New technology holds upstream key
Digitalisation is more than a buzzword in the efforts to get costs down and projects started
It is difficult to have a conversation about the upstream oil and gas sector in general without the impact of new technologies, big data and digitalisation looming large. April's MCE deepwater development (MCEDD) event was no different.
But David Phillips, head of equity research, developed Europe at bank HSBC, makes a valid point that, while new technologies are gradually gaining acceptance and implementation in the field, "there is increasingly more discussion around activity growth than around new technology such as digitalisation".
"If you go back to some of the discussions and the corporate PR back in 2017, you could not hide. But some investors feel like they are in the middle of digital fatigue, because they have heard the same story for the last 18 months," says Phillips.
"You can talk about the theme, how it might improve things, lower costs, increase recovery, but what is the number? Is it flat opex over the next few years? Is it 5pc improvement? The numbers are lacking at the moment. So, some investors are like, only when we see some numbers on this, then we can weigh up how important this theme really is," he continues.
And, while technological advances are important in getting costs down, their impact on the structure of how offshore works should also not be underestimated. "What does digitalisation mean for the supply chain?" asks Phillips.
"If you become predictive; if you can automate a lot of your feed process and do work over a weekend that took you a few months before; if you need fewer vessel hours for your maintenance work; if you have different types of contract, such as life-of-field, that means you need, bluntly, fewer engineers, fewer OSVs, so there are a lot of implications," he says.
"As and when activity picks up, are there certain segments that will disappoint people's expectations of a hockey stick recovery, because there are issues in the background that are changing the way operators use the supply chain? The investment community does not quite understand how some slices of demand in the industry will change over the next few years," Phillips continues.
Adding the numbers
Thunder Said Energy (TSE) is a new consultancy dedicated to examining new technology in this space. Thus, it is unsurprising that its founder and CEO, Rob West, is keen to try to answer Phillips' plea for figures behind the digitalisation headlines.
"In deepwater drilling, by my numbers, you have saved about $5mn/well through the automation that has happened so far. I think you can save another $15mn/well," says West. "You can do other things like change the drilling design. Shell has patented some very interesting stuff around mono-bore drilling. Instead of doing these tapered wells that are quite complex, you can just go straight down. BP has patents around free-standing risers, [making lifting] much easier.
"I can find engineering and construction companies that are prepared to put lower contingency into turn-key contracts when digital twins are built, which is going to save single digit percentages that will actually become quite meaningful," West continues. "And, as an example of real-time monitoring, the Norwegian Ivar Olsen field-there are 80,000 tags monitored and tracked in real-time and sent back to shore. If you look at opex in these fully monitored platforms, you are at $3-4/bl."
Robotics is another area of focus. "Everyone is filing patents-UAVs, crawlers, subsea drones, inspecting flare stacks with drones. It is really happening everywhere," he says.
"We did our first billion cell reservoir simulation in 2017. Eni owns Europe's largest super-computer at 22 petaflops. We can get more oil out of these reservoirs. We can also see the reservoirs better. Fibre technologies are getting 100 times better resolution, perf by perf through a vertical well. So, you can see exactly where hydrocarbons are flowing and improve their recovery rates," West continues.
"I have seen papers and patents on companies using machine learning on where to place wells. If you can figure out literally where is the best place you could put it, that is giving around 9pc higher flow rates from these wells," he says.
And the bottom-line figures are striking. "I have taken my average project, with its $50/bl break-even, and easily I can get $2/bl off the capex, easily I can get $2/bl off the opex, and that is a 3pc uplift on the IIR, equivalent to a $15/bl higher oil price. This is what we are achieving with technology in this industry and I think it is transformational in getting capital back amidst the reluctance to invest," says West.
But it is not all good news, not least because the offshore's competitors for that capital are also improving. "If I look at the top 20 technologies for remaking shale, they get you to a $25-30/bl break-even price, and they are happening," says West. "This is what offshore has got to compete with. Other sources of hydrocarbons are improving all the time, offshore has got to be improving all the time."
Innovations in deepwater and offshore represents only 9pc of all the research papers West has analysed, but it accounts for about a third of global oil and gas. "In a way, we are under-indexing on the R&D, we should be doing more here," he warns. In contrast, shale is only 5pc of the world's oil, but 20pc of all the patents and technical papers are shale-focused.
The share of digital-focused innovations is also crucial, given that, according to West, "if we look at what was delivering the uplift in IIR, a lot of this was digital technologies; if they were more of them, it would uplift the IIRs more".
About 1 in 5, 21pc, of all upstream patents and papers are digital in some way, according to TSE research. But for the ultra-deepwater, the share falls to 17pc. "Albeit it is only a small percentage, but we could be doing more on digital in the deepwater," says West.
"And, if you look at the areas where digital is the focus, something like monitoring, we are already there, 70pc of patents have a digital element," he continues. "In the subsea, this figure is less than 10pc. There is a big disparity [in R&D on digitalisation] depending on the portion of the industry at which you are looking."
Investment in new digital technologies could also offer a significant opportunity to differentiate individual operators. "I have been scoring companies on who has the best technology in, say, drilling or completion, and adding it up, company by company. You can then rank who, as an investor, you would really love to see developing a project and who may need to step up their technology initiatives," says West.
For the laggards, "if you do not have your own in-house technology, you just have to pick the best technology available from the supply chain", he continues. "How is that going to affect your returns? There is a multi-dimension of factors that can affect whether a project flies or not, things like how big is the field, how good is the reservoir, how generous is the fiscal regime. All those things are going to vary."
"And, if you have got a great reservoir or great fiscal terms, you can probably use middling technology and be just fine," says West. "But, in this new world of challenged capital costs, if you want to develop the average field in the industry, and create excess return, develop it better than others, have higher IIR, then you need to bring better te