July 29, 2018, by Ernest Scheyder and Ron Bousso
LUFKIN, Texas/LONDON (Reuters) – In the pine forests of eastern Texas, oilfield workers equipped with virtual-reality goggles are helping BP’s (BP.L) shale business turn a profit for the first time.
Thousands of automated wells feed data on their performance into the firm’s supercomputers each evening. If they show a need for maintenance, an Uber-style system summons a subcontracted repair firm to keep the shale wells flowing at optimal output and minimal cost.
Such technology has helped slash BP’s shale oil and natural gas production costs by 34 percent over five years. The shale business turned a profit for the first time in 2017, BP said, although the company declined to disclose the figure.
BP’s progress in shale underpinned its $10.5 billion acquisition last week of BHP Billiton’s (BLT.L) U.S. shale operations. The deal highlighted BP’s newfound confidence in a sector that has challenged oil majors, which initially struggled to adjust to the quick pace and fast-evolving methods used to tap shale with horizontal drilling and hydraulic fracturing.
BP and other majors that had traditionally focused on large, multi-year conventional drilling projects – such as Royal Dutch Shell (RDSa.AS) and Chevron (CVX.N) – were left behind when the shale boom took off a decade ago.
The British energy giant is now catching up with smaller rivals, using technology and its institutional knowledge from global operations to push shale into a second phase that it hopes will reward its massive scale over the agility of smaller competitors.
“We spent the last four years retooling our business and getting ready for this opportunity,” David Lawler, who heads BP’s shale business, said in a call with analysts after the BHP deal announcement. “We’re at the lowest production costs we’ve seen in many years. We’ll take that model, put that to work on these (BHP) assets and dramatically improve production and performance.”
BP faces other large rivals in the race to grow U.S. shale production and profits, including Exxon Mobil Corp (XOM.N), Chevron, Shell and Norway’s Equinor (EQNR.OL). All are expanding drilling and acquisitions, particularly in the Permian Basin of West Texas and New Mexico, the largest U.S. oil field and the center of the shale revolution.
They aim to capitalize on the vast resources unearthed by new drilling technologies, which also allow companies to start and stop production quickly in response to market shifts. That’s a key advantage over the long-term commitments of billions of dollars required by offshore oil or liquefied natural gas (LNG) projects.
The BHP deal will transform BP into one of the world’s biggest shale oil and gas producers. BP’s total shale output will increase from 315,000 barrels of oil equivalent per day (boed) to more than 500,000 boed. Its reserves will jump 57 percent to 12.7 billion barrels of oil equivalent.
BP’s output of shale oil – which is worth more than natural gas – is poised to rise from about 10,000 barrels of oil per day (bpd) to about 200,000 bpd by the middle of the next decade.
The deal, BP’s first major acquisition in 20 years, also marked a watershed moment for the company in the United States as it looks to leave behind the $65 billion fallout from the deadly 2010 explosion of its Deepwater Horizon rig in the U.S. Gulf of Mexico.
The BHP deal will also re-establish BP as a major player in the Permian Basin. BP had sold all of its assets there to Apache Corp (APA.N) in August 2010, right after the Gulf disaster.
(Graphic: Oil majors U.S. shale production in 2020 png – tmsnrt.rs/2K1IOVN)
UBER, POKEMON AND OIL
Today, BP operates more than 1,000 shale wells that produce mostly natural gas in the Haynesville basin, which straddles eastern Texas, Arkansas and Louisiana.
It has used the data from its automated wells to create a streamlined system that farms out maintenance to a fleet of lower-cost contractors. The firm now orders up repairs much in the same way a homeowner uses a mobile app to hire a maintenance person or a passenger summons an Uber for a ride.
BP puts repair work out for bid to pre-approved contractors, who then compete for jobs. Each contractor is rated after completing the work, and those with high rankings have a better chance of getting hired again.
“This means we’re not hiring and firing staff all the time depending on market conditions,” said Brian Pugh, chief operating office of BP’s shale division, which the company created as a stand-alone unit in 2015.
BP equips field staff and contractors with augmented reality goggles to make repairs more efficient, modeling its methods in part on “Pokemon Go,” a popular video game where virtual images appear to be in real-world surroundings on the player’s screen.
The field workers are connected through their headsets to BP’s Houston offices, where experts can see and show staff how to perform repairs while they work.
BP has started to collect many of these fixes in a video library so staff can call up videos, much like YouTube, to fix problems themselves without expert consultation.
The company’s algorithms crunch data compiled from its wells each evening. Operators wake up each morning to a report telling them which wells may need repair, a task that once took hours each day as workers drove from well to well in search of problems.
The systems, BP said, cut downtime for wells needing repairs by 50 percent, boosting production last year by 70 million cubic feet of natural gas across its shale portfolio.
The technology provides a panoramic view into the ongoing needs of the oilfield, said Kimberly Krieger, who overseas BP’s shale operations in eastern Texas.
“It’s like looking into a crystal ball,” Krieger said.
(Graphic: BP shale cost cuts – reut.rs/2K51HHq)
SLASHING COSTS, TURNING PROFITS
The firm’s success in reducing costs reflects its ability to spend money automating its oil fields and overhaul work processes to drive down service and equipment costs. BP also separated its shale business from the main company to allow the business, now headquartered in Denver, to form its own culture.
“We’re able to leverage the best parts of our global business to boost our shale operations,” Pugh said. “Our smaller shale rivals in the U.S. don’t necessarily have that.”
Other majors are shooting for the same results.
Exxon expects its shale operations to produce $5 billion in profit by 2022, compared to a $2 billion loss in 2016.
Chevron expects 10 percent of its profit to come from the Permian by 2020 after it lost money there during the oil downturn of 2014 to 2016.
Shell forecasts that shale operations will make money for the first time next year and cash flow will hit $1 billion by 2020.
“We use our global size to our advantage when we negotiate with suppliers.” Greg Guidry, who recently retired as Shell’s shale boss, told Reuters in March. “Costs keep coming down.”
Reporting by Ernest Scheyder and Ron Bousso; Editing by Brian Thevenot