Economies of Shale
January 20, 2020

The context

•  The U.S. now produces approx. 12MM BPD and this is expected to grow to somewhere between 17MM and 20MM in the next five years.

•  This growth may serve to drive down oil and gas prices, thus affecting the economics of shale production.

•  The market cap for S&P500 energy companies has halved in the last four years. There have been 200+ shale producer bankruptcies in the same period (in particular small and medium-sized companies).

•  Wall Street is now attempting to force economic discipline in the industry by requiring better ROCE and a general return of cash to shareholders.

(Source CNN)

The Solution

•  We can no longer simply change the rig count to reflect today’s price. We need to make a budget and stick to it.

•  Sticking to a budget requires implementing a number of small but crucial process changes, e.g., whether you use stochastic or probabilistic AFE generation.

•  The most significant single influence you may have on holding to AFE amounts is how you conduct your daily Drilling meeting; making sure your people both MAKE and HOLD commitments.

•  The key in how you translate outcomes into actions, via behavioral change.


For years it has been a common practice for operators to adjust their rig-counts based on the prevailing economic winds and, more specifically, this week’s oil price. Rigs are shed as price drops, but perhaps more importantly, they are added when the current price triggers the right ROI for particular locations. It’s a simple method of managing a large (or even a small) program that gives O&G executives the feeling of control.

Yes, you probably have the goal of continuously improving your spud-to-spud cycle time, and you probably sleep soundly at night, knowing that you have a team on Engineers devoted to this pursuit. The thing is, the performance of those teams is the major driver (in most instances) of AFE amounts, and those AFE amounts are what is truly driving your cycle-time. Missing AFE targets generally means upward pressure on AFE amounts, meaning your Engineers, by failing to meet expectations, are giving themselves more elbow room on the next drill. Never mind the fact that they secretly keep 10% as a cushion in every AFE!

Just like at home – make (and stick to) a budget!

We at Audere Partners have seen this scenario play out countless times at our clients; the client organization sets a capital budget, and expects a certain degree of activity based on that (e.g., $0.6B should yield +/- 100 new drills). As the year progresses, reality bites, and we begin seeing deviations. Our Engineering techs or analysts tell us that, on average, we are exceeding AFE amounts by (let’s say) 10%. We thus start pulling available levers. We might renegotiate rig contracts, perhaps let some contract vendors go, capitalize on cheaper bit selections, and generally tighten our belts while waiting for the oil price to rise again and save us.

But this simply circumvents the key issue; why are we unable to stick to the AFE amounts in the first place? We have heard all manner of ‘reasons’ for the ongoing discrepancies. The most common is “we just didn’t anticipate this rock” closely followed by “it was a one-time event and won’t happen again” and the ever-popular “we were trying something new, and it didn’t pan out as expected.” Some of the savvier Drilling VPs will launch into a tirade about the fact that the problem lies with the method of AFE estimation rather than the performance of an individual rig or crew. While it is true that any forecasting method will have flaws, our experience shows some worrying trends:

•  Large scale analysis of AFE vs. actual trends across a significant number of O&G operators shows that they are nine times more likely to exceed an AFE amount than to come in under budget

•  Interviews with a large number of Drilling Engineers, VPs, Managers, Superintendents, etc. from those same companies tell us that external or technical issues are by far the most often cited root causes

•  Those same interviews tell us that the most common action taken after multiple failures to meet AFE amounts is to raise the AFE budgets

In summary, our plans are flawed; we blame the rock or the equipment and respond by allocating more funds! It would be nice to have a simple, technical fix for all of this, the the truth is the problem isn’t technical. 

Sticking to AFE amounts involves a number of small changes to how your Drilling department operates. We can start with something easy and relatively fun for Engineers, which is to critically examine your AFE compliance history (comparing AFE allocated amounts with actual amounts for closed AFEs). With enough data, you can begin to find some key sources of variation. In our experience, there are some common things to look for:

•  Using different templates for the AFE creation in the first place (i.e., not standardizing)

•  Overlooking some key cost drivers (we routinely forgot to add on-site generators rental or transport costs)

•  Use of the wrong vendors (we were all told not to use XYZ vendor because they cost more, but Engineer Fred still uses them)

•  Failure to pay attention to contract terms (we are routinely being charged for X, but the contract states that X is included in the price)

•  Engineers running tests on expensive new jewelry that isn’t sanctioned (I just thought I would give it a try because ABC company is having some luck with it)

An analysis of your AFE compliance data should allow you to close some loopholes in expenditure. Still, it should also provide you with some revelations about where you are routinely underestimating costs (e.g., data might show that you are systematically underestimating days spent on curve building) such that you can make corrections to your (now standardized) AFE generator and eliminate as many planning errors as possible.

So, make a budget, make a better AFE generator, make better AFEs, and introduce downward pressure behaviorally.

Your Process is Calling

We are constantly amazed by the fact that the majority of Drilling departments to not routinely hold After Action Review meetings (or their equivalent) to ensure that the organization extracts every ounce of learning from the multi-million dollar investment they just made in each well. Drilling and Completions AFEs are comparatively large, and generally getting larger as our data shows. So how do you ensure that every single Drill serves to teach your organization a better (cheaper) way to drill a well?

Reviewing the timeline, key metrics, and learnings from every single well should be a key component of every Drilling program. We recommend setting a regular standard day, time, and place on which all recently completed new drills are reviewed to share what worked well and what didn’t. This is where metrics such as $ / Foot and AFE compliance % (or its proxy), Cycle Time, NPT, etc. come in handy.

You are probably thinking, “yeah, we tried that, and it just became a grind.” That’s a typical response; however, this is again a behavioral issue. Your staff pays attention to the things you pay attention to, so if you don’t attend, if you don’t say anything or if you don’t seem like you want to get into the details, they won’t either.

This is a key issue, and incredibly important to the successful functioning of a excellent Drilling program. You need to require your Engineers to really think about what went well, what went badly, and what they would recommend as changes for the program overall going forward. Make sure that your Engineers have REALLY thought through what happened, why it happened, and what they would do to avoid (or repeat) the outcomes. Ask questions. Lots of questions.

But the real secret is not in getting to an outcome; it’s in translating that outcome into action. You cannot hope to set budgets, stick to them, and drive down costs if you don’t hold your people accountable for improvement actions on a short-term basis.

To stay on track financially, you need to keep on track operationally. The 12 people you gather in a room daily (it could be five, or it could be 35) have a tremendous amount of collective experience and are no doubt experts in their disciplines. It’s a lot of horsepower to gather in a room, and you should use it to good effect.


Most Oil and Gas companies are basically full of Engineers, Scientists, and Accountants. They work reasonably well together because they view the world in generally the same way. The problem, of course, is that everyone tends to see things the same way. Engineers tend to think that every problem is technical, and if they could find the right vendor, with the right equipment, used in the right combinations, they could solve every programmatic problem.

Unfortunately (and I can say this because I used to be an Engineer) they are generally wrong. The one thing every Drilling program has in common is that humans run it. This introduces all sorts of issues such as ego, status, fear, judgment, and yes, in some cases, a lack of competence.

Our advice is that you ignore the behavioral component of your program at your peril.

If you genuinely want to survive and thrive in this new era of economic prudence, you need to learn the behavioral tricks of the trade.

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