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Deloitte report shows need for 'Goldilocks' approach to shale drilling

U.S. oil and gas producers could achieve greater efficiencies and billions of dollars in cost savings by moving away from a one-size-fits-all approach to well creation, Deloitte said in a report released Oct. 23.

The authors of the report said that by becoming more adaptable and recognizing that well drilling methods may need to change from one location to another, producers in the Permian Basin and Eagle Ford Shale could generate capital efficiency gains of 19% and 23%, respectively. That could translate into as much as $24 billion in capital expenditure savings.

Scott Sanderson, a principal in Deloitte's oil and gas strategy and operations practice, said producers have reached a critical point and are coming to the realization that uniform drilling methods are translating into weaker returns. The "brute force" approach of longer laterals, greater fracks and the use of more proppant is actually leading to smaller production numbers in many cases.

"We had a client several years ago who said, 'We haven't reached the point of diminishing returns and we're going to keep going until we reach that point,'" Sanderson said. "They've reached it."

The report's analysis of more than 80,000 wells shows the dilemma faced by producers. The "factory approach" of using the same methods for every well is showing weak results, but treating each well as a unique process would be costly. The solution is to find a way to improve optimization from well to well but not lose the factory approach in the process, Sanderson said.

"The Goldilocks, not too hot, not too cold, approach, is out there," Sanderson said. "But just pumping more horsepower isn't the answer."

The report's findings show obvious differences in geology from one play to another, requiring different approaches to improved efficiency, Sanderson said. But it also showed that a uniform approach may not even work in the same formation as the rock changes from one place to the next.

"It's not something you just say, 'here's my well design and I'll put it on autopilot.' You're not going to be able to do that," Sanderson explained. "You're still going to need a pilot in the cockpit flying the plane and making adjustments as things unfold."

Finding an approach that allows for improved efficiency but remains cost effective will be complex, but it is a necessity the industry is starting to realize must occur. The benefits of finding a mix that improves efficiency but requires minimal adaptation could save huge sums and help mollify frustrated investors, Deloitte said.

"$24 billion in productivity — that's a pretty big prize," Sanderson said. "There's a lot at stake to get that right, and the industry is working really hard on it. They've made their bet, and it's a long-term bet. They're going to figure it out and make it sustainable."