[00:00:00] Speaker A: They're not the most complex things. They're actually quite easy. It's how do you get everyone to run the same direction to do it is the problem.
[00:00:06] Speaker B: When you bottleneck a decision and visibility of capital at one person, then you have a limited input into what's being decided.
[00:00:17] Speaker C: Welcome to the next imperative, a podcast hosted by a M. Energy leaders tackling key issues and trends in the industry.
[00:00:26] Speaker D: Welcome back to the next imperative.
As investor focus on oil and gas companies has driven them to deliver free cash flow and returns of capital, many have rediscovered the art of base production management, and many have found that it can deliver some of the highest returns in their portfolio on a capital basis. Today we're going to talk about how some of the forward thinking integrated oil companies have approached this, what they're doing, and how it's worked out for them. Joining me in this discussion are industry thought leaders and a. M colleagues, Riyadh Nasser, Jay Campbell and Alan Pender. And I'm your host, Jeff Van Gulo. Jay, can you get us started? Kind of giving the audience a sense of what we mean by managing base production?
[00:01:05] Speaker B: Yeah, when we're talking about managing base production, we're really talking about simply the management of all the wells after the first six to twelve months of production. This includes everything from running the well, managing it, keeping it online, making sure it's producing, making sure it's producing cost effectively, and continues for the life of the well.
[00:01:26] Speaker D: Great.
Alan, anything to add?
[00:01:30] Speaker A: Yeah, I think just to add to that, and Jay hit on these points, but really keeping the wells flowing is some function of arresting or flattening decline, reducing downtime and efficient Loe. But that's really the, when we think of base production, we think of all three, not just production, but can you do so cost efficiently?
[00:01:56] Speaker E: Loe per boe is a metric that we often use, and that may sort of encapsulate how we think about production and managing production. And to the point, it's equally the numerator as well as the denominator there cost as much as it is production uplift.
[00:02:17] Speaker D: In my sense that the last.
[00:02:20] Speaker A: Ten years or so, as the share.
[00:02:22] Speaker D: Revolution really kicked off, the emphasis on base production kind of fell by the wayside.
Do you guys agree with that historical context and kind of what's made things come back around?
[00:02:33] Speaker A: You've done a good point.
Over the last 1015 years, a lot of the resources have gone to the development side, both physical capital dollars and human capital. So we've trained up almost an entire working generation on DNC or when I say subsurface, more on the reservoir side. And so now that where things have transitioned, we know that the industry is under more capital discipline, really pushed to generate free cash flow. A lot of this is falling on the base business, but it's happened in a time where all the investment and resources, both people and dollars, has happened on the development side. So now the base business is being relied on to deliver on that.
[00:03:27] Speaker B: And I think it's important to point out as well that what's happening is as plays are getting cord up, as inventory is starting to decline a little bit, as capital investment is slowing on the DNC side, those barrels that come off of new wells are the cheapest barrels that will ever happen.
And a really good, intensive drilling program shoots off a lot of production.
And now, as we're starting to see the slowdown in that capital, the decline curves are starting to hit. And that's creating a lot of focus in areas that just historically have been overshadowed by the DNC programs. And you can see that in all investor presentations and everything, there was always a mention about aloe to boE, but everything was around latest well results as they slow down. Now everything has to start thinking about how do I manage that base business? How do I keep my wells online? How do I optimize them? How do I make sure that I'm hitting maximum well deliverability? And those are all a lot of more blocking and tackling that need to become core competencies of the future organizations.
[00:04:44] Speaker E: Yeah, I would add, it's not that production management was neglected in the past because of the fact that there's less inventory, there's less capital. The barrels coming online are not as new, and so they're going to be more expensive. It's just that more important that it needs to be managed. Now you're starting at a more sort of a difficult place, a more expensive cost per barrel. So you've got more work to do to get down to that sort of top quartile cost for those barrels.
