Episode Transcript
[00:00:00] Speaker A: The data is a means to get to solutions.
[00:00:02] Speaker B: You got to be able to run on 80%, 80 20. You don't have the time or the ability to go and analyze every single decision at every single. Well.
[00:00:15] Speaker C: Welcome to the next Imperative, a podcast hosted by A and M energy leaders tackling key issues and trends in the industry.
[00:00:23] Speaker D: Are the compliance requirements on visual inspection, et cetera. Are those being satisfied by drones and aerial? Is that being worked into the routes? How does that figure in.
[00:00:39] Speaker A: Sayon? What really drives the footprint is any kind of like, well, testing whatever that schedule is.
Drones are being tried just to get a flyover.
There's cameras on site. There's things like that that are being tried. They do miss stuff.
[00:00:59] Speaker D: Right.
[00:01:00] Speaker A: And so at the end of the day, if it's leak detection and we want zero leaks, it's probably impossible. You can't do it. It's going to happen.
It's really the amount that you're willing to tolerate because you're never going to eradicate it to zero. Or you'll make sure there's always a person on site and it'll cost way too much. So it's a balance and there's no right science way to define that.
[00:01:23] Speaker D: The risk tolerance, some risk is okay, right.
[00:01:27] Speaker A: If you try to eradicate risk, it's going to cost too much.
[00:01:30] Speaker D: Right?
[00:01:30] Speaker A: That's right.
[00:01:32] Speaker B: So one of the things that we're often asked is, okay, interesting. I've heard this conversation. How do you guys typically start? So, Alan, how do we typically start?
Operator comes in, says we might have an issue on lease operations or loe, and we just want to take a look. Yeah, how do we do that?
[00:01:53] Speaker A: We come at it in two prongs and I'll just say qualitative, quantitative. And the quantitative side is we have a lot of proprietary data, a lot of lease operating statements, a lot of downtime data. And on the quantitative side, we come in and use that peer data, normalize, let's say cost category per boe and compare you against it to discern what's going on and where gaps exist. That allows us to come in fresh, but use facts. We have no bias. We find the facts and we drive to what's going on. Downtime side is no different. And sometimes the gaps are rationalized by structural reasons. You operate in maybe a slightly different edge of the play, and there's things like that. But oftentimes it helps drive towards solutions. On the qualitative side, that's where all the insights are externally. What are these operators doing differently than you because that's how you get to solutions. But also on the qualitative side, visits, ride alongs, how are decisions made, how are your meetings conducted? These are things that you have to have and you can't really get the full answer without both.
[00:02:59] Speaker B: You're pointing to a great point. And you brought up our peer review tool which has, it's our data, proprietary data set that we gather as we work with our clients. And one of the biggest issues that operators face is lack of transparency of data across the industry. Obviously, you wouldn't go and just post all of your lease operating statements to all your peers and let them look at it.
In the DNC world, it's a little bit different. You have an industry that is built around lots of data, transparency, benchmarking. You can compare every single well that was drilled and what was the depth and the formations and the completion methodology and the pounds per foot and everything else. But on the Loe side, what we've seen and operators struggle with is we don't know what goods looks like because we don't know what others are doing. We think we're good.
And this tool, peer view that we've built over the years allows us to go in and say, okay, let's take a fact base of some of your peers. How are you performing against them? Doesn't mean that you're good or bad. It just helping you understand that what are the cost structures of the different peers and how you rate against that. And then the idea is that you may find gaps versus performance. And then the question becomes, okay, what do you do about that gap and what are some of the nuances? Is it structural? Is it driving distance? Is it age of wells? Is it water cuts? All those are legitimate factors that cause difference in cost structures. But then are there things that we're doing as a company that our other operators are doing? Are we overworking things? We have too much compression in the field. Do we have different lift strategies?
Do we have more operators than we need to? Because we haven't really thought about different models of pumper routes and so forth. So all of those different factors, it's very difficult when you're sitting inside and all you know is what you've seen. And maybe you talk to. And a lot of operators do talk to each other. They do. But it's one thing just to talk one off on different topics, another to sit there and say, okay, let's look at our cost structure holistically versus peers, and what can we learn and what actions can we then take to improve our operations because we know that we're in a place where production is continued to decline. That's the reality, is as soon as you turn that well on, it is on the decline curve. So we will always having to be think about how do we optimize and manage the overall economics of the well to drive our returns to our shareholders. And I think just that third party outside in point of view coupled with, and this is really important that Alan brought up. It's not just taking data. It's taking data with people like Alan who've been there and worked with these operators and can talk about what are the differences and what are the nuances and why are the decisions being made that are driving different strategies out in the field. So I think that's an important part of it.
