Joint Venture Challenges Drilling's Status Quo

Abstract

Shell is facing up to fast-rising future drilling costs by taking control, with a venture that will build, own, and operate drilling rigs. The company has created a joint venture with China National Petroleum Corporation (CNPC) to build a new generation of special-purpose automated drilling equipment. There is a back-to-the-future quality about the strategy. Oil companies once owned many of the rigs used to drill their wells, but largely got out of the business in the 1970s and 1980s as they pared back to focus on the more profitable business of finding oil and gas. Shell is changing its strategy as the number of wells it drills soars to take advantage of unconventional reserves. For example, rather than drilling 10 highly productive wells to develop an offshore field, Shell expects to drill about 10,000 wells to produce natural gas from a single coalbed methane project “The well manufacturing joint venture is an opportunity to redefine our costs in an area where we spend a significant amount of money,” said Peter Sharpe, executive vice president of wells at Shell. Shape declined to say how much Shell expects to invest or benefit from the venture. The agreement was signed between the companies in late June. As of late July the two sides were working on a detailed business Sharpe plan and negotiating details, such as what intellectual property each would contribute. The operation, which has not yet begun design work, expects to begin production in 2013. The venture is not going to become the driller of choice on all Shell projects. It is aimed at fields requiring high-density drilling, with thousands of wells drill over decades. Fields that do not fit into that category include Shell’s US shale holdings, where the drilling is not on the scale needed for its high-density field approach. The business plan for Shell’s manufactured drilling program goes after costs in a variety of ways. It combines new technology—drilling automation—with long established cost-cutting strategies: partnering with a low-cost provider, economies of scale, specialization, and cutting out the middleman. Shell’s partner in China, CNPC, is a major maker of drilling rigs in one of the world’s largest and most efficient manufacturing economies. While Shell is far better known, Sharpe said CNPC’s budget for drilling and completing wells is comparable to its own. The automated drilling program is expected to lower costs by drilling wells faster with fewer people on site, which should make it safer as well. It reduces the number of rig workers, who are hard to find in some territories. Sharpe said there are countries where “we can’t train the people we need at the rate we need them.”