[00:05:19] Speaker D: And it's increasing productivity, but not at all cost. I mean, there was a few years back when adding barrels of production was really critical to valuations, where people know cost is no object. Get the production up. That's not what's happening today. Right.
[00:05:35] Speaker A: And back to Jay's point, a really high activity development campaign. On the development side, DNC can mask a lot of things on the product side, because you're hitting your financials with very flush barrels. And so when you get to the opex side, the unit cost per barrel loe per boe, all look good. It can mask it.
The trick is, in one sense, spending the capital to drill the next. Well, it costs money, but it's almost easier going and fetching 1% of downtime. And we have a client where getting 1% of downtime off of the base is 60 to 70 million drop through to cash flow. Infinite return takes no capital, but is a lot more choreographing to get it in the base business. So it's the opposite end of the trade off. Doesn't cost capital, but it's also how you pull that off is more organizationally and how you do it.
[00:06:41] Speaker E: Can you dig into that downtime? I mean, that 1% makes such a big impact. What are the main sources of that downtime that you can address?
[00:06:50] Speaker A: Yeah. And so when we deconstruct downtime for our clients, we look at, really, there's a view of saying controllable, non controllable. Non controllable is weather related. These are things we can't do much. We don't really look at that notion. If weather is non controllable, there's things we can do to insulate.
There are things you can do. So we really deconstruct. Like, where are the big chunks of downtime occurring? Maybe it's surface equipment, maybe it's compressor driven. And then we dig into the root cause of why is that happening? And oftentimes, what you find, if it's, let's say, compressor related, because that tends to be, they do upset. These are mechanical things that will fail.
It requires a team to be able to manage it.
Tracking metrics consistently, looking at the same information, the right operating rhythms. I know Jay knows a lot in the space.
Things like, does your lease operator know how to restart a compressor? These things are not the most complex things. They're actually quite easy. It's how do you get everyone to run the same direction and do it, is the problem.
[00:08:00] Speaker B: And I think one of the key concepts in this space, especially lease operations, is lease operations. Cost structure is driven by thousands of decisions every single day in the field, by hundreds of people. And so to what Alan's talking about is these aren't necessarily complicated things, but these are cultural, these are process, these are discipline things that need to be in place to really optimize and manage your wells as they are declining the compression one is a great one. Oftentimes what you'll see is you'll see, why are compressors failing? Well, what kind of preventive maintenance program do we have in place? How are we managing it? How are we tracking it?
Are production superintendents in different regions running different strategies, or is everybody aligned? Have we thought about it? Are we using AI to start look at preventative failures and some things like that that people are starting to get into? So I think that's the question is these are not complicated. People have been doing a good job of this for years. The intensity of the focus is what's increasing and that's what's changing.
[00:09:13] Speaker E: And when these disruptions happen, what process do you have in place to remediate them immediately? Can you do that internally? Do you have to rely on somebody else to do it? So there's a whole kind of process component to shore that up.
[00:09:26] Speaker A: And to Jay's point, when we work with clients in this space, if it is found that there are opportunities on the simple things, do this first. We call it master the basics. Let's get shore up little things like having consistent metrics across all operating areas. Having a consistent conversation does drive results, and you see it flush out in the thousands of decisions, because that's what it is. These guys are making decisions, guys and gals, thousands of decisions on a daily basis. But if it's different conversations with different metrics, different agendas, it's not going to create the value that you're trying to get.
[00:10:03] Speaker B: Yeah. When you think about this base production management, what does good look like? Well, I think good looks like one. A clear understanding and ability to manage the cost that implies. I've got to have systems reporting structures, clarity and visibility across the organization, so people know what the scorecard is and how to know whether I'm doing a good job or bad job on it. I need to try and manage my wells to maximum well deliverability.