[00:06:09] Speaker D: Yeah, the data allows us to sort of identify, hey, where do we think the gaps are? And then the conversations, the field visits, the insights, having worked there before, allow us to figure out what's driving the gaps. And then that leads to recommendations on how to close the gaps. I think we've been fortunate on the data side that we've had so much activity on that side of it that we can afford to look within a particular basin where some of the cost components are very basin specific, like water hauling and disposal, for instance. Others may be we may have the ability to compare cross basins, like compression, for instance. One of them is more heavily labor focused, the other one is more equipment focused. And that kind of points to where you can draw a circle for comparison. But the data on its own isn't very useful. It's the experience of the people and sort of how embedded we are in the organizations and the understanding of operations that we have within those organizations that allow us to be effective when we move from one operator to the next.
[00:07:15] Speaker A: And I like how we stated, the data is a means to get to solutions.
[00:07:20] Speaker B: Right.
[00:07:21] Speaker A: And we do work with a lot of operators to realize that value. And it tends to be things that require programmatic approach and a lot of different functions because internally or organizationally, those are hard to pull off. Overhauling a compression fleet is hard. It's very hard work, and if you haven't done it before, it's very uncomfortable. So those are the things that we tend to find in areas like that. Not to use that as an example. There's others. Those tend to be more of the big game changer opportunities where it's cross functional and it's just hard to do within a particular function. Let's say one thing that we talked on cross skilled a little bit.
We have a lot of great clients that do a lot of good things. Just to state that we worked with a client recently that said, okay, well, let's identify for the individuals in the field what are the key activities that drive value, and we're going to tie it to downtime, flattened decline and efficient loe. Let's kind of work through that and then we're able to tie certain activities they do to that and place some value. And it turns out lease operators, it's mostly around minimizing downtime. That's a very good use of time.
But whenever you look at how they are trained and developed, it's totally disconnected from those. You look at the training criteria and it's 100 different things.
Just simply linking the two and putting some structure and program around it is big. I mean, these are simple things, but they have long term payoffs.
[00:09:01] Speaker D: Jay, you recently had a conversation with a client around optimizing their artificial lift strategy. And I think they were hanging on to esps a little bit longer than others. Can you share that story and talk about kind of what led to those decisions and why they could have been thinking more broadly?
[00:09:24] Speaker B: Yeah, it's an interesting one. Artificial strategy is a very complicated thing to unravel, but it has pretty significant costs. For an instance, an ESP is going to drive your utility costs. It's going to drive your rental costs generally because they're rented. And it's going to drive your workover rates, your costs, because your esps, especially in the permian, fail pretty frequently.
So this operator specifically starts in line with peers. I mean, they're basically doing what the peers do.
But it was actually some of the discussions and questions that came up was, does our development strategy impact the artificial lift that we choose and when we choose it? And what they were doing is the way they were doing the development strategy is they would set up a pad and drill a few of the wells and then they'd come back and add more wells in. Well, when they did that, that would cause Frac offsets. And so in order to prevent the walls, the neighboring wells from getting watered out from the frac, they would keep esps on. Okay, and right thing, keep production up, keep it running, and that's all good decisions.
But what that does is that impacts your cost structure. And so what was great is we did an Louisa BoE comparison by categories we talked about and they were high in a few categories. And that just started raising the question of this seems like this might be to some degree, part of your lift strategy. And it's been a really good series of conversations around that to just say, okay, are we doing, are we in line with peers? And I just actually got off the phone with one of the head production engineers over there, and we're still digging in it. We're still talking to him back and forth. And it is not just want to say, it's not an easy decision. It's not like, well, you guys should be here. But the great thing that happened is just by raising the gap and the difference allowed for a really robust conversation that they probably weren't having before.
[00:11:36] Speaker D: Right.
[00:11:36] Speaker B: And now they're starting to think about and the trade offs, and are we making the right trade offs? What are the implications of the asset development strategy and how does that impact our lift strategy and how long we keep esps on for and should we keep them on for that long?
There's so many interrelated factors that drive costs in a production operations center.
