Oil Forever? New Technological Breakthroughs Sweeping Oil Markets

  • Date: 01/10/16
  • Tracy Alloway, Bloomberg

New technological breakthroughs are helping turn unprofitable wells into moneymakers and allowed companies to keep pumping even in the face of crude prices that have more than halved over the past three years.

Last spring, Statoil ASA announced it had used the same oil well design and components to drill three reservoirs for the price of one.

While the specs for Norwegian Sea drilling might provoke reactions akin to the oil field’s name—the Snorre—such standardized pipes and casings could hold the key to a pervasive mystery about today’s energy market: Why is everyone still drilling when prices are in the basement?

Even as oil producers have planned $1 trillion worth of spending reductions between 2015-to-2020—cutting staff, delaying projects, and squeezing contractors—they’ve continued to green-light new wells from the Norwegian Sea to Brazil, and from Uganda to the Gulf of Mexico. Those initiatives mean oil production will continue to grow, adding to the supply glut and putting downward pressure on prices.

It’s a development that has both baffled and frustrated the world’s biggest producers of crude, who have been waiting for lower prices to force a rollback of global production. They have largely blamed the resilience of the world’s oil drilling on U.S. shale producers, as well as efforts to maintain market share, but the Snorre and other projects like it suggest there may be another–much more boring–culprit at fault.

That’s because oil majors’ urgent mission to slash costs includes standardizing the components used in drilling for oil–a development that has helped turn unprofitable wells into moneymakers, protected bottom lines, and allowed companies to keep pumping even in the face of crude prices that have more than halved over the past three years.

“One might wonder how it is possible that with expenditures being cut dramatically in the upstream industry, output is still growing in many parts of the non-OPEC world while the costs of future projects are declining,” analysts at JBC Energy GmbH wrote earlier this year. “One of the key topics in this respect is industry standardization.”

While oil traders have been pondering the prospect of a production freeze from OPEC, which has so far ramped up production to seize market share and force upstart shale players out of business, they’ve paid scant attention to cooperation already taking place across the industry.

Earlier this year the heads of some of the world’s biggest oil majors, including Saudi Aramco, BP Plc, Repsol SpA, and Statoil, met behind closed doors to discuss a push to cut costs by standardizing the equipment used in exploration and production. Other joint projects are already under way, meaning everything from the ‘Christmas Tree’ collections of valves and spools used in oil wells, to light bulbs, and engineering contracts are now up for standardized treatment.

It’s a sharp turnaround from the heady days of the mid-2000s when oil reached more than $145 per barrel. Back then, nascent standardization efforts were primarily aimed at speeding up lead times—the interval between the discovery of oil and when drilling commences—in order to make up for a shortage of engineers and other energy industry professionals.

“People were rushing to get hydrocarbons into the market. If something wouldn’t work, you could just throw more money at it,” said Rod Christie, president and chief executive of Turbomachinery Solutions at GE Oil & Gas. “Today that’s not an option. Everything has to be more efficient.”

Now, lead times and costs are again at the fore—but for very different reasons. With the price of oil dipping to $26.21 in February and currently hovering around $45 a barrel, attaining maximum production using the least amount of time and resources is crucial.

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