Analytics Checklist – Surviving Low Commodity Prices

April 20, 2020 by

When commodity prices fall and capital programs for drilling and completions get cut, its time to turn your attention to analyzing your data and making decisions that will minimize the negative consequences of these times. That’s why Verdazo has given all their clients unlimited licenses to help them dig into their data and find the opportunities that will help them the most. Today I’m going to offer a bit of a checklist and some suggestions about what you could/should be looking at.

Essentially what you’ll be doing is a detailed asset review. A typical asset review would be looking at every well and assessing its performance from three perspectives: Production Performance, Financial Performance, and Performance to Plan. A typical asset review would be answering questions like these on a monthly or quarterly basis:

  • Are we on plan? What’s the variance & trajectory?
  • What wells are losing money? Why? Are there identifiable patterns?
  • What are our top performing assets? What’s our strategy to keep them that way?
  • What are our bottom performing assets? What are we doing about it?
  • What cost/downtime reduction strategies are we exploring? (e.g. change in chemical treatments, new workover strategy, equipment changes)
  • What’s our shut-in plan if prices drop below ____?

The area of focus in these times is Financial Performance and deciding which wells are best to shut in to minimize loses.

Which wells should I shut In?

Before identifying wells to shut in, you should understand any contractual obligations you have, take-or-pay contracts etc. and ensure that this informs the degree to which you are able to, or unable to, shut in production.

Over the years I have seen a number of downturns and a common approach through difficult times is to keep wells producing if they are generating revenue that is greater than their variable operating cost (Variable Opex). Variable Opex is expressed as cost per unit of production and include costs that are directly, or indirectly, involved in the production, transport, disposal etc. of oil, water and gas. The idea is that if a well is covering its Variable Opex then any excess revenue could be, at the very least, covering some of their fixed cost (Fixed Opex). Fixed Opex are costs you incur whether a well is producing or not… like lease fees and taxes. Assuming you have gone through your various accounts and grouped them into the categories of Fixed and Variable Opex, you’re ready to do your shut-in analysis. If you haven’t split out costs into Fixed and Variable you can just use Total Opex for the same analysis. The two biggest hurdles to overcome in shut in analysis are the “accrual wedge” and BOE conversion factors.

1) Beware of the accrual wedge

Accounting data often has a latency of 3 months or more, for operating costs to make their way into the accounting system. As a result, there is an accrual wedge that needs to be taken into account. This accrual wedge is typically entered at a field level, or higher, as a placeholder for well operating costs you expect to incur, but haven’t been entered into the accounting system yet. When retrieving Variable Opex data, you’ll need to go back far enough to ensure that accruals (not yet assigned to individual wells) aren’t making your costs look lower than they actually are.

2) Beware of the BOE

If your well produces just oil or just gas, then the Variable Opex per unit of production is straightforward and you’re off to the races. If you have a combination of gas & oil then your unit of production is typically going to be expressed as BOE (Barrel of Oil Equivalent). The traditional mcf to BOE conversion factor used in the industry is 6 mcf = 1 bbl of oil. This is reflective of relative heat content… but we need to be taking into account a price-based, or value-based conversion. Failure to do this could result in keeping wells producing that are losing money (see example below). Accounting departments may scoff at using a value-based conversion factor, but operations-decisions often need to be informed by calculations, and conversion factors, that don’t follow the conventions of accounting practices. You’re making decisions, not reporting financials… so use the conversion factors that will fuel the best decisions. I cover this in some detail in a blog called “Time to rethink the mcf to BOE conversion factor?”.

Let’s do an example:

  1. Pick a month (or several months) that precede the accrual wedge and gather this data:
    • Total Variable Opex = $30,000
    • Oil Sales Volume = 500 bbl
    • Gas Sales Volume = 4,000 mcf
  2. Calculate the Value-base Barrel of Oil Equivalent (VBOE) by dividing the Oil Price /bbl by the Gas Price /mcf.
    • Oil Price = $30/bbl
    • Gas Price $1.5/mcf
    • VBOE conversion factor = $30/$1.5 = 20
  3. Calculate the Total Sales Volume in VBOE:
    • 500bbl + (4,000mcf / 20) = 700 VBOE
  4. Calculate the Variable Opex /VBOE. Using VBOE normalizes the value to the cost incurred to generate $30 of revenue.
    • $30,000/700 VBOE = $42.86
  5. Is the Variable Opex /VBOE lower than the price of oil?
    • Variable Opex $42.86 > $30 of revenue. Shut in this well

If we had used the standard 6:1 to convert mcf into BOE, the resulting Variable Opex /BOE would have been $25.71, misleading a decision to keep that well producing.

Note: Calculating the Variable cost / VBOE assumes that the GOR remains constant. This is a reasonable assumption to make after the well has been producing for over a year.

Verdazo has automated this process for several clients, positioning them to respond quickly and plan proactively for various commodity-price scenarios. Contact your business analyst to get a white paper on this and discuss a possible implementation.

Look for other accounting opportunities

Don’t stop there… there are an endless number of diagnostics and analyses that could find missing revenue. Many of the issues you may find will be associated with non-operated wells, which don’t always receive the same scrutiny as operated wells. I have many anecdotes of clients finding hundreds of thousands of dollars when they use diagnostic techniques or simply look at accounting charts well-by-well. Here are some things you could look for:

  • variable fees being charged when there is no production (not uncommon on no-op wells)
  • sales volumes without any revenue (you can use trends of realized-prices per well to spot these, or just scroll through charts well by well)
  • dramatic changes in shrinkage or liquid yield
  • net volumes produced (from the field data capture system) that vary significantly from sales volumes (from the accounting system)

These can easily be accomplished using the right collection of charts and interactive workflows. These are also great tools to annotate, use for collaboration with peers, and provide justification and transparency to decisions. To get started with diagnostic techniques and investigative workflows check out these links:

Diagnostic Analytics: Tools to Identify Opportunities

Diagnostic Workflows: Optimizing Financial Performance

 

Production Performance

Now that you’ve decided what wells to keep producing you can focus on minimizing downtime, and reacting quickly to well servicing needs. Continued analysis could lead to recognition of patterns of failure and downtime reduction strategies (see this client story and this blog Diagnostic Workflows: Optimizing Production Performance).

 

Performance to Plan

In this case, the “plan” is based on production forecasts and associated capital and operating costs (fixed and variable). When a well deviates from its forecast, that has cashflow implications and reserve write down implications. It is also an opportunity to improve your understanding by asking questions like:

  • Why is this well performing differently than planned? Is it within the uncertainty tolerance that I expected. Production that is lower than expected could result in reserve evaluation write-downs & negative market reactions (see Uncertainty Considerations for Development Planning Type Curves)
  • Is this something I can correct with operational changes?
  • Were my subsurface assumptions correct?

All of this can feed back into cycles of improved understanding and continuous improvement.

Here is a technique to spot your biggest deviations from forecast… Diagnostic Workflows: Variance from Forecast

 

I hope that gives you some impetus to jump into your data and figure out the best path to surviving these tumultuous times. Contact your Verdazo representative for available configurations that can help you accelerate your analysis.

 

Don’t forget to check out my last blog Waste disposal: what comes up must go down and support some local emerging technology startups. If you’re looking for cost-efficiencies on wastewater trucking and disposal decisions then Galatea Technologies can help. If you are still managing to drill wells and want to get the most out of your completion execution then check out Labsite.