I think oftentimes we could just say, hey, we just need to keep the well online. Well, there's a difference between keeping the well online and having production engineers that are really optimizing every single barrel of production and making sure that it is eking out everything it can. And there's often trade offs. Some operators will say, hey, we want to do a slower pull down on the well. There's operators that say, we want to pull as much production forward as possible because of different philosophies of the reservoir and how they believe that the reservoir is going to react to different lift strategies. But the point is, you can't just turn on an artificial lift and just let it run. And just every time falls or fails, you just go fix it and then it's back up and running. There's got to be lots of diligence and thought about what are we doing with that? Well, how are we making sure that we're delivering all the production. So clear understanding of management of costs, focusing on managing well, deliverability. And I think another thing that we sort of touched on is with this transition and an increased focus on base management, is that in a lot of cases, the workovers and the production operations have greater return opportunities than DNC capital. And yet what we typically see is that prodops workover budgets and just Loe budgets are really just rollovers from the prior years.
And I think what we should start seeing is allow those workover programs to compete for DNC capital. Because what we really should be thinking about is how do we optimize cash flow to the bottom line? What are the right decisions and the best decisions that's going to maintain the returns or deliver the returns the shareholders are looking for?
[00:12:17] Speaker A: I think to that point, even more importantly on the capital side, a lot of things are going to longer laterals, bigger projects. Those are long projects that outlay a lot of capital. And we talked about this on the capital efficiencies topic.
What operators have done in the past when they do the megaprojects that they will give like short cycle cash flowing projects, that's through the drill bit to be able to kind of fund your way in. But workover on a rate of return basis very much compete with the development side if you just look at the IRRs.
[00:12:50] Speaker E: But how is it typically happening right now? I mean, there's some capital amount that gets sort of allocated for new well development within an operating area, right?
And within that sort of bucket of funds, an asset manager may allocate, sequence, et cetera, the wells to drill and complete. But then there's this other amount of money that gets applied to kind of work over capital. Now they may prioritize projects within that amount of money, but what's preventing them from making those prioritizations across both buckets of spend?
[00:13:27] Speaker A: The individuals over the area are incentivized to maximize value in their area, not across the whole.
But that's good.
You got to also be able to think in two ways, the whole, as well as being able to give that individual stick to maximize the value that they're doing.
[00:13:50] Speaker D: PNL for every well or PNL for.
[00:13:51] Speaker A: Every pad, PNL from every well. But being able to centrally be able to look across the portfolio.
That individual is doing their job when they're trying to maximize the value in their area doesn't always mean that the sum of the parts is good for the whole, and it'd be so generic. But that is how it happens.
[00:14:10] Speaker B: If you think organizationally too typically, you've got your COO, and then there's a development team and a DNC team, and then you got your production ops team that's over here.
The only place where they're actually having conversations about capital and capital exchange and where should we make the trade offs is at the CoO level, right. It's not pushed down into the further parts of the organization where they can be having maybe more robust conversations. And I'm not saying the COO is doing a poor job or not poor job. It's just when you bottleneck a decision and visibility of capital at one person, then you have a limited input into what's being decided.
[00:14:49] Speaker A: And I'd say that the cycle of how the decisions are made, capex and development, is more or less straightforward. You have an inventory of it. You can plan for it, you can schedule it. The workover world, it's a hopper that is never set. It's constantly changing, so it changes throughout the year. You can't really plan for it. Things do happen and be able to break it down into what is true. Good return projects look like clean outs, asset jobs, and then what is just the failure? There's failure related things that do happen, right?
Attacking the root cause on failures. We want to minimize those.
We call it the perpetual 40% IRL. It keeps coming back, and it's like, well, let's do something about it. It happens all the time.
[00:15:36] Speaker B: Yeah, I think that's actually a really good point. A lot of times we'll see that work of returns are based on what's my payback, or it's going to be based on IRR. It's a single factor. And what's always funny is that unless you've got really good reporting and you track things over time, you may have a well that, hey, man, this thing pays back in two months. The problem is it's failed eight times in the year.
So how many times did that actually get the payback? It didn't. It was a negative well, but on paper, every single time they brought it back, it was a two month payback. And it never actually delivered on that payback.
