In February, Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) announced it had “decided to reassess the development plan for the Fram oil and gas field in the North Sea, due to unexpected initial drilling results.”
The development plan originally estimated that the field, located just west of the halfway point between the United Kingdom and Norway, would produce 35,000 barrels of oil equivalent per day, but the “unexpected well results” proved the company needed to create an alternative development plan for production. The discovery was a disappointment because it also proved that Shell’s large investment in what it calls “competitive IT” was not an infallible technique to recover unconventional resources like deepwater oil or gas locked in hard-to-access rock formations.
Shell began to use competitive IT — complex algorithms, visualization tools, and other technologies — several years ago when the company’s management started having a hard time gaining access to conventional oil and gas reserves because many governments had become reluctant to share them with Western companies.
That meant Shell had to depend on unconventional resources. Extracting oil and gas in those circumstances required the company to utilize complex engineering while betting technological strategies could make unconventional oil and gas reserves profitable.
IT strategist Arjen Dorland was charged with developing a plan to allow the company to function in its new reality, according to The Wall Street Journal. Seismic sensors linked to new interpretative software and visualization applications were meant to reduce the cost of drilling wells and improve the speed and efficiency with which each well operated.
Yet despite this disappointment, Shell management has continued to reiterate a positive outlook for the company’s long-term future in the North Sea, Upstream International Director Andy Brown told UpstreamOnline during an interview at the Offshore Europe conference. In fact, he said that the company’s decision to allocate $2 billion in annual spending for the next three years to the North Sea region was proof of its continued commitment.
However, a large majority of those funds will be spent on projects Shell does not operate, including its large positions in new projects — Clair Ridge and Quad 204 – operated by BP (NYSE:BP).
As for its company-operated assets, Shell has made efforts to improve its integrity, meaning the company has focused on achieving strong operational results from its wells and extending their operational lifetimes. Brown maintained that Shell’s work was evident in the wells’ increased operational efficiency and uptime. As part of the strategy, the oil and gas producer is also attempting to concentrate its production operations around core hubs, a move that is also key to Shell’s future profitability in the North Sea as it reduces inefficiencies, according to UpstreamOnline. That strategy also relies on divesting “isolated or diminishing” assets.
“Our focus is on creating significant assets with sustained longer-term life and concentrating the business around core hubs, Brown told the publication.”If I look at Shell’s equity production, this is a business that has seen some decline. I am looking for higher production numbers in future years.” He declined to explain current or expected production rates to UpstreamOnline, but he did say he was “quite excited we are getting on top of our asset integrity.”
Shell’s new strategy fits with the producer’s larger goal of “sustaining the company’s upstream engine,” Brown added. “That relies on us being able to have high uptime, being able to get the most out of the reservoirs, getting good recovery factor, having good water injection, good well and reservoir management and maintain asset integrity.”
Brown’s optimism matched the tone of the company’s January “competitive and innovative strategy” meeting with shareholders. While the economic outlook remains uncertain for some of Shell’s key markets, the company’s CEO, Peter Voser, noted that its expectations for long-term growth in global energy demand remained unchanged thanks to a rising world population and improving standards of living in developing countries. “Meeting this demand growth with clean and affordable energy is a formidable challenge for our industry and it is a major opportunity for Shell,” he said in a press release.
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