PwC: Engineering, construction firms help maximize shale development returns for oil and gas sector


Three key elements to optimize shale plays:  balancing supply and demand, advancing performance and enhancing investment portfolio

NEW YORK, January 16, 2014 ― As oil and gas companies continue developing new shale wells across the US, engineering and construction (E&C) firms have a vital opportunity to optimize these plays using their existing core competencies, according to a new report by PwC US entitled, Shale Gas: New conventions for unconventional development for the engineering and construction industry. Launched as the second installment in a three-part series, the report highlights three key elements that E&C companies can consider utilizing to enhance the development of shale plays: balance supply and demand, advance performance and find the efficient frontier.

“The rapid development of shale basins requires oil and gas companies to promptly and efficiently respond to the rise in unpredictable challenges and the ever-changing dynamics of managing shale process elements, whether that’s related to the supply chain, timing or design,” said John Doherty, U.S. engineering and construction advisory leader, PwC. “E&C companies can leverage their well-practiced flexibility and existing skill sets to respond to these various issues, ultimately creating an opportunity to take on a leadership role  for its oil and gas clients.”

Balancing supply and demand
Balancing supply and demand, known as “manufactured drilling” in shale development, is becoming an increasing priority for shale basin operators. Manufactured drilling helps balance the forecast demand for resources (i.e. labor, equipment, rentals and materials) with the constraints in the organization and its supply chain.

A key manufacturing characteristic of shale basin development and production is its repeatability, which dictates the supply chain. “Oil and gas companies should have a dynamically adjustable supply chain that can adapt to unexpected changes in any of the process areas. E&C companies are accustomed to tailoring a supply chain to the needs of any given project, providing another opportunity for them to bring that skill set to bear on shale development, and ensure that the right resources are in the right place at the right time,” continued Doherty.

PwC’s report also identifies four non-manufacturing characteristics that should be taken into account to fully reap the benefits of an efficient, horizontally integrated supply chain:

  • Push vs. Pull: Shale development is a “push” process driven by capital investments and largely dependent on the availability of land access and capital funding.
  • Variability and Uncertainty: Land drilling, completions and production operations can vary significantly from well to well, while the work scope of each well can evolve unexpectedly.
  • Managing Constraints: Factors such as lease terms, land boundaries, geology and infrastructure can hamper a firm’s ability to balance shale development supply and demand.
  • Hybrid Production: At the basin level, continuous and discrete processes that combine processing and new well drilling rely on a single pool of funding and resources.

Advancing performance
The ultimate goal for most oil and gas companies is to improve their operational and financial performance and increase their returns on invested capital. Returns are primarily driven by three factors, which when utilized efficiently, can maximize profits for oil and gas companies:  project cost, project schedule and asset revenue.

With a clear and forward-looking view into all plans and activities, oil and gas companies can reduce costs by becoming more strategic in the sourcing and deployment of labor and equipment. “With a clearer view into resources needs, it is no longer necessary for companies to supply every crew with all the equipment it might ever require, but instead, equipment can be held in centralized locations and provided on a just-in-time basis. Labor utilization can also become much more efficient if companies know the composition of its crews and when they will be needed, which can significantly reduce downtime when crews are no longer assigned to sites that aren’t ready to receive them,” said Doherty.

According to PwC, these improvements can help eliminate 20 to 30 percent of a business’ costs, and if an E&C firm can help reduce the cycle time of a well development project for its oil and gas client by 30 percent, it can help the client deliver the results of a producing field more quickly.

Finding the efficient frontier
The efficient frontier provides a systematic, bird’s-eye view into the information needed to improve the investment portfolio, helping to determine which projects fit, which don’t, and why. Technology can also ease the process by providing a common, centralized view of information and forecasts. In the shale basin, investment decisions center on three key elements, which include the choice of the well to drill, the choice of facility, pipeline, or road to construct and the choice of maintenance activities to perform. Additionally, two types of risk valuation should be added to the equation:

  • Reserve risks: With shale, the extent and makeup of ground reserves are uncertain, and the rate of decline from one well to the next can also be difficult to predict.
  • Commodity price risk: As liquid and gas prices swing, the fluctuations can guide decisions about “sweet spots” and where to prioritize investments in light of market forecasts.

An E&C firm can help an oil or gas company build in the costs and take appropriate steps to avoid unforeseen impacts on the supply chain, including commodity price declines and adverse weather conditions affecting the transport of materials. Additionally, an E&C firm can increase its value to a client, who may be working with multiple partners, by acting as a general contractor that can help to mitigate pain points and challenges associated with shale development.

“It is crucial for E&C firms to monitor the opportunities and rapidly evolving management practices aimed at addressing the complex challenges that arise during the course of the shale well production process. By aligning operating expenses, capital investment and resources across the full portfolio of development and production, E&C firms can become a critical piece to the oil and gas sector and the overall shale gas value chain,” continued Doherty.


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