War on dry hole costs

The rush to contract for deepwater-capable mobile drilling units 2-4 years ago produced a lot of drilling in great water depths - at $20-30 million per well. During the following low-price cycle, producers weren't inclined to park $150,000/day rigs very long, so they drilled - and drilled.

The rush to contract for deepwater-capable mobile drilling units 2-4 years ago produced a lot of drilling in great water depths - at $20-30 million per well. During the following low-price cycle, producers weren't inclined to park $150,000/day rigs very long, so they drilled - and drilled. To optimize the high drilling costs, producers made the most of their geoscience investments - where it really counted.

As a result, geoscience capability is shrinking dry hole costs in deepwater. In the US Gulf of Mexico the exploration dry hole rate appears to be as low as 50%. Even outpost or delineation wells, necessarily drilled at the margins, are producing excellent results.

The logic is there: (1) The need for oil and gas as an energy source is not going away. (2) Drilling costs make up the largest expense in hydrocarbon recovery. (3) Cost reduction is king in a commodity world. So, what's next in the push to eliminate dry hole costs? Try the following for starters:

  • Remote sensing technologies are becoming very sophisticated and producers can now fully integrate the results with increasingly detailed levels of seismic investigation to highgrade prospective areas.
  • Geological assumptions in high risk exploration can be ground truthed with shallow slimhole wells and vertical seismic profiling, rather than drilling to target zones, as a means of quickly evaluating plays. It won't be easy to walk away from sub-target wells, but the trend would encourage development of drilling methods that eliminate wellbore circulation and use wired wall drillstrings to convey downhole information.
  • The drill bit can become the principle means of investigation, or better yet, a wellbore construction tool such as a laser can cut hole and build quasi-casing protection behind it to get deep penetration - quickly.

None of this is easy in a hostile remote environment, but a notable lack of investor interest in the midst of high oil prices has forced the industry to wage a cost war on two fronts: (1) developing more information before spudding a well; (2) minimizing the drilling footage required to obtain the missing geological information.

Significant cost cuts in this important upstream sector should help re-gain the attention of investors. Joining the "new economy" may not be out of the picture after all.


Measuring price impact

Calculated on a bbl-per-gross-domestic-product ratio, civilization is less dependent on crude oil today than it was in the 1970s - by about 10 percentage points. Increasing efficiency, however, does not suggest that demand will drop by much with higher oil prices (elasticity of demand).

Unlike many commodities, price swings in oil and gas are few and far between, so demand elasticity projections are more theoretical than real. But the challenge goes beyond long price cycles.

Demand for crude is relatively elastic in the power generation sector (substitution), somewhat elastic in the transportation sector (curtailment), and relatively inelastic in the petrochemical and derivatives sector (no substitutes). Not only do oil derivatives show up in a large number of consumer products today, but rising oil costs descend slowly through the value segments of manufacturing and chemical process chains.

For many petroleum-based components or end-products, there are few low-cost substitutes. Moderate-to-low oil prices over a long period of time have forced competing products off the market. Also, manufacturers are more subtle in absorbing higher feedstock or component costs than are transportation and power generation consumers. The latter two are quick to move fuel costs through to consumers or politicize the impacts.

As a result, oil price impacts are two-tiered. Just as most consumers have recovered from higher transportation and power generation energy costs, they begin to face pervasive price movements in retail food, container, chemical, and consumer items.

Add to this the time required to move a higher or lower price bbl from the wellhead to the consumer, and you have an economic network that is fairly dependent on crude oil in the near term, virtually without regard to price, and unable to develop cheaper or easily manufactured substitutes. But the petroleum industry can't crow about this too long - everything changes in time.

Readers wishing to respond to issues presented on this page or elsewhere in Offshore, or offer authored articles or article suggestions, should contact the editor by E-mail (leonardl@pennwell.com) or Fax (1-713-963-6296).

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