DENVER—Lean times require lean measures. And the oracle of lean in oil and gas is New York City-based Hess Corp. (NYSE: HES), which has found that the process of continuous improvement at the center of lean manufacturing also creates the opportunity for profit in a commodity resource business.
Hess will expand its Bakken 2017 drilling program by four rigs to six total after adjusting to one the more economically challenging events in the oil and gas industry’s volatile economic history.
The Bakken Shale fits in with Hess Corp.’ balanced portfolio philosophy towards oil and gas. Hess is half domestic, half international; half oil, half gas; and half onshore and half offshore.
The company currently operates 550,000 net acres in the Bakken, including 350 drilling spacing units (DSU) yet to drill in the core of the play, more than any other operator in North Dakota. Those 350 DSUs represent nearly 3,000 wells in inventory with roughly half of inventoried wells expected to generate a return of 15%, or higher, at current oil prices.
“We say that the Bakken, if you’re in the core of the core, is competitive with the Permian,” COO Greg Hill told attendees at Hart Energy's DUG Bakken and Niobrara conference in March. Hill said that Hess increased the number of economically beneficial wells even as oil prices fell.
“Hess is about value growth,” Hill said. “What we are trying to do is to deliver the maximum NPV (net present value) per DSU. That may not be the maximum production per DSU because we’re trying to deliver the most value.”
How did Hess make the transition even as commodity prices fell? Service cost reduction is a factor, Hill said, but “the biggest part of it is what we’ve been able to do with lean manufacturing to continue to drive our break-evens down. More of it is what we’ve been able to do with our completion philosophy to drive our productivity up.”
Going Lean In The Bakken
Hill discussed adaptation of the lean manufacturing philosophy of continuous improvement and smooth workflow among both vendors and Hess.
After a one-time reduction in service costs early in the downturn, the practice of lean enabled Hess to reduce well costs from $5.6 million to $4.6 million over the last year even as the complexity of wells increased exponentially. Based on conversations with vendors and public records, Hess believes it is in the top quartile of performance on both a well cost and performance basis in the Bakken.
As an example of how lean manufacturing impacts oil and gas, Hill outlined a day in the life of a well operator. The individual will respond to a signal that there is a problem somewhere out in the field that needs to be addressed on his rounds, even while performing preventative maintenance in operations elsewhere.
“In the old days, an operator would get in his truck, drive around and check every pad, check every well, make sure everything was okay,” Hill said “That’s like a doctor driving around to everybody’s house to see if somebody’s sick. There’s a lot of inefficiency in that.”
Using big data analytics and filtration software, Hess eliminated waste by making sure the operator only visits “sick” patients.
“When the operator goes there, he knows exactly what the problem is, and knows exactly how to intervene,” Hill said.
Secondly, Hess well operators now carry a standard kit to address preventative maintenance, including appropriate tools and modern visual controls to monitor what needs to be done. The company has standardized its well site designs, the equipment on the wells, the parts to support that equipment and created specific maintenance intervals.
“What that has allowed us to do is to increase to over 1,500 operated wells now with effectively no additional operations staff as a result of eliminating all that previous inefficiency,” Hill said. “What lean also does is it really drives defects out of your business. The operations need to be very focused on reliability.”
To assist the process, Hess has created focus teams, including engineers, who are focused on problem-solving.
“What has all that done? It’s reduced our cash operating cost,” Hill said. “We’ve really only been at it on the operations side for a couple years, but it’s reduced our cash operating costs by 32%. We’re just getting started.”
Hill said Hess can drop cash operating costs another 50% to 60% as the program matures, which will further maximize NPV and drive higher returns.
As for data analytics, Hess has assembled its own propriety algorithms on how to approach development of a DSU. The analytics are based on the performance of every well the company has ever drilled in the Bakken, plus the results of every well competitors have drilled, thanks to the open records of the North Dakota Industrial Commission, which are without peer in any other state.
“Basically, we load about 75 attributes or so for every single Bakken well,” Hill said. “The software learns. As people drill new wells, we upload all that new information. The algorithms run, and the software learns.
Consequently, Hess has improved its understanding of what drives performance in the Bakken and can anticipate to within a few percentage points how a new well compares to predicted values. This practice has led Hess to look at three primary operational levers. The first of these is well spacing.
“Hess is different than almost every other operator in the Bakken,” Hill said. “We’ve chosen to go with a very tight well spacing. That’s a nine and an eight. That means nine wells in the middle Bakken and eight Three Forks wells on a pad where those two formations overlie each other.”
The second lever is reservoir entry points for frack initiation, followed by the third lever, which is frack intensity. Hess, unlike many competitors, is using sliding sleeves for frack initiation.
“What the algorithms and big data do is they inform you how to take those three apexes—well spacing, entry points, and proppant loading—and basically solve for the equation on how to maximize DSU value.”
Those findings will underpin Hess’ move this year to 60 sliding sleeve stages per Bakken well—up from 50 in 2016—and an increase in proppant loading to about 140,000 pounds per stage.
Comparing current results versus wells over the last five years has led to Hess to believe that the company is generating more DSU value than other well designs in similar rock across the entire spectrum of commodity prices.
Bakken EOR Upcoming In 2017
Hill concluded by noting continuous improvement doesn’t stop. Hess is actively looking to a future that incorporates enhanced oil recovery and has locked down exclusive access to a porous media laboratory at the University of Wyoming.
The facility is the only lab in the world that can image rocks and flow through porous media at the micro, nano and macro levels simultaneously, using complex and proprietary scanning technology developed at the university.
“What we’re able to do [with the University of Wyoming] is a reservoir temperature and pressure model in actual conditions,” Hill said. “We’re actually able to image and understand how that flow actually works, what are the influencing factors on that flow, and whether we can increase recovery.”
What Hess has discovered is the injection of certain fluids—and the way they are injected—can have a significant impact on additional Bakken recovery.
“We’re going to execute a field test, the first injection in 2017, so stay tuned on that,” Hill added.
Richard Mason can be reached at email@example.com.
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