Just about everybody knows that the production-decline curve in the U.S. has steadily worsened during the past 10 years. But many may not know how fast that curve is accelerating. According to EOG Resources, the annual decline rate in domestic gas production averaged between 27% and 28% in 2002 and 2003. This compares with mid- to high-teen levels during the early 1990s. Today, U.S. operators are having to punch far more holes in the ground than a decade ago just to keep reserves steady, much less grow them. True, according to U.S. Energy Information Administration figures, U.S. dry gas reserves grew 6% and 3% in 2000 and 2001, respectively. But this was the result of corresponding 45% and 30% increases in the domestic gas-rig count during those two years. What has triggered such troubling phenomena? More importantly, what can be done to curb the precipitous decline-curve problem in the U.S., particularly in gas production? To find out, Oil and Gas Investor recently discussed these issues with top executives at four of the world's leading oilfield-service companies. Participating in the discussion were Paris-based Sami Iskander, president of Schlumberger Ltd.'s wireline division; Tim Probert, senior vice president, drilling and formation evaluation, for Halliburton Energy Services in Houston; Rod Clark, vice president of marketing and technology for Baker Hughes Inc. in Houston; and Mark Hoel, vice president of technology and logistics for BJ Services Co. in Houston. Investor Sami, is the U.S. oil and gas industry facing an increasing production-decline curve? Iskander With 70% of the world's production today coming from fields that are more than 30 years old, operators are understandably running more and more into such downhole problems as falling pressure, water encroachment and corrosion-all of which lead to an acceleration of production decline. Probert We're seeing that noticeably in the U.S., which has increasingly become a gas province. In fact, out of some 1,100 rigs drilling domestically in recent months, only 155 of them were drilling for oil; the rest were gas wells. Investor How steep is the production-decline curve in the U.S. with respect to gas wells? Probert Data suggest it has been accelerating quickly. In 1990, for instance, the annual decline rate for gas wells in the U.S. was around 16%; in 2001, it was above 26%. Clark Looking at the problem from another perspective, the average North American gas producer in 1995 was yielding 2.3 billion cubic feet (Bcf) per well. By 2002, that measure had fallen to 1.25 Bcf per well. And even in 2001, when drilling activity was robust, gas production briefly fell below 1 Bcf per well. Investor Why has this situation come about? Hoel We've been working through our basin inventory in the U.S., drilling the highest-opportunity, highest-return projects first. And as we've done that, the remaining prospects have gotten deeper, tougher and costlier to drill, with less favorable rates of return. That has caused a lot of operators to spend less on U.S. prospects and more on foreign ones. All of this has put pressure on domestic decline rates. Clark Ironically, the successful launch of new drilling and production technologies by the service industry has actually exacerbated the decline-curve problem since it has allowed operators to achieve greater production volumes early on and an accelerated recovery of their investment which, of course, is a positive on the other end of the scale. Probert It's sort of the classic good-news, bad-news scenario. The new technologies applied to drilling and stimulating North American wells in the 1990s significantly improved the drainage of reservoirs and allowed operators to more rapidly monetize production. But these advances also created decline rates we've never experienced before. Iskander If there is an upside to this picture, it's that many experts predicted much steeper production-decline rates than we've actually witnessed. The reason such a doom-and-gloom scenario hasn't unfolded is because of the technological innovations that we and other service companies have introduced. Today, those innovations are making it possible for operators to profitably produce hydrocarbons where they couldn't before. Investor Sami, elaborate on this last point as it relates to Schlumberger's wireline division. Iskander During the past year, we've introduced Analysis Behind Casing (ABC), which is designed to bring [reservoir] evaluation behind casing [in old wells] up to the same level as that for openhole wells. Put simply, the entire objective of ABC is to find overlooked, bypassed reserves and help produce them in a cost-effective way. Recently, this new technology was used by a privately held Wyoming producer that has an already developed gas field with multiple pay zones. This operator recognized, however, that its recovery factor in the field was low. So it used one of the tools of ABC-a Cased Hole Dynamic Tester (CHDT). This technology drills holes through casing into a formation, takes reservoir-pressure measurements and fluid samples, then plugs back the casing to ensure its mechanical integrity. The client found out by running the CHDT that many thin zones in its gas field still had virgin pressure. Armed with this information, it got permission from the state to begin infill drilling. Investor What are some other applications of this ABC technology? Iskander CHDT is also being used in the Lower 48 for frac-job design. When an operator is designing a frac, the knowledge of formation pressure is critical to achieving maximum productivity from the frac. Meanwhile, independents are using other parts of the ABC portfolio of petrophysical and geophyiscal reservoir services to replace openhole logs with like-quality logs behind casing. This allows an operator to move a rig offsite quickly to drill the next well-saving both time and money. Investor How is ABC technology helping operators with only marginal production? Iskander One of our clients-a small heavy-oil operator in Kern County, California-had a multi-zone well that was producing 1,600 barrels per day of water and very little oil. But instead of plugging and abandoning that well, he ran an ABC resistivity tool in the well and found out that one of the well's zones