December 2017 Exclusive Story
Operators Lock In 2018 Oil Hedges
SEATTLE–Oil and gas exploration, drilling and production always have been cyclical businesses, driven by commodity product prices that reflect often-unpredictable supply reserves, global economic, political and demand factors. The only thing predictable about oil and gas prices is their unpredictability.
Nonetheless, the oil and gas industry has played a dominant role in serving the energy needs of industrial and consumer markets, owing largely to competitive cost structures relative to other sources of distributable energy. Consequently, cost consciousness has become engrained in the industry’s DNA, as have adaptability and innovation.
The oil and gas industry has experienced an unusually long period of price stability. Despite a very low supply reserve cushion, the 2014-15 pricing cycle has reminded us of the volatility of the oil and gas market, and has renewed industry focus on cost cutting, consolidation and competitiveness in this shifting landscape. But this is an industry with a history of responding to changing market dynamics.
Throughout its history, the industry has demonstrated an ability to innovate on a massive scale, even when the experts thought it “played out,” by redefining market economics through novel drilling techniques, revolutionary production enhancements, and enabling new resources through enhanced exploration technology. The rewards following the current price downturn will go yet again to those companies that can best leverage technology to reduce both infrastructure and operational costs, increase asset productivity, and deliver these high-value energy products to a broader consumer market.
Now, more than ever, technology has an important role to play in defining the future of the oil and gas industry.
Looking at the past decade, the genesis of the most important innovations has been the need to either reduce operating expenses or enable certain types of production operations that were not technically or economically feasible. This is especially true of the collection of technologies (horizontal drilling, multistage hydraulic fracturing and enhanced lifting techniques, for example) that have made shale oil and gas production viable. Said another way, the past decade has been one of operational innovation.
As we look to the future, technology has an important role to play in resolving the ever-increasing challenges imposed on exploration and production infrastructure. This next decade may be the decade of infrastructure innovation.
Citibank analyst Ed Morse has pointed out that despite low oil prices, we are in a market that has relatively little spare capacity. In his words, “Even with this imbalance . . . there is virtually no spare capacity in the world.”
This means we are operating in an industry that needs to continue to identify new sources of production and to produce them. The challenge is that the remaining global resources tend to be in those tight, highly corrosive, high-pressure and/or high-temperature reservoirs that have been left for last.
These difficult-to-produce resources are becoming more challenging to operate in, and have a direct impact both on the cost of the infrastructure required to produce them and the cost to maintain them over time. This dynamic is playing out at a time when the industry needs investment to produce, but when funding is more difficult to secure.
In short, the same revolutionary techniques and technologies that have transformed the industry by opening new frontiers in unconventional resources, ultradeepwater plays and enhanced oil recovery, also are creating much more demanding operating conditions and assets that cost more to develop and operate over their life cycles.
Innovations that can reduce the upfront and operational capital associated with constructing and maintaining infrastructure in these more aggressive and complex operating environments could be the answer to further enhancing operational capabilities and safety factors, while maintaining the cost competitiveness, of the energy industry.
Whether it’s Mother Nature defining the high pressures and temperatures of ultradeepwater reservoirs and corrosive heavy oil deposits, or abrasive and corrosive, technology-enabled complex operations such as multistage hydraulic fracturing or carbon dioxide enhanced oil recovery, the dynamic is the same: more aggressive operating environments with tighter economic margins.
Despite the huge enabling breakthroughs in production operations, the infrastructure impact of long-lateral horizontals in a shale play, of HP/HT reservoirs in deep water, or of steam-assisted gravity drainage in oil sands can materially impact the absolute return on asset investments.
For this reason, the next big step is optimizing the infrastructure itself, using advanced nanotechnology materials and technologies to redefine the performance envelope of operational assets, without increasing cost.
Infrastructure is one of the few remaining areas that can improve returns by attacking both the numerator (enhancing productivity) and the denominator (reducing cost) in the equation. If the industry does not address the implications of these new operating conditions on infrastructure-related capital expenditures, the reality will be increasing capital and asset maintenance expenses without anything to offset them. It will become simply a question of whether the higher and higher investment hurdles can be overcome.
