FI­NAN­CIAL POST

HOW THE DRILLING IN­DUS­TRY IS TURN­ING TO TECH.

National Post (National Edition) - - FRONT PAGE - GE­OF­FREY MOR­GAN

CAL­GARY • 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.”

ROBEERT SEARLE

The in­dus­try is now in­creas­ingly com­pet­ing for con­tracts based on bytes rather than drill bits as tech­nol­ogy takes on a sig­nif­i­cant role.

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