was still free of water. So he plugged all the other zones and began producing from that single zone. The well soon began producing 300 barrels per day of oil. Investor What new technology will you bring to bear in 2004 that will further mitigate the decline-curve problem? Iskander Up until now, we've only been able to take resistivity measurements just a few feet into a formation. Within the next six months, we'll commercialize a new type of measurement tool that can look into a formation and take resistivity measurements hundreds of meters away from a wellbore. In fact, it will be able to take deep resistivity readings between wells that are more than a half-mile apart. This will further help us find bypassed oil and design appropriate secondary-recovery programs. Investor Your outlook for the direction of the service industry in 2004 and beyond? Iskander Today, the oil and gas industry is producing worldwide some 77 million barrels of oil equivalent (BOE) per day. But with the demand for oil and gas steadily increasing-and decline rates edging up-we're going to need over the course of the next 30 years to be able to produce 50% more than we do today, or another 44 million BOE per day. If we're going to meet this need, the easiest place to begin looking for more oil and gas is where we already know it is. And that's why such a large part of Schlumberger's wireline product and service portfolio is dedicated to enhancing recovery in fields with known reserves. Investor Tim, what has Halliburton been doing? Probert We apply a range of technologies to help customers maximize their reserve recovery rates-in both new and old wells-while reducing operating- and capital costs. One of these technologies, from a drilling perspective, is our Geo-Pilot rotary-steerable system. It includes a directional-control tool, a matched wireline LWD (logging-while-drilling) tool and an associated, specially designed bit. Investor What does the system do? Probert It allows a producer to drill faster, which shaves days off the drilling curve and hence, reduces costs. Also, it allows an operator a more complex well geometry, whereby he can hit multiple targets while minimizing the tortuosity of the wellbore. This lowers well risk while enhancing the prospect of better drainage of multiple zones in a reservoir. Currently, the Gulf of Mexico is a significant market for this technology, but there are onshore applications. We also use multilateral completion systems. This technology allows a producer to drill multiple wellbores off a single wellbore-like branches off a tree's taproot-to better drain a reservoir. We're employing this approach in the Permian Basin; Bakersfield, California; and even in the Appalachian Basin-turning some wells that traditionally measured production in barrels per week into wells that are now measuring output in barrels per day. Investor What about production-optimization techniques? Probert In that area, we're focused on PinPoint Stimulation technology-a very efficient and accurate way to stimulate untapped reserves. Basically, it allows operators to perforate and fracture not only multiple, but particular, zones of interest, that is, narrow lenses of production. Importantly, it allows them to do this in a single trip in just one day versus many trips over several days. Currently, this technology is being used in the Rockies, South Texas and the Midcontinent. Investor What about the cost savings associated with all these technologies? Probert What we're focused on is reducing both capital and operating costs for independents. Fewer wells producing more hydrocarbons per well means lower surface costs, as well as capturing more upside in terms of increased recovery from any given reservoir. Investor Any new technologies or tools that assist in both the exploration phase of drilling as well as production optimization? Probert Our Landmark Graphics' Decisions-Based Asset View is a tool that allows all of an operator's key constituencies-geologists, geophysicists, drilling and reservoir engineers-the opportunity to integrate earth-modeling analysis and well planning in the same space at the same time. An important adjunct to this technology is our Real-Time Operations Center (RTOC), which allows producers to monitor the progress of their wells and make better real-time decisions about those wells; it also reduces operational risk by enabling the better placement of wellbores within a reservoir. While this tool has previously been the domain of major oil companies, we've developed a mobile version of ROTC-now becoming available to independents-to remotely manage every aspect of their drilling and completion operations. Thus, a Rockies operator can view in our ROTC center in Denver the progress of an exploratory well or frac job-and bring to bear the expertise of all of its constituencies on that operation-without those constituencies physically having to be at the well location. Investor Rod, what has Baker Hughes been doing to address the decline curve? Clark We've taken steps to improve the well construction process at the front end, solve production problems after a well is put onstream, and lower an operator's cost of ownership over the life of his asset by increasing recoveries or reducing downhole risk. Investor How have you improved the well construction process? Clark One of our products, Baker Oil Tools' Composite Bridge Plugs, allows an operator to isolate multiple zones during hydraulic fracturing in a single well and then, once the frac job is completed, the operator can drill right through the plugs to the next zone-all in just one run. These plugs save the client both time and money. This same Baker Hughes division has also developed multilateral technologies that permit producers to leverage the investment they've made in the vertical section of any given well. Using these technologies, an operator can drill multiple laterals from the existing [vertical] motherbore and complete multiple zones of interest. The result: he winds up not only increasing the yield from his initial drilling investment, but also improving the efficiency of reservoir drainage and, in many cases, delaying the time of waterconing. Investor What services have you introduced to solve production problems? Clark Our Baker