(Originally written for McKinsey’s website, using their data and analysis).
Well intervention best option for cost conscious mature field operators
With oil prices above $100/bl for much of the last decade or more, there has been little pressure to keep a lid on operating costs, which have risen steadily over recent years, especially in mature offshore provinces such as the North Sea. Now that prices have fallen the issue is coming sharply into focus, with many operators seeking to protect squeezed cash flow by cutting costs whilst maintaining production.
According to our latest research, well intervention is a better approach to lowering operating expenditure per barrel in mature areas than drilling new wells. Analysis from our Energy Insights Well Intervention Benchmark shows that those companies adopting an “active” interventionist approach are seeing unit lifting costs about 5% below those with an “average” one, indicating that it offers good value for money, with active operators more than recouping their additional costs. Intervention is also usually cheaper, quicker, and less risky than drilling a new well.
Active intervention achieves a higher return per barrel by enhancing the overall volume of recoverable liquids (volume protection) by an average of 5% compared to average operators, according to our figures, while production is boosted by 10% on average. The costs involved are relatively low – in fact, the cost per barrel added from intervention is roughly 5-10 times lower than the existing average unit lifting cost, making it well worth the effort even for small incremental volumes.
Graph – Cost per barrel added from intervention for a group of assets USD/barrel
Incremental production can be calculated by subtracting the production rate trend before intervention, from that afterwards. When results from 2012 and 2013 were compared, those companies that actively intervened extracted over 5% extra on average, with the top quartile over 10% and some as high as 40%.
Given the evidence of intervention’s cost-effectiveness, the current low activity levels in the sector suggests the industry is missing a trick. Operators have been reluctant to adopt an active intervention programme for a variety of reasons, including a “Green field mind-set”, where many operators of a mixed portfolio of green and mature fields struggle to get the balance right. Consequently, many companies, particularly the majors, are seeking to address this by divesting mature assets. In response, specialist independent mature-field operators are gaining ground, acquiring such assets, and developing them with a focus on cost and active intervention.
McKinseys also believes there is a tendency toward a short term focus in many companies, obliging asset managers to deprioritize well integrity and production optimization tasks, in favour of maintaining current production levels. While that may prove a priority in the short run, it can lead to an erosion of asset integrity, as well as missed cost saving opportunities. There is also an ingrained belief that drilling new wells brings higher value, although our findings tend to disprove that.
Adoption of new techniques is also constrained because many mature field operations have no single point of responsibility to minimise cost and maximise long term recovery, and there may not be an interdisciplinary team responsible. Combined with limited management time, and little data or guidance to make better choices, this leaves operators tending to do what they have always done.
A failure to focus on production costs has left many operators today without much practice in well intervention and performance monitoring. That unfamiliarity combined with a traditional preference for new wells, creates uncertainty over what may be a relatively untried option. This added risk is made worse by uncertainty over the benefit of intervention. Asset teams often lack the information to be certain that intervention will bring higher value than drilling, and decision makers can also be deterred because there is no potential for a big upside win with steady low-cost, low-level intervention.
Above all a lack of measurement and comparison of the results of intervention, means operators are left to guess at how successful they have been. Only a few operators benchmark rigorously, and without benchmarking there is no point of reference for performance and practices. It is important to assess the incremental recovery, and compare it to the costs of intervention in each case, so the most efficient approaches can be adopted and fine-tuned. Most successful companies get better with time at both refining their intervention techniques and monitoring their success. This leaves them better placed to reduce operating expenditure, and maintain cost effective production from maturing fields.
When resources are limited, as is the case in the current low price environment, it is important that production enhancement efforts are directed in the most cost-efficient way. In the case of intervention, it represents lower up-front costs than new wells, reduces average operating costs, and adds significantly to daily production and overall recovery volumes. Many operators do not value intervention sufficiently, tending to opt for new wells instead. And when intervention is undertaken, it is often carried out in a sub-optimal way and not measured to assess performance. The best operators actively seek ways to do more intervention with more impact by putting the right enablers in place.