And the guys that are leading production operations, man, they got a lot in their head that they're trying to keep in line. So many decisions, so many different factors. They're kind of getting whipsawed by everything that's happening all over the place. Like they are on the tail end and they're trying to adjust and keep up and keep everything moving and keep cash flow moving. The pressure they're on and I don't want to understand is a lot. And so I think it's important to realize that they're doing the best they can. The reality is sometimes they just need some support and some guidance and some. Hey, have you guys thought about things a little bit differently?
[00:12:38] Speaker A: Jay and I are on the same client, so this is actually two birds 1 st because we needed to exchange this, coming into this, it's.
Yeah, Jay handled a lot of good things, like just having a fresh set of eyes and fresh set of data. A lot of people are doing good stuff, but we are at the point where, because the base business is being relied on much more so than in years past to deliver cash flow, this is when squeezing every lever possible is the movement. And a lot of really good economics in a field can be thrown off through good base management. The numbers are very good. It's just, it's. It's harder to coordinate.
I think. I think for traditional, mature fields, on the conventional side, reach a point of eor, you're going to water flood, you're going to co2 flood.
From a shale perspective, there's trials. We know from when you develop some of these wells, you're recovering about 10% from. How do you get the rest?
That's a big one to be solved.
It's a mixture of the development team and the production operations team.
There's been steam and gas injection. The issue is how do you recover it? It seeps back through. You can't capture it. There's not a cap on the reservoir like a conventional reservoir where you can recapture anything injected and cycle it back through. And so there is trials. People are trying to figure this out, and this is where things naturally lead to. Everything ends in Eor at some point. It's where does it end for shale is really.
A lot of people look to the iocs on stuff like this. They have the scale to run projects and test.
[00:14:31] Speaker E: Experience from global operations is like abroad.
[00:14:34] Speaker A: That's it.
Elsewhere.
[00:14:36] Speaker B: That's right.
As I think. Kind of final thoughts on this. Overall, I think it's important to point out a few things. One is that base production management shouldn't be exclusively about costs. I think it's easy to just say, let's go cut costs. Let's go cut costs. Let's go cut costs. And yes, that is a good lever to pull. It's a necessary lever to pull. But if you're not thinking holistically about my revenue, my production volumes and my costs and the long term implications of the decisions I'm making, you're going to make suboptimal decisions and you're not going to drive the shareholder return that the investors are looking for and that they're expecting. So I think that's one is when you think about base management, you've got to be thinking about uptime and costs.
[00:15:30] Speaker D: I might add the capital costs that sort of have already been invested to get to a total value picture.
[00:15:36] Speaker B: That's right.
So, Alan, what other thoughts you have as you kind of reflect on the key takeaways?
[00:15:47] Speaker A: I think you really nailed from an executive level, the key things we're weighing cost and production, and depending on what's happening on inflationary or deflationary environments, strategy can't pivot. You have some room, but you don't want to spend too much money on the cost side and not recoup the barrels again. We're all bound by physically, not economics. At the end of the day, I'd say it's really a lot of what this comes down to ends up being cultural within an organization, and it goes back to how many decisions are made every day. But that is really one of the key takeaways yeah.
[00:16:31] Speaker B: So to that front, if the CEO, COO, business unit, leads, general manager, whatever that lever, whoever's ultimate got authority for that entire asset, if they're not bought in and driving operational change and culture and change and behavioral change, and making sure there's a focus on this, it's not going to happen.
Production engineers have great intelligence, great insights, and can drive things, but they need the support field guys, foreman, foreman, have some of the best ideas out there. Lease operators have really good ideas on how to improve operations of the field. Superintendents have great ideas, but those ideas don't bubble up unless there's a focused effort and a drive from the leader of the asset to make that happen.
[00:17:21] Speaker A: And here's where it matters for executives. The solutions we're talking about are sustainable.
These are run rate costs. So on an mpv basis, these are run rate costs, and these are very big impacts of value.
One operator that, if we looked at just the field economics, that really focused on optimizing, flattening, the decline, downtime, and efficient Loe, the MPV on that field was basically the equivalent of the same equivalent of just cutting, being able to get drilling costs, drilling completions costs down by 10%. You can't always count on that because inflation, right. So these are things that ride out cycles. These are very big key levers. They're hard, but they're long term and sustainable.
