas companies are driven to the most difficult resources and must meet the challenge of lowering full cycle costs so that they can provide their shareholders with the returns that they have become accustomed to in an environment of volatile and unpredictable commodity prices.

This is, in fact, a continuation of a process begun in the aftermath of the nationalizations of the 1970s, when new provinces such as Alaska, the North Sea and offshore Gulf of Mexico were discovered and developed with greatly enhanced technologies and managerial systems. Remember that the giant Prudhoe Bay field was discovered in 1967 and the Ekofisk, Forties and Brent North Sea fields were discovered from 1969-71. In the late 1960s and early 1970s, Middle East crude oil could be purchased for about $1.20 per barrel, a level well below the eventual finding, developing and infrastructure cost of these discoveries. But Adam Smith's invisible hand was at work, first sending prices through the roof and stimulating a huge surge in activity; then bringing prices back down to earth, causing an extraordinary period of innovation in technologies, rationalization in infrastructure and services and changes in managerial systems to bring costs in line with the new price levels.

In retrospect, the 1990s were an aberration in the trend of more difficult access to conventional resources as the fall of the Berlin Wall discredited centrally planned economic models and low prices created budget shortfalls in resource rich countries, encouraging them to open up their conventional resources to foreign investment. Higher prices of the 2000s have solved the budget shortfalls and slowed progress to more open economic models. Resource rich countries are more and more inclined to favor the conservation of their low cost resources over maximization of short term cash flow. International oil companies are again obliged to stretch the technological and managerial envelope by addressing the higher cost resources that still abound. In this paper, we draw on the experience of practitioners in US and international deep water exploration and development and unconventional resource plays as well as consultants active in developing strategies and performance improvement programs for high cost resources, to uncover common themes in moving toward low costs for high cost resources.