[00:16:12] Speaker E: How big? I know oftentimes when we look at clients and look at opportunities to improve their production management, it's about finding some of those marginal wells that are high cost, low production, or some combination thereof.
And they don't usually believe that those opportunities exist, but we always find it a little bit interesting that there are quite a few of those. And I know that one of the recent projects or current projects that you're on, there's a rather significant number of those.
What causes or what leads to such a large amount of wells being marginal within an organization that they're not going after to try to kind of move on and get out from under those costs?
[00:16:58] Speaker B: That's a great question.
I think some of it comes back to the earlier point I was making about what does good production management look like? It comes down to, do I have a clear understanding of costs?
Really? Do I have a well level p l? Jeff, you mentioned that concept. Do I have well level p l or do I at least have a unit level or a battery level understanding of cost structures?
Am I continually tracking those wells? And then you always run to the issue and say you're doing that and you start to see it go negative.
There's always a question of what do we believe about the future? Do we believe that we should be at $70 oil, $8100 oil? And does that make a difference in how we're going to determine whether keep it in? There's always the question about, well, we give up the lease if we lose these wells. So we want to keep it on just so that we have the optionality of the lease.
That's legit in some areas. And then in some areas you say, wait, that's not really a legit. No one's drilled here in 30 years.
We don't think that that's going to be something to continue to drive for. But then the fourth is you have p a liability, right. And that's pretty significant. And so if you're not systematically dealing with low volume wells, as they get to the point where they're kind of beyond hope and they're dead, then you end up with a very big p a liability.
[00:18:32] Speaker E: Right.
[00:18:32] Speaker B: And management teams don't want to go drop tons of capital that they could go use to drill new wells or work over new wells just to go plug a well that has zero value. Just really, all you're doing is you're putting cash down hole, literally. So I think those are the factors. Is the concept about do I hold the lease, do I spend my p a liability, my p a capital?
Or what do I think about the future in terms of what's the opportunity about where I think the oil price is going?
[00:19:08] Speaker A: And on the marginal well point, sometimes the solution is running parallel paths. See if you can shed the asset, sell it those areas. I mean, it might be for nothing at the end of the day, once you include the valuation of the P A. But it depends. It goes back to Jay's point, like, if you are an operator that cannot dedicate the effort to be able to cover those types of wells, it's taking away from the wells that are productive. And you do need to be focusing time on what we see. And Jay hit on letting leases expire. You asked what holds it up. Oftentimes land again, this comes back to their job is acquiring leases.
And so oftentimes, most times we come into clients and we find a lot of negative cash flowing wells that are opportunities to be able to shed to improve the financials.
But when you find out the root cause of why there hasn't been anything done with it, it's because the decision making process is very difficult. You got to bounce across functions to get that across the finish line.
[00:20:15] Speaker E: I might add to that, that not everybody does a great job of allocating costs that are at a battery to all the wells that are associated with it, and sometimes they do so evenly, and it might give you an inaccurate picture of the cost associated with those wells.
[00:20:35] Speaker D: How are the integrated thinking about this problem differently?
[00:20:42] Speaker A: I'll hit on where integrated operators have such an advantage scale, and we'll dig into that a bit. But IOCs, or very large independents have, because they have the scale. The things we're talking about take work. This is not just drilling the next well, getting a couple of rigs spun up on the drilling side.
The IOCs benefit from the scale because they can put dedicated people to work to. Like, how do we shave off a percentage of downtime on production? How do we rest a client and be able to see the whole, and then ultimately, how do you arm the boots on the ground with the tools and team to be able to pull that off? And at the end of the day, that's what it still comes down to. Digital oil field really is something that has to be a team based approach where you're arming the people with the tools and resources to be able to.
[00:21:37] Speaker D: Make the right decisions and empowering them as well. Correct?