[00:18:07] Speaker B: I think one other factor that is an important factor, but it's often overlooked, is that ENP operators have a lot of engineers. They have a lot of very technical people, and they like to get to 95% accuracy of their analysis. They like to drill in and say, if I do this, this is going to happen. And they get to run all those models and they build all those skill sets with the DNC world, and they can huge machine learning and AI, and they can run all kinds of different variations and complex analysis.
An Loe, you got to be able to run on 80%, 80 20.
You don't have the time or the ability to go and analyze every single decision at every single well. So there is a mindset shift differential that needs to be driven in organizations. If you're going to be really effective in production operations, you need to make sure you get the culture in place, the tools in place, and then you got to be comfortable just running at 80% accuracy and not overanalyzing every single decision. Now, there are definitely things that need to be done, and you need to make sure that you're doing the amount of due diligence. I'm not saying that. Just saying we see it a lot of times when operators just want to grind out every single analysis to get to 99% accuracy. When the decision was already known that we got to do this two months ago, and what actually happened is you just left a whole bunch of value on the table because you let your field run for that much longer without acting quickly and moving.
[00:19:51] Speaker A: And what's fun about this world is trial and error that presides over everything at the end of the day.
But how you try things.
We have a method we like to use, but think about it. Control test. Right. And clearly measure. Once you started trying something different, maybe it's organizationally moving things around and centralizing, trying more extreme techniques and try it. Pilot in an area. Riyadh and I, we lived offshore for a little bit. Oh, yeah, that first started. That's what we did. That was my first project at the firm.
[00:20:28] Speaker D: Yeah, he was training and all.
[00:20:30] Speaker A: Yeah, that's what it was. We tried a different route schedule. We were on boats, and we tried a method to say, let's reroute everything and not do every platform. Every day.
There's a safety component. You got to do a rope swing to get from a boat to the platform. Right. Minimizing that, it's just math. Those are the more dangerous things you do, but also allows you to cover more areas.
[00:21:01] Speaker D: I really sort of latch on to the cultural and organizational piece and the buy in that's required and the top down sort of support of change, because the industry strategy has changed so much, and sort of the key metrics in terms of returns, et cetera, over production and all of these things, it really requires a different way of approaching the field.
And I think that the folks in the industry are really bright people and they're good workers, et cetera. And underneath the right leader, I think that they'll grow and contribute to problem solving and solutioning in a different way. And so setting that tone at the top, Clo or bu leader, gmops, in many cases, sets that tone within a business unit. If they have it, they set it as a priority, and then they push it down effectively, which isn't very easy to do with these larger organizations. Communication is important. Change is important.
All of those things need to be managed, and it needs to be done sort of top down all the way to the field.
It's also going to influence your sort of in source outsource strategy.
Where do you want to develop that capability and where can you afford not to and outsource? So I just can't underscore enough the importance of that.
[00:22:31] Speaker E: The last thing I'll add is these projects really compete well for capital. The returns are great and if you allow it in your budget process, you'll find that it competes with during the wells. And really more thoughts will be put into increasing the budgets.
[00:22:47] Speaker D: We haven't quite yet hit on the role of know compliance requirements are significantly higher, environmental obligations are increasing across the board. How does this affect production management, Jay, would you say? And decisions that you make in the field to optimize yet another variable?
[00:23:09] Speaker B: It's a great point.
The missions focus is really changing the game in a lot. It's going to add a lot more work into field operations. There's testing standards that are going to be coming in place where you have to go and visit, well, certain schedules. You're starting to see flyovers, you're starting to see all kinds of leak detection programs in place. You're starting to see operators think about how can I cheaply and yet cost efficiently track and identify when emissions are happening when I've got leaks so I can go address them faster. One of the fears that a lot of operators have is, and we've seen it in a number of operators, is a third party will pay for a study to fly over the permian, for instance. And there's a big emissions cloud that they capture and they say this operator is a megapluter, right. It may have been a 32nd flare, but the second that it flew over they got caught. It just was by chance.
That is a fear. That is something that's happened because then all of a sudden they're getting hit in the press with negative press about emissions and how they're a large emitter and what's going on and let's crack down an industry. So I think there's a fear of that, but then there's just the regulatory requirements that are coming out that you have to deal with. There's the penalties coming from IRA about emissions that are happening as well.
And so you see all this push for reducing emissions.
And part of that whole discussion also what you're seeing is a move of electrification.