Petrolite production-chemical portfolio includes a chemical treatment called Restore. With it, we're able to remove organic deposits in a wellbore that can impede the production stream. Its application has resulted in production increases of up to 300% on wells that have shown production declines as great as 50% per year. On some wells, productivity gains after a Restore treatment have been sustained for almost two years before needing another such treatment. Investor The cost of this treatment? Clark Payout or return on investment to the customer has been as short as three weeks, but in most cases, it's within three months. Investor What are you doing to help producers lower the cost of ownership over the life of an asset, increase recoveries or reduce downhole risk? Clark Baker Atlas is currently introducing in North America its new Predator XP perforating system. This is a deep-perforating technology that allows an operator to penetrate hard, low-porosity gas reservoirs, and to achieve much fuller reservoir depletion and much higher production rates on new wells than traditional perforating technologies. This system can also be used on existing wells to increase productivity, minimize lifting costs and lengthen the economic productive life of those wells. This Baker Hughes division is also introducing a new logging service, 3DEX Scout. This is a simpler version of our earlier 3D Explorer, a high-resolution logging service used to identify hydrocarbons in very thin, interbedded reservoirs such as turbidites in the Gulf of Mexico. In some cases, 3D Explorer has identified as much as 30% more reserves versus conventional measurements. The problem with 3D Explorer, however, is that this full-suite service has been cost-prohibitive for some producers operating in lower-productivity onshore reservoirs. 3DEX Scout addresses that issue. It offers slightly fewer logging elements at a lower cost, but has roughly the same qualitative capability of identifying thin, interbedded reservoirs. Investor Do you expect a higher level of oilfield service activity in 2004 than in 2003? Clark I can't offer projections, but I can tell you that in a mature resource basin like North America, increased levels of drilling activity are required just to keep reserves steady, much less grow them. According to the EIA, U.S. dry gas reserves grew 6% and 3% in 2000 and 2001, respectively. However, this was the result of corresponding 45% and 30% increases in the gas-rig count during those two years. Investor Mark, what is BJ Services doing to address the decline curve? Hoel Let me point out that since 1945, more than a million frac jobs have been done in the U.S., and as we go into deeper and tighter gas sands we're going to have to advance our fracturing technology. As we see it, this technology has-and will have-by far the greatest impact on curbing production-decline rates in the U.S. BJ Services, a highly focused pressure-pumping company, is very much involved in developing technologies to optimize primary completions and remedial treatments for older, existing wells. As part of our efforts to optimize primary completions, we've paid a great deal of attention to increasing the length of fracs to more effectively drain reservoirs. One of the early patented products we developed in line with this focus is Enzyme G, a system designed to break down and clean up the polymers used in creating fractures in formations. Use of this enzyme permits greater, unobstructed fracture length and hence, more production flowing into the well bore. A 10-year study we just completed on hundreds of wells where this polymer-specific enzyme was used shows average 58% and 68% production increases in gas and oil wells, respectively. Investor Any further advances in fracturing technology? Hoel We've also focused on improving the fracturing fluids themselves and have introduced Vistar. This is a chemically modified fracturing fluid that uses only half the polymer of conventional fluids to achieve the same frac length. In a case study of South Texas gas wells that used Vistar, production increases ranged from 84% to 114% after 90 days, compared with offset wells. We've also introduced a new proppant [a substance used to prop open formation rock] called LiteProp. Lighter in specific gravity than typical proppants, it can be easily transported deep within a formation with just brine water. This allows an operator to back off spending so much money on fracturing fluids and enzyme breakers and focus more of his dollars on increasing effective fracture length. Investor Can you quantify this technology's effectiveness? Hoel In one West Texas Permian Basin well, its use by a small-cap operator resulted in a 72% jump in production relative to offset wells not using LiteProp. Investor What else are you doing to optimize completions? Hoel Quite a few tight-sand gas basins in the U.S. have multiple producing horizons. But in these cases, it's very difficult to do well completions-in a timely manner-that specifically address each zone of production. To deal with this problem, we and our partner Marathon Oil have jointly developed EXcape. This technology allows an operator to treat each zone in a well that has multiple producing horizons with perfectly tailored frac jobs-all in one trip. He doesn't have to wind up doing 10 or more separate frac jobs that may take days or weeks, or make compromises such as frac'ing a whole group of zones all with the same design. With EXcape, we hydraulically shut off each zone as we come up the wellbore, providing the targeted frac length or stimulation to each individual zone, again in just one trip. As the result of this technology's use, we've seen an average 80% decrease in the time it takes to do a multi-zone completion. More importantly, we've seen this technology deliver a huge increase in well production because reserves aren't being bypassed. Investor What about well remediation? Hoel That's an important issue. A lot of small operators have wells in fields that are now 30 or 50 years old and are in need of remedial work. One approach we're applying is refracturing, which can actually help a producer achieve relatively the same production rates from these older wells that were realized from the initial completion of them.