Q: How should I factor changing commodity outlooks and prices into my pad design?
A: Richard Gaut, CFO of Petro.ai sheds some light on this tough industry question, “Traditionally, you don’t have a good idea of how a well will perform for the rest of its life, until the first six months have gone by. So, operators are thinking, six months from now the world could be falling apart and even though today it looks like $95 per barrel, we could be back at $60—so how would this pad really look economically once we have the taps turned on? The operator is doing that downsize scenario analysis.
“With Petro.ai you don’t have to wait 6 months. You have to wait 8 seconds while the next scenario runs. It’s transformational how fast you can analyze your DSU to DSU development strategy. That’s a one click change to take a scenario from $95 to $65.
“Traditionally, you’d have to start back at the beginning for each iteration, rerunning the whole process, redoing all the work. For Petro.ai, that’s one input into the system.
“The challenge that we see our clients having is that the operator knows that the wells that they’re drilling and completing today, are wrong. They’re designed for a $65 world and their sponsors are making them keep their wells too wide. They’re so concerned about the degradation as you tighten these things down, that they won’t allow their engineers to do it.
“Even though our analysis shows that at these commodity prices, if you went from 4 wells per section to 6 wells per section you’d be in a better place. But in any company, there’s a competition for capital. You should be putting more wells in the ground because you’re going to get a return but they won’t do it because they’re so afraid of this offset degradation.
“We’ve gathered enough data and what we’re sharing back with the leadership is arming them to go increase their capex, to increase their drilling completion budget. We’re arming them with all these different scenarios of if we tighten spacing and the commodity prices fall, it’s still a good investment. If we tighten spacing and commodity price stays the same, we get double the profits. If we tighten the spacing and commodity price goes up, then that’s the big win.
“The operator has the power of these different scenarios on top of the same digital twin of the reservoir. The high accuracy of the Petro.ai digital twin allows for strong confidence because it’s been trained by offset wells, blind tests have been performed. This means Petro.ai is giving the operator the confidence to go to their investors and get more money to improve the size of their capex budget.
“Public companies are doing the same thing. Public companies are acting like prices are at $65 because Fidelity and Vanguard and Blackstone and all the big public investment groups have activist positions on their board saying don’t go drilling more wells with commodity prices higher than we thought. Instead, give me a dividend. Pay down your debt.
“For public companies, the people who own that stock know that the market is better than they thought, so those gains come to the investor, not back in the ground.
“But if you’re an agile private company you need to take those gains and drill more wells. Private equity sponsors that see this better environment than they thought want to pay down debt or sweep the cash. But the operators are saying, don’t sweep all the cash, drill more wells because that increases the value of the rest of our position.
“We see companies running 1 rig, when they should be running 4. They’re acting like oil is still at $65. They don’t know how to space their rigs because they’re using type curves. Petro.ai is making scenario recommendations that will dictate and advance their capital program for the rest of 2022 and 2023.
“Without Petro.ai, private companies don’t have the ability to do this tradeoff scenario development internally. They’re busy watching a frac or worried about a screen out or calling a service company or trying to source sand, trying to find tubulars. They’re worried about frac dates moving. They’re worried about executing rather than having the time to think strategically about what’s going to happen six months from now and buying into their stronger future.”
What should companies be worried about? Not reaching out fast enough to Petro.ai to raise those earnings on each DSU, to operate at the maximum with tradeoff scenarios that are fast and accurate. Decisions that were made last year need to be re-evaluated with the cutting-edge precision and opportunities that Petro.ai provides. Use low prices. Try high prices. Check it out and drill with confidence.
