2020 Top Operators Report: Crushing The Cost Curve – Operators Still Finding Ways To Increase Productivity

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Editor’s note:

Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.

This year’s Daily Oil Bulletin Top Operator report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.

To do so, we made some changes to the Top Operator format.

Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.

We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.

Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.

Download the report here.

Canada’s oil and gas industry has been on a relentless pursuit of operational excellence for the last five years in response to lower oil and gas prices.

KPMG’s national energy leader Michael McKerracher says that effort has been effective, but more will need to be done.

“We’ve driven out a lot of costs. Canada has done a better job on cost-reduction than the rest of the world,” he notes. “The next reductions will come from applications of technology at the drill bit, in the manufacturing process, or the back office.”

McKerracher expects the focus to be on cutting production costs rather than development costs in the short term. However, he expects reductions in both areas.

He also believes potential for disruptive change remains despite the advances in the last five years.

“Look at the last three months during the COVID-19 pandemic. Things like remote working that took six to eight months to accomplish in the past have now taken only six to eight weeks. One example is the widespread use of collaborative software like Microsoft Teams. This is disruptive change and there will likely be more disruptive changes similar to this.”

Right now market forces are driving down costs as service companies compete for limited work, says Lee Curran, vice-president of drilling and completions for Peyto Exploration & Development Corp. “We’ve seen a lot of oil-based inputs like diesel fuel and drilling fluid base oil fall in excess of 25 per cent. So that's a pretty easy cost reduction to understand. Drilling rig day rates continued to reduce. Well testing, casing, those types of major inputs that comprise a lot of our capital cost structure have come down, in the high single digit to low double digit numbers. This industry is hypercompetitive right now.”

Todd Burdick, vice-president of production at Peyto, says some operating costs are declining as well.

“Basically since 2018, we've been negotiating road use costs with road owners, and we've seen some pretty good gains on that. As we mentioned lubricating oils, we expect those to fall. And again, with methanol, we expect that to fall. We've already seen about a 16 per cent drop in the methanol price from Q1 into Q2 here. Finally we're starting to see some reduction in government fixed costs. The AER Administration Fee has been reduced for 2020. We have indications that property taxes will be reduced. We don't know exactly what that number will be yet. We're hoping that it's significant.”

Canadian Natural Resources Limited is targeting operating cost reductions from 2019 levels of approximately $745 million.

“Every area, every team, has goals and objectives to get to. It’s a combination of looking at what we do, whether capital or operating, and see what we can do differently to improve our efficiencies and drive our costs,” says president Tim McKay. “And I can say that all of the companies that we work with — in fact all Alberta companies — have felt the pinch we have here in Alberta and are working extremely well in terms of looking for opportunities in terms of how they can be more effective and efficient in their operations, as well as what they can do to lower costs. They recognize we’re in it together and we’ve had an excellent response from many of our vendors and service providers.”

Tourmaline Oil Corp. is pushing forward with a number of innovations that are driving both cost reductions and environmental performance.

Its diesel displacement initiative uses an integration of technologies to drastically reduce diesel consumption, GHG emissions, and cost. Tourmaline’s entire fleet of drilling rigs, all its boilers, and all its pressure pumping fleets are bi-fuel natural gas. It has two completions natural gas turbines, two natural gas portable generators, one highline powered drilling rig, and is building a highline completions transformer skid. With natural gas electrical generation on site it has completely eliminated several diesel engines from some locations. Tourmaline is currently calculating a cost savings of over $11 million per year and expects that to grow as it introduces the next phase of technology innovation.

Digital technologies are also being applied to drive operational excellence.

In November, Suncor Energy Inc. announced a multi-year strategic alliance with Microsoft Canada to take advantage of Microsoft’s full range of cloud solutions as it moves toward a cloud-based computing platform. The deal should enable the rapid deployment of new technologies that improve safety and productivity through artificial intelligence, machine learning, enhanced automation and visualization.

“Although we are an industry leader in many respects, we still have much to learn in the digital space, which is why we’re working with a number of organizations including Microsoft to challenge us,” says president and chief executive officer Mark Little.

Imperial Oil Limited has several projects underway leveraging machine learning and optimization techniques. It has completed and deployed a steam flood optimization model to Cold Lake where it uses both machine learning models and a mathematical optimization model to help put limited steam to the best locations to maximize production. It is now deploying this model to all of its Cold Lake steam flood areas and seeing very promising results.

It is also field-testing a haul truck predictive maintenance model that uses machine learning to predict haul truck component failures far in advance in order to avoid unplanned downtime.

Another big opportunity area is optimizing maintenance processes. Imperial has completed an optimization model for maintenance scheduling that helps it to optimize resources and minimize risk for the 50,000 tasks it schedules weekly at its Kearl oilsands facility.

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