HOUSTON—Imagine the oil and gas world as an assembly line, churning out cubes of oil and natural gas. Assembly lines are efficient. Changes mean swapping out one part—not the entire system. Industrial and aviation companies typically cut costs annually. But on the hydrocarbon conveyor belt, cost efficiency doesn’t seem to follow any logical pattern.
“In oil and gas, specifically the upstream, costs as we know tend to follow oil price and in general have trended upward over time,” said Bernard Looney, BP’s CEO for upstream, May 2, at OTC. “We need to change this.”
The U.S. shale revolution, Looney said, is part of the way forward—a fundamentally different mindset that the industry should adopt. “This combination of innovation and continuous improvement is the driving force for the future,” he said.
“It’s how we will improve through the productivity of our oil sector and put costs on a downward curve.”
For instance, BP’s Mad Dog Phase 2 project in the Gulf of Mexico went through about $10 billion in cost trims, Looney said.
“This was a $20 billion project, and we’ve brought it down to under $10 billion with expected returns improved despite a lower oil price,” he said.
However, the real value might be in opening up the company to using more technology and collaboration. In 2015, the company teamed with Maersk to train rig teams in an immersive simulator in advance of an Egyptian project.
“It has helped our rig teams in Egypt complete six of the best wells ever in the Nile River Basin,” he said.
With climate change accords and greater use of alternative energy, the oil and gas industry needs to distance itself from the turbulence of the commodity market. Though alternative energy sources make up a small portion of overall energy production, each year it’s seeing the kind of improvement that E&P companies dream about.
Looney said the cost of onshore wind electricity generation has been cut in half since 2009. In a similar time frame, the cost of solar manufacturing has fallen about 75%—and by 99% since 1976. Battery costs are on the same downward trajectory. Lithium ion batters used in electric vehicles are projected to drop 77% between 2010 and 2018.
“The Tesla Model 3 will go over 300 more miles [483 km] on a single charge,” Looney said.
Like their manufacturing cousins, oil and gas producers cannot be satisfied or stop challenging themselves at every step.
“There’s a reason we still talk about Henry Ford 100 years on from the Model T,” he said. Over time, perfecting the company’s assembly line meant Ford could build a car in 90 minutes, instead of 12 hours.
“We already have an example of how to do that here in the onshore in Texas and across the Lower 48,” Looney said.
Despite the Lower 48 rig count vaporizing by roughly 80% to about 400, production is close to what it was when the downturn began in earnest in November 2014. The shale revolution has been about breakthroughs and technological responses that have helped maintain productivity.
“In just a few years, our own Lower 48 business in BP has seen a 60% reduction in the development costs of the wells we drill in the San Juan Basin,” he said.
Energy forecasts suggest that by 2035 demand will increase by one-third. Before then, the price of oil will doubtless see more cycles. Continuous improvement seems to evaporate in the good times, Looney said. As prices improve, the industry will need to hold fast to a philosophy of improvement and innovation or it will suffer again.
“We need to hold onto this even when the oil price recovers,” he said. “That is when the true test will come.”
Darren Barbee can be reached at dbarbee@hartenergy.com.
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