My energy finance career began in late 2014. As commodity prices fell from $100 to $35, I had a front row seat to the devastation. To quote Berkshire Hathaway's 2001 letter, "you only find out who is swimming naked when the tide goes out." It turned out that many unconventional operators and service businesses didn't own bathing suits. My job was to identify fundamentally strong businesses that needed additional capital … not to survive, but to thrive in the new "low tide" environment. To follow Buffett's analogy, I was buying flippers and goggles for the modest swimmers.
Following 18 months of carnage, commodity prices began to improve in 2016. Surviving operators had been forced to rethink their business models: pivoting from "frac 'n' flip" to "hydrocarbon manufacturing". Over the following two years, I familiarized myself with hundreds of service companies and their operator customers. The entire industry was chasing two seemingly conflating objectives: 1) creating wells that are more productive 2) creating wells that are less expensive. This is the Shale Operator Dual Mandate: make wells better while making them cheaper.
Shale Operator Dual Mandate
As an oil service investor, I was uniquely focused on how each company I met helped their customers accomplish the Shale Operator Dual Mandate. Services that achieved one goal would likely survive, but not thrive. However, those that helped customers meet both goals were sure to be the winners in the "new normal" price environment of $50 oil.
Transformations happened quickly throughout the OFS value chain. Zipper fracs drastically improved surface efficiencies, ultralong laterals were drilled further than ever before, in-basin sand mines appeared overnight, and new measurements came to the fore. These new measurements deliver incredible insights: fracture half length, well productivity by zone, vertical frac growth, optimal perforation placement, and much more.
In Basin Sand
New Measurements
While zipper fracs, long laterals, and local sand have taken over their respective markets, new measurements have struggled to gain traction outside of "science pads". Frustrated technical service providers bemoan the resistance to change and slow pace of adoption in our industry. These obstacles failed to slow the advance of zipper fracs, long laterals, and local sand … why have disruptive new measurement technologies been on the outside looking in?
Challenge #1: Unclear Economics
The first challenge for new measurements is unclear economics. Despite the recent improvements, unconventional development remains cash flow negative … and has been since its inception.
The above data suggests ~ $400B of cash burn since 2001 … small wonder operators are wary of unproven returns on investment! (Note: to be fair, operators were incentivized by capital markets to outspend cash flow for the great majority of this period. Only recently has Wall Street evolved its thinking to contemplate cash on cash returns, as opposed to NAVs).
For any technology to become mainstream, it must either immediately lower costs (e.g. zipper fracs, local sand) or have obvious paybacks (e.g. long laterals). New measurements, by contrast, do not clearly map to economic returns. Instead, these service providers tend to focus on "interesting" engineering data and operational case studies. Operators will not put a technology into wide use until its economic impact is fully understood. This can mean waiting months for offset wells to come online or years for neighboring operators to release results.
Challenge #2: Changing How Customers Work
The second challenge, which is just as important to end users, is that service providers must deliver insights within a customer's existing workflow. Operators are busier than ever before. E&P companies have experienced waves of layoffs, leaving those remaining to perform tasks previously done by now-departed colleagues.
In addition, many service providers don't appreciate the opportunity cost of elongating an existing customer workflow to incorporate new variables. A smaller staff is already being asked to perform more work per person; it should be no surprise that customers are hesitant to allocate budget dollars to perform even more individual work.
Challenge #3: No Silver Bullets
While each new diagnostic data type is an important piece of the subsurface puzzle, no single element can complete the picture on its own. Instead, each measurement should be contextualized alongside others. For example, fiber optic measurements can be viewed alongside tracer data to better determine which stages are contributing the most to production. When each diagnostic data source is delivered in different medium, it becomes nearly impossible to overlay these measurements into a single view.
The Oxbow Theory
The combination of the above factors leads to the "Oxbow Theory" of new measurement abandonment. As you may know, as rivers age, certain sections of the river meander off course. Over time, sediment is redistributed around the meander, further enhancing the river's bend. Eventually, the force of the river overwhelms the small remaining 'meander neck', and an oxbow lake is created. Sediment deposited by the (now straight) river prevents the oxbow lake from ever rejoining the river's flow. By the same token, new measurement techniques that do not cater to existing workflows may be trialed but will not gain full adoption. Instead, they become oxbow lakes: abandoned to the side of further-entrenched workflows.
Our Solution: Petro.ai
Petro.ai is the only analytics platform designed for oil and gas. If you're an operator, we can help make sense of the tsunami of data delivered by a fragmented universe of service providers. If you're a service company, we can help deliver your digital answer product in a format readily useable by your customers. Please reach out to info@petro.ai to learn more.
