This is fourth article in a five-part series from Oilweek’s Innovators issue.
When a company calls in auditors, management naturally expects them to open the books. That is, after all, what auditors do.
On the other hand, when an oil company hires optimization consultants, management usually expects them to go into the field to check wells and facilities.
But not all consultants take the same tack. At one Calgary optimization firm, the first move after being hired is not going on a field trip, but taking a hard look at the client’s books, including financial statements.
“Our first stop is always the operating income statement,” says Arnie Hansen, president and chief executive officer of Netback Production Solutions. “It tells a story and usually points to where the deficiencies may lie, and then we work upstream from there.”
“When we first look at an asset, we usually look at the top five operating costs in the income statement,” says Hansen. These costs usually include maintenance, power, chemicals and operating costs in general. “We focus on those first and go upstream from there and try to find where the deficiencies lie,” he says.
Asked to summarize his work, he puts it succinctly: “We fix broken and underperforming oil and gas assets.” That includes both surface and subsurface assets: geology, production constraints, metres and everything in between. It’s all-encompassing management optimization for the oil and gas industry.”
In a sense, Netback’s team represents what, in an earlier era, might have been called efficiency experts, but geared specifically to the oil and gas business. The focus is on spotting inefficiencies in producers’ field operations and processes and drawing on a number of disciplines to get the job done.
The company’s team includes geologists, geophysicists, engineers and a facilities-optimization group. Indeed, it includes everything that would make up a normal operations team for an under-performing asset in an existing exploration and production company.
Hansen’s staff is not new to optimization nor to the oil and gas business.
“We’ve seen this movie before,” he says. “We’ve been forced to turn over every rock, looking for cost-cutting and optimization opportunities, back when oil was trading at much less than it is today.”
Yet theirs is not a cookie-cutter approach, and Hansen acknowledges that producers’ cost profiles vary significantly by play and by geography.
“Operating costs on a Montney play are different than on a Lloydminster heavy oil play. As far as operating netbacks, what we look at is relative to the area,” he says. “You’re expected to have higher operating costs in a place like Lloydminster, where you have higher maintenance costs.”
In the current downturn, producers are stressed, with some running at or under the margin. Some have laid off staff and need technical support because they can’t do what they want to in terms of managing operations. For Netback, that’s an opportunity.
According to Hansen, the industry’s legacy assets also provide an opportunity for his team. Often these older properties are running on tight margins, typically with high operating costs, sometimes due to antiquated technology or being on a waterflood.
In recent years, the biggest cost escalation has come in power, chemicals and well-servicing, what Hansen terms surface and subsurface maintenance costs. “Back when oil was $100 a barrel, service costs went higher,” he says. “[Today] it’s a slow, downward slide for service companies to reduce costs, even though we’re seeing some substantial decreases.”
He cites power costs as the low-hanging fruit in some cases. His team will take steps to optimize power usage within a facility or, more broadly, within a field. That might mean integrating cogeneration power as part of the overall scheme. “We make sure the producer is getting the most value from his [power] rate schedule,” Hansen says.
Netback might also recommend a producer reduce maintenance periods with the overall objective of ensuring that the client is efficient in carrying out maintenance, workovers and completions.
With some producers, there’s room for improvement at a still-earlier stage: the selection of properties for optimization. Instead of focusing on higher-return, core properties, some operation teams tend to focus on non-core properties, yet these are typically higher-maintenance, higher-cost assets.
“They should be focusing on the higher-return, core assets and consider outsourcing some of the under-performing, non-core properties,” Hansen says.
With low crude oil prices continuing, he acknowledges that the industry’s interest in services like Netback’s is strong, but it wasn’t always the case. “When oil is at $100 a barrel, nobody focuses much on operating costs,” he says. “But when you’re at the price levels we’re experiencing, the first thing companies typically do is look inward.”
Looking ahead, Hansen believes the industry’s focus on keeping costs down will continue for the foreseeable future. Cost control will be especially important as the Alberta government expands taxation of carbon beyond large industrial emitters.
Currently, the province’s plan calls for phasing in carbon pricing in two stages: $20/tonne economy-wide in January 2017 and $30/tonne economy-wide in January 2018.
Alberta’s new carbon levy will apply to the purchase of fossil fuels that produce greenhouse gas emissions when burned. However, it does not include the national tax on carbon emissions that Canada’s federal government has promised to introduce before year-end.
“I think the carbon tax is going to have a huge impact on industry,” says Hansen. “Companies need to start thinking about energy efficiency improvements now to try and offset some of those costs because industry typically has a six-month lead time to initiate projects.”