HOW THE DRILLING INDUSTRY IS TURNING TO TECH.
• Kevin Neveu has seen his share of oil booms and busts over his near-40-year career in the oilfield services sector. But this time, as he finds himself navigating yet another bust cycle in an ever- shrinking sector, he’s competing for drilling contracts with the aid of bytes rather than just drill bits.
“We’re into the upper teens now with various clients who are accepting the technology and running with it,” said Neveu, a 38-year veteran of the industry and CEO of Precision Drilling Corp. “We think that we’ve earned customers in the U. S. and in Canada. We have earned rigs.”
The technology, called Alpha Automation, allows Precision to automate and use algorithms to drill wells, eliminating human error and reduce costs at a time that oil and gas companies are demanding their oilfield services providers drive down their costs.
Precision charges customers to use the software, but Neveu said the programs more than pay for themselves. “We’re saving them far more than we charge,” he said. “On a Permian well, we’re drilling these four days faster on a 28-day well.”
For years, drilling companies have competed on pricing and mechanical advancements, which can take the form of additional horsepower or highly specialized drillbits. But the industry is now increasingly competing for contracts based on bytes rather than drill bits.
The technology deployment is being accelerated as the North American oil industry faces one of its worst crisis ever. With oil prices hovering around US$ 40 per barrel, the North American shale oil and gas industry is struggling to survive the twin blows of the pandemic and structural decline in crude oil demand. With many oil and gas companies, especially in the United States but also in Canada, reeling and on the verge of bankruptcies, the pressure is on the oilfield services companies to offer low-cost solutions.
“How do the different drilling companies differentiate themselves? It’s now with technology — there’s no question about it,” Ensign Energy Services Inc. president and chief operating officer Bob Geddes said, adding the same drive toward higher- tech components is happening across other industries.
“In the car business, it’s no longer what’s under the hood that differentiates it. It’s all about the technology that comes with it. It’s the same thing on the drilling rig,” Geddes said, adding his company’s software engineering and development team at one point numbered 50 people, but has since shrunk to 11 amid the struggling economy.
Drilling companies in Canada and the U. S. have built software teams and developed programs that use algorithms and machine learning to drill wells. Those programs are being rolled out across drilling fleets in an effort to improve the efficiency of the drilling rig. In some cases, wells can now be drilled remotely, which has allowed companies to keep working during the coronavirus pandemic.
“This is not that different than machines learning how to trade everyday,” Stifel Firstenergy analyst Ian Gillies said, referring to high- volume trading algorithms that have taken on increasingly large roles in finance and trading over the past decade.
“When patterns repeat themselves, the machines know what to do,” Gillies said.
Patterns do repeat frequently in drilling as oil companies are increasingly moving to pad drilling, in which multiple wells are drilled on the same well pad, churning through the earth in roughly the same location and hitting the same geological formations. The shift has reduced costs for oil and gas companies and also allowed drillers to automate more of their processes. As a rig drills a dozen or more wells adjacent to one another, the rig’s software learns at what depths more power or more weight on a drill bit may be required. In such cases, the rig rather than the drilling engineer will make the adjustment.
Drilling executives say the technology limits human error and allows the rigs to hit the exact part of the formation it’s targeting with little variance, while reducing costs and drilling times.
Precision’s Alpha applications, which were developed with National Oilwell Varco, Pason Systems Ltd., Schlumberger and others — have reduced drilling time and costs for customers in the Permian shale oil formation in West Texas and allowed the company to gain market share, Gillies said.
Precision commercially rolled out its fifth and sixth drilling software application in the second quarter and says it has 12 more under development. The company said its technology improved one customer’s drilling times by 8 per cent in the second quarter, and has now drilled 110 wells for its customers using the technology.
In the U. S., oilfield services and drilling companies have been developing competing programs in an effort to gain market share. Analysts say Tulsa, Okla.- based driller Helmerich & Payne Inc. is among the most advanced, but Bermuda- based Nabors Industries Ltd. and Houston- based Patterson- UTI Energy Inc. are all developing their own systems.
“We will continue to drive technology and performance in the drilling sector,” Nabors president, CEO and chair Anthony Petrello said on his company’s second quarter earnings call this week. “We firmly believe that the future of our industry and the company’s success will be determined by our ability to continue automating the drilling process and integrating the relevant services into our leading-edge rig platform.”
In the second quarter, Baker Hughes Co.’s technology helped to drill a well at a rate of 3.2 kilometres per day and the company’s software and automated equipment can assist in drilling a well without a crew present, said Paul Madero, vice-president of global drilling services.
The algorithms, automation and software development is improving the efficiency of work on drilling rigs and, after the COVID-19 pandemic cause oil prices to collapse, customers that were previously wary to adopt new technologies are willing to try it out, Madero said.
“I think it’s now the new norm,” he said. “We’ve been pushing this over the last couple of years. Last year we were calling our customers, now our customers are calling us.”
Roughly half of the wells Baker Hughes assisted in drilling were drilled using the company’s remote drilling technology in 2019. As the coronavirus pandemic swept across North America and other economies earlier this year and required companies to develop and enforce social distancing protocols, that number jumped to 70 per cent in the second quarter.
However, Ensign president Bob Geddes said that drilling activity has declined so sharply and oil and gas producers are under so much pressure that getting customers to sign off on any kind of drilling activity has become a battle.
One way to encourage further adoption of algorithm- based drilling would be to transition the industry to performance- based contracts, rather than contracts that pay drillers a day rate.
“The operator doesn’t want to pay to put on an Edge Autopilot,” Geddes said of his company’s software suite, which costs $ 2,700 per day to run on the drilling rig. But if an oil and gas producer wanted to sign a performance- based contract with Ensign, the driller would do so automatically. We’ll decide what technology we put on the rig at our cost. We want to save the operator money.”
As for who has the best or most advanced technology, analysts say it’s very hard to assess.
“It’s very difficult for someone sitting on the outside to adjudicate which ones are more advanced or user friendly than others,” Raymond James analyst Andrew Bradford said, adding that various technologies from different operators may tackle slightly different problems.
Bradford said it’s also difficult to tell whether the new technology will translate into higher earnings for drilling companies developing the software. The drillers may charge for the use of the software but they end up losing drilling days. In addition, it’s not clear exactly which positions on an oil and gas rig can be eliminated as a result of the technology.
When Precision posted its quarterly results on July 23 — a net loss of $49 million — Bradford said the adoption of the Alpha Automation suite was notable but he couldn’t determine whether it had improved the company’s finances.
“From our analytical perspective, we haven’t noticed any change in the cost structure of the company,” he said. “It might be lost in the noise, but it isn’t jumping out at us.”
For his part, Neveu said he welcomes additional competition and moves by other drilling companies to commercialize algorithms and software of their own because it will drive adoption more broadly in the industry.
“We think there’s value in having another driller that’s not too far behind us,” he said, adding that Precision has been able to develop its applications quickly because of its partnership with National Oilwell Varco. “We’re the largest land use. We think the app developers will really accelerate development.”