Nanotechnology holds tremendous promise for achieving breakthroughs in infrastructure components using new metallurgies, chemistries and electromechanical devices. Broadly speaking, nanotechnology involves manipulating matter on a nanometer scale. But it is hard to define with specificity because it is such a diverse, emerging field. The science can mean very different things to different people, ranging from digital technology to miniaturized mechanical devices, to chemical compositions. Consequently, there are almost limitless potential application areas for nanotechnology in oil and gas fields.
Despite all the cutting-edge technologies at the industry’s disposal, there has been little advancement in cost-effective infrastructure materials. Steel is still steel and rubber is still rubber, and despite some advancements to higher-priced alloys, very little has changed in industrial metals since this industry’s beginnings. The basic metallurgical and chemical compositions of steel have remained largely unchanged. But major advancements are under way.
One example is an advanced, low-cost manufacturing process to produce nanolaminated metals and materials that are stronger, lighter and more durable than conventional steels and alloys, all while keeping prices competitive with conventional alloys.
When conditions require purpose-engineered solutions such as corrosion-resistant steel alloys, composite pipe or specialty elastomers, the solutions have tended to come at much higher cost. There is a tremendous opportunity for nanotechnologies to change that dynamic by maintaining cost parity with conventional, low-cost options while also meaningfully extending the life of assets in more aggressive environments.
Imagine the improved profitability associated with reducing the frequency of artificial lift system repairs because of corroded tubing strings. No matter the type of play, production downtime is one of the biggest margin killers in the oil and gas business. The more aggressive the operating environment and/or narrower the margin, the greater the impacts associated with production downtime.
This begs the question: What value would be represented by a tubular product with nanolaminated steel or nanocoating materials that could keep a well on line for, say, 36 months instead of six or eight, before requiring an intervention to address a corrosion-related failure? What impact would this have on operational return on that tubular asset?
The implications can be profound, especially if the nanotech-enabled solution can be delivered at the same pricing point as a conventional component. Keeping the well producing means avoiding lost or deferred production, effectively recovering more hydrocarbons. Plus, the operator would incur lower maintenance expenses and dramatically reduced recurring costs to replace or repair tubulars and pumps.
The higher a project’s capital- and operating-expenditure profile is, the greater the potential impact associated with applying nanotechnology is. Take, for example, high-cost, technically complex projects such as Gulf of Mexico Lower Tertiary wells drilled 30,000 feet into HP/HT reservoirs in 10,000 feet of water. Here, corrosion, erosion and wear resistance remain important, but enhanced strength, modulus, weight and other beneficial characteristics of nanotechnology alternatives also can affect infrastructure cost dramatically.
We have run simulations that suggest using advanced nanolaminated metals in deepwater fields can reduce total project OCTG requirements by 30 percent or more, compared with conventional alloys.
Being able to deploy stronger and more durable, yet lighter-weight casing with one-third the wall thickness and much larger-diameter production tubulars not only has major well cost benefits, but also means wells can produce more hydrocarbons. Moreover, if the tubulars are longer lived, operations will be safer and will not have to be shut down as frequently for repairs.
Beauty is in the eye of the beholder, and nanotechnology is in the hand of the wielder. Nanotechnology isn’t a technology, but describes the impact of scale on a number of technology sectors that can have dramatic impact on application and performance.
One example is using small-scale sensor technologies to characterize and monitor reservoirs and reservoir infrastructure. This application is adapted from the core architectures of the “smart dust” autonomous sensing and communication devices initially developed at the University of California-Berkley. The idea is to infuse the wellbore with microscale sensors that can “talk” with one another to reduce downhole and surface communications infrastructure.
These particle-sized, low-power devices use small-scale batteries and antennae to become ubiquitous to the well while both sensing and communicating information in real time during well construction, completion and production operations. They require no communications hub or connections, and can collect data such as pressures, temperatures, chemistries and flow rates, and transmit them over very long distances by relaying data from one device to another.
As these sensor systems and components are reduced systematically in size down to the nanometer scale, their ability to improve the resolution of reservoir monitoring and to interact with the chemistry of the reservoir is increased, providing more and more valuable data. These devices plug directly into the concept of the digital oil field, which seeks to improve both opex and capex over the life of an asset by optimizing production performance while minimizing operational problems and inefficiencies.
The U.S. military’s new small-unit operations tactical model provides interesting analogies to the smart field paradigm. The model describes autonomous operating units within the broader command structure to provide more responsive and effective results with greater efficiency and a lower logistical burden.