[00:21:41] Speaker A: That's it. The individuals in the field, they do make the right decisions. They see it firsthand, the eye in the sky. Maybe it's a control room, maybe it's others that are tethered to them and the tools. That's what unlocks this whole thing. And that's where iocs we do see moving. But that is their advantage. At the end of the day, it's hard for a smaller independent to provide all that.
[00:22:03] Speaker E: One of the biggest costs we sort of run across, we've been talking about the production side. Now I think we're talking about the cost side. But one of the biggest costs we have is labor and lease operators being one of those costs. I know that you've done a lot of projects, both of you guys have around optimizing the lease operators because it's a significant spend.
What are some of the levers that you use to get those numbers down? I know that kind of multi skilled is one.
Automation and routeless approaches are another. What are some of the bigger ticket levers there?
[00:22:38] Speaker A: Do you want to start on this one? I think we might compare and contrast a little bit.
[00:22:43] Speaker E: Okay.
[00:22:44] Speaker B: Yeah, I think some of the levers, I keep going back to it, but it's clarity of costs. And let's talk about the basic route structures for lease operators. You can do a few things. One is you can have a standard route. I just run my pump a route, and I'm going to do that every single day.
Obviously, that's the highest cost. And that's not taking into account which wells are down, which wells are up. Does the well need to even get checked?
And is there value in going to check the well? So then from there, what happened is you migrated over to more of an exception based pumping pump by exception concept. And what that means is I've got an eye in the sky. I've got somebody that's telling me every single day, hey, this is on your route, the year signs this grouping of wells, go take care of the ones that are most important. So new well, new developments, I should say, not new, younger developments. That's extremely important because a well that's putting out 140 barrels a day, being down for 8 hours, 10 hours, because they're waiting for a guy to get there on his route is a problem.
A well that's producing half a barrel a day, you're going to have a different strategy for that. And so really thinking about what is my cost structure, what do those wells look like? How am I going to manage that? And thinking holistically about it, I think is really important. Alan's gotten into some more. Even beyond route exception based surveillance, you're.
[00:24:18] Speaker A: Getting into some other things.
Given the dynamic nature of shale production, where we're seeing a lot of things gravitate towards is we'll call it routeless or team based. And so the team based approach and generally what works well with flush production is thinking about each facility and looking at your top 25% producers, for instance, and then putting the focus on that. And so the trade off is the old methods of managing routes is an individual owns that route, knows the equipment. Right. So now you're talking about more of a team based where you got kind of a lead and a couple of lieutenants managing entire area and running to the hottest issues and focusing on where the barrels are.
Cross skilling. We have a lot of new people that have come into the oil field. These are individuals that you are continually bringing in more and more. And the swiss army knife individual in the field that used to be kind of the old school whale, that's less. I mean, the new people coming in are very technology savvy, but having the cross skilled individual that can fix a dump valve right there, fix the downtime situation while they're there, there's things that are like welding, that's specialized, but there are things like very quick fixes that having the right skills, they matter so much to the people on the ground.
[00:25:45] Speaker E: That's great.
[00:25:48] Speaker D: Things getting, as far as you said, exception based routing. Is it to the point where in a morning a pumper may get a list of, these are the wells you need to hit, and you hit them in this order, maximize the efficiency of windshield time.
[00:26:00] Speaker A: I'd say the kind of routeless concept I talked to would be more. And this is being trialed, it seems to deliver results for now. But what that would look like is basically have some level of a dashboard. When you get your, call it, like battery health dashboard, you can kind of look at an area and you start your day. That is your checklist, but you're also starting it with those tools and the resources around you in the control room. So you plan in your day with your team, with the eyes in the skies, we'll call it. But you're able to pivot based on the things that occur that day.
Whereas pump by exception might be more. You're still maintaining a route. So there's things that are being tried, but ultimately, what individuals are trying to or companies are trying to do is get the right people in the right place at the right time. Not to be generic, but that is what you're trying to do.
[00:26:59] Speaker C: Thank you for listening. Make sure to subscribe to the next Imperative so you never miss a new episode. Also, visit our
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