Compressors is a big use when most of the compressors are out in the field and they're running off of fuel gas and they're emitting co2 as they combust. That's a problem. And so what's interesting and what's going to be happening over time, and this is something the industry is going to have to really work through, especially in Texas, is that as the operators start shifting to electric compression, it's going to draw on the grid. Well, you're drawing on a grid at a time when the grid itself is having new challenges. We have all kinds of new demands. We've got a higher mix of volatile generation capacity with solar and wind, and so you're having more fluctuations. And so right now, managing power, managing costs, managing load is going to be hard. And I don't know if there is enough generation capacity. I'm not a generation utility guy, but I would wonder, is there enough generation capability within the Texas grid to be able to support all the new compression that needs to be put on to deal with the scope? Two, emissions. And how do operators deal with it? If they all start moving that way, what are they going to do? What are you hearing about emissions?
[00:26:15] Speaker A: Yeah, I think generally what we see is if we think stateside for a minute and just take into the assumption that the world will need hydrocarbons for some time to come, I won't weigh in on what that looks like, but we know that it's energy dense molecules. You can transfer it with infrastructure. It competes well with other sources. So let's just take that in. So this is really the chance for companies to produce emissions friendly hydrocarbons, take all the goods that hydrocarbons are, and try to mitigate some of the more emitting factors of that. Right.
It is energy dense, but it does emit.
And generally, where we would start, because I don't have a belief that this is going anywhere. I think there's going to be more pressure that's put on people. We would say generally start with, look at what areas you can do to manage emissions that's economical. Right. These are basic things you can do at a facility like leaking. That is physical money just going to the air, and you could be selling it. There are things you can do. The tweaks that you can made to recycle that, getting rid of pneumatic devices, those things leak. Being able to weld in certain areas, using vapor recovery units to siphon off tank fumes. Those are all sellable things. Start there within the day.
We're under the capitalist structure of having to deliver value to shareholders. We have to be able to make money. Start with those and then start to expand into some of the areas that you're going to have to, but build the capability now to be able to handle it later.
[00:28:04] Speaker D: I think that's such a dynamic market. Right. It makes me think of a few things. One, it's the importance of having kind of current peer data and understanding of operations because it's changing from year to year and the requirements are becoming more and more voluminous. I like the compression example around electrification. That's one move. Jay brings up a great point on the limitations of that. Ok, well, let's think about other ways to optimize not only the cost but also the emissions.
How are we sizing our compression fleet? Are we doing it based on the production that we have today, or are we doing it based on the production and capacity that's required?
Twelve months from now, 18 months from now, how do we. Right size. You could take two compressors and get them down to one that's a little bit larger. That may be less of an emitter if you don't have the ability to electrify in that instance. So all of those many things need to be considered in tandem with one another.
The hits keep on coming and it's just kind of one baseball after another that gets thrown in the direction. So there's much to do.
[00:29:18] Speaker B: I think that's a great analogy is lease operations are going to get more expensive, more costly. And yet, Alan, it's a great point. Hydrocarbons aren't going away, not for a long.
So until some long distance in the future, that is the case, operators are going to continue to have to deal with more and more regulation, more and more structure. And it comes back to that's just cost getting loaded on top of it. It's cost and it's complexity. And so doing what you can now to standardize, to structure, to put in operating rhythms, to improve visibility of your reporting and decision making that we've been talking about cleaning that up now, so that as new things get layered on, you can more effectively handle that. I think it's important.
[00:30:11] Speaker A: There's no better industry to face a challenge than energy like proven empirically. The ingenuity, I might be biased, we might be biased, but the ingenuity is unbelievable. So if there's an industry that can handle it, it's the oil and gas industry specifically.
[00:30:30] Speaker B: And I would say even one more thing, just to call it my plug.
I think the last barrels on this earth should be coming out of the US. It's going to be the big guys, the US that is going to produce the cleanest, the most efficient, the most emissions friendly barrels on the earth.
And so I think it's not hard to imagine what other countries are doing, but America is going to be the best. And so I think part of what we also need to do is say, how do we continually move the needle to be more efficient, more cost effective, and drive shareholder value and prove to the world that that's where the last barrel should come from.
[00:31:20] Speaker C: Thank you for listening. Make sure to subscribe to the next Imperative so you never miss a new episode. Also visit our website alvarez and Marsal.com to learn more and to connect with us.