In the case of the digital oil field, this basic model can be adapted to allow asset teams to make informed, independent decisions based on real-time data being generated in the field. Instead of calling in firepower, they may call in an equipment technician or service provider to perform on-demand maintenance or repairs based on real-time data from the field. This structure, enabled by infrastructure monitoring capability in real time, enables further organizational and operational efficiency.
Of course, this model assumes that the huge amounts of data coming from oil and gas operations can be turned into actionable information, which is no trivial feat. Data management is a challenge already, and data volumes will continue to grow exponentially as sensor technology becomes more prolific. More data does not necessarily mean more information.
Fortunately, there are numerous big data initiatives to develop technologies to synthesize large quantities of data and turn them into business intelligence, including data mining, analytics, neural networks, and self-learning machines. These technologies not only give big data users the ability to quickly mine massive quantities of data, but also have evolving algorithms that can learn over time how information actually is being used.
Converging Technology Domains
Nanotechnology has evolved in discrete fields focused on relatively specific applications such as miniaturizing mechanical or digital devices, optimizing the performance of fluids and coatings, and more recently, enhancing the characteristics of metal alloys. The impacts of these technologies are powerful in their own rights, but going forward, the biggest game changers are likely to occur at the boundaries of those discrete fields, where nanotechnologies across different application and development areas converge.
For example, smart materials that not only have improved mechanical properties by virtue of nanostructures, but also that can respond to the environment they are exposed to by self-healing, or sensing and reacting to chemical or physical changes, could extend further the life of oil field assets. The convergence of a ubiquitous sensor and a nanoscale chemical delivery pod into a single system could not only sense and report on the status of its immediate chemical environment, but also respond to deliver targeted corrosion inhibitors.
A commercially available case in point is chemically reactive proppants that release chemicals to enhance corrosion resistance or impede scale formation, based on an external stimulus such as detecting carbon dioxide or water within the space of a fracture. Nanochemical reactions to inhibit scale or corrosion are only the starting points.
Imagine how nanothixotropic materials capable of detecting and altering the viscosity and chemical properties of a downhole fluid could revolutionize drilling and completion, or how reactive nanodevices that could detect what was happening in a chemical, pressure or temperature environment, and then introduce responsive actions to alter those conditions could benefit production operations.
Increased Safety Factor
The applications for nanometallurgies are not confined to the borehole or to cost reduction. They extend to platform structures, topsides equipment, subsea systems, and to creating safer and more robust infrastructures.
In one case, a nanolaminated alloy is being used on fasteners deployed on offshore rigs. Although these are already low-cost commodity products, fasteners are critical to both operations and safety. In many cases, they are the component that stands between a high-pressure chemical environment inside a distribution system and the people and environment outside.
Conventional metal fasteners have to be replaced frequently because of actual and potential corrosion, and there is significant labor cost involved. Testing shows that using a nanolaminated alloy can extend fastener life by more than 15-fold at a capex competitive with conventional fastener coating technology.
This means not only the potential to reduce replacement and maintenance costs, but also an increased safety factor through a mitigated failure mode. Broadly, nanotechnology materials have the potential to improve economics as well as to deliver more robust and safer infrastructure products to the aggressive oil field environment.
As we look to the future, oil and gas operators can continue to expect very big things from this very small technology. We do not yet know what kinds of nanotechnologies will be developed, but it seems a safe bet that they will one day help the industry solve “grand challenges” such as boosting recovery rates in ultralow-permeability rocks, enabling seafloor processing, or eventually perhaps, enabling solutions to realize the potential for carbon sequestration, the anticipated demands of this operating environment, and the clean and cost-effective oil and gas industry of a future generation.
CHRISTINA LOMASNEY is chief executive officer, president and co-founder of Modumetal Inc. in Seattle, which is focused on pioneering nanotechnology solutions for ultrahigh-performance metals and coatings. Her career has focused on researching, developing and commercializing advanced materials technologies, starting at The Boeing Company, where she served in engineering roles, including Boeing’s Phantomworks™ advanced metals manufacturing department. Lomasney later founded Isotron Corporation, an advanced materials company. She serves on the board of directors of ASTM International. Lomasney holds a B.S. in physics from the University of Washington, where she also completed applied physics graduate studies.