Sometimes, it’s the little things. Sometimes, the little thing might be less than six inches long.
When the price of oil started falling, everybody wanted to know what the breakeven price was in US shale plays; there seemed to be a general consensus that if you said $70, you’d sound reasonably intelligent. More recently, my colleague Carin Dehne Kiley of S&P Ratings wrote a thorough analysis that said when you figure in natural gas value and average interest expense, the “required wellhead oil price” was $55.
There’s been plenty of coverage of how the industry got those numbers down. Some were cyclical and reversible: operating costs dropped as energy costs dropped. Service costs fell also. But Carin’s estimate was that 25% of the drop was sticky, and wouldn’t reverse itself just with higher prices. In an interview I did with Continental Resources CEO Harold Hamm at the Platts Global Energy Forum in early December, Hamm said that sticky figure is probably closer to 50%. Those more permanent changes include workforce reductions, drilling more wells from the same pad, drilling longer laterals and so on.
And then there are the smaller things. Bill and Diane Nielsen — spouses who are both executives and metallurgists at Materion Performance Alloys — were part of a team jointly nominated with Hess in the category of Commercial Application of the Year at the Platts Global Energy Awards for a piece of equipment that is less than six inches in length. They had the misfortune of sitting next to me at the awards dinner, and here’s their story (though their efforts didn’t win the coveted prize; the award winners and the full content of Insight magazine, distributed at the dinner, can be found here.)
Materion has an alloy that goes by the name of ToughMet, and it’s a copper-nickel-tin alloy. But it wasn’t until Bill and Materion brought expertise to it that it could be machined; previously, it only had uses as powder metallurgy. Materion’s first use of the alloy in the oil patch was as a non-magnetic centralizer, a piece of equipment used in directional drilling. Other applications in drilling, aircraft and automotive equipment followed.
Meanwhile, Hess — and others —had a problem. The coupling joining sucker rods to other tubing would often fail, particularly in the Bakken. The workover cost after a failure was huge; Diane estimates it at $100,000 per well. Hess was looking for solutions, and turned to Materion.
“How this came to be is that there was an engineer we worked with at Hess who is a metallurgical engineer, and he had previously worked at Schlumberger,” Bill said. “So he was very familiar with what the material could do and had used it for a number of applications.” He contacted both Bill and Diane; she shared a Yonkers upbringing with the Hess engineer.
Copper and tin together make bronze; that’s good for bearing applications. Copper and nickel together are corrosion resistant. The three of them together were viewed as a possible solution to a problem of metal fracturing in a corrosive environment. Materion needed to, as Bill said, “modify the performance of the material so it could actually survive the field.”
“Once we were confident the coupling would survive, Hess started to pick out wells where we were going to put it in the ground,” Diane said.
The tests that followed were seen as a success. In a paper Hess and Materion published jointly in World Oil magazine, the authors said the greater quality of the couplings and the sharp reduction in failures could reduce workover costs by $75,000 per well per year. “The net benefit of one year’s uninterrupted production from a well producing 100 b/d at $40/bbl is $130,000 to $200,000 of pre-tax cash flow, depending on how long the well is typically down for a tubing failure workover,”according to the paper. “The return on investment is high, and the payback is quick.”
But that wasn’t all. Bill and Diane laid out other benefits, like reduced friction in the entire artificial lift process, “and there was more oil coming out of the well than ever before.” The increased output ranged from 6% to 25%; they said an average number might be closer to 8%.
Then why wouldn’t everybody race to adopt it? For starters, the ToughMet couplings are three times or more the cost of conventional couplings. With companies looking to squeeze costs out of their operations in the face of low oil prices, Bill noted that companies often decided to run through the in-house inventory of steel couplings rather than switch to the more expensive alloy.
“And another thing we had to overcome is that a lot of people darkened these companies’ doors with every kind of snake oil solution, and most of them don’t work,” he added. “So that’s why we collected so much data over several years and waited until we had a large amount of facts.” The commercial rollout began after lengthy testing early this year, according to the joint nomination. The customer list, the Nielsens said, is now between 15 and 20 customers.
It’s a small number for a small piece of equipment and the amount of production it has put on the market so far remains limited. But the increased crude oil production in the US from its lows — probably about 350,000 b/d — came to market through a lot of reasons. This was a story about one of them, and it’s just a small part for an industry that is exiting 2016 in a lot better than shape than what might have been predicted coming in.