Unconventional Oil and Gas: Unlocking Value Through Collaboration

Abstract

Guest editorial In North America, unconventional oil and gas represents the largest energy discontinuity of the past few decades. Gas production from these resources grew from 20.8 to 44.5 Bcf/D between 2006 and 2012 and now represents approximately half of North America’s supply. Oil production is growing and is beginning to affect world oil flows. The scale of this ongoing activity is far reaching: Capital investment in new unconventional oil and gas wells has reached USD 100 billion per year in North America alone. With worldwide reserves largely unexploited, the real growth in the sector may be just beginning. Such rapid growth, combined with a high level of field development activity over a long period of time, is putting the traditional relationship between producers and service companies under strain, while also creating new opportunities for both sides. Developing unconventional oil and gas resources presents an opportunity for change for three reasons. First, activities are relatively uniform, with multiple, repeated operations taking place in close proximity during the life of a basin. Second, field development goes on for much longer, with drilling and completion activities continuing for many years. Third, the primary source of value in such operations has shifted from the discovery of plays to their efficient development. These changes provide an opportunity for producers and service companies to reset historical relationships, preserving value and reducing cyclicality for both parties, while also potentially improving safety for those in the field. Based on our experience in these emerging plays, we have identified a series of opportunities for operators and service companies to bring real innovation to oilfield development in the near term. Central to these opportunities is our belief that operators and service companies should focus on developing closer and longer-term relationships with each other. This will enable the industry to unlock significant value. In particular, companies should focus on three areas: transparent operator-supplier contracting practices, joint supply chain optimization, and lean field operations. Transparent Contracting Practices The increased repetition and sheer longevity of activities associated with unconventional oil and gas drilling—a company may drill in a basin for 10 years—means that some procurement practices have the potential to provide much more than they can in the conventional environment: Procurement levers that may not be worthwhile in a conventional 1-year, 10-well project could be incredibly valuable when applied to a 1,000-well program over a decade. Companies will need to choose their levers with care, however. In conventional oil and gas, producers may favor strategies that deliver savings by squeezing supplier margins. With relatively short contracts at stake, suppliers may be willing to accept such arrangements, especially during a cyclical downturn. They are likely to be far less accommodating when negotiating a multiyear contract. In that case, the most effective procurement practices will be those that enhance collaboration and joint value creation between operators and service or equipment companies.