Are Permian Basin operators maximizing opportunities to capture and understand cost and improve performance?
A lack of transparency and understanding of costs such as water processing and handling can hide potential issues. Capturing costs, then benchmarking those costs against peers, provides the clarity operators need to identify potential issues and take measures to address any cost-related performance gaps.
Benefits of Benchmarking Permian Costs Against Peers
Benchmarking your Permian operations provides a peer-to-peer performance comparison with study scope including operating costs for well servicing, wellsite equipment, gathering lines, and central processing facilities, as well as costs for energy, chemicals, labor (first-level supervision and below), water transportation and disposal, and field general and administrative support costs. Proper benchmarking involves a holistic study of the entire system and identifies opportunities to improve economics and become more efficient.
Using recent Permian Basin data, benchmarking generates an in-depth analysis of performance and spending and provides a roadmap for performance enhancement. The analysis compares industry standards to the Permian’s current averages to evaluate efficiency and understand costs and expenditures. Using downtime causes and relevant reporting systems in partnership with subject matter experts, current Permian production data is measured and analyzed. Downtime causes that are recorded and analyzed include well failure and artificial lift problems, integrity issues, wells being shut in for nearby plant development work, and hydraulic fracturing.
Improvement Opportunities Seldom Obvious Without Peer Data Comparison – Examples
Opportunities for improvement are seldom obvious without a peer data comparison. For example, in one benchmarking exercise a company’s initial review of water hauling tickets compared to peers found a number of issues ranging from partial loads, high standby times, and even phantom water loads that were being charged. Without the benchmarking exercise the operator did not have a clear understanding that there were issues that needed to be addressed.
In another case, preliminary benchmarking results identified higher water transportation cost than what other peers recorded. Benchmarking identified a gap of 8.2 million US dollars in the company’s costs versus the leader average. The gap was calculated as the difference between actual cost spent by the assets to the low average in the company’s peer group.
Benchmarking provided empirical data that lead the company to audit and review invoices. The company then created a team to examine the invoices to better understand the cost variance. When it was time to finalize the results, the company’s team recognized that operations needed to be optimized.
Benchmarking Methodology and Deep Industry Knowledge Key for Meaningful Results
Proper benchmarking methodology combines empirical data with industry expertise and looks directly at operations in similar economic and environmental conditions. As industry operators move away from a drilling-operations focus to a focus on scaling up production infrastructure, benchmarking helps to identify performance gaps and ensures no money is left on the table. For example, a comparative analysis can identify how decisions made in a well’s development stage will impact its long-term operating costs. A well can appear to be cost-neutral when it’s initially established, but without proper insight, the operator may experience long-term financial regret.
Additionally, decisions around facility layout, water management, and strategy for handling gas are all factors that can benefit from benchmarking. Operators’ understanding of water handling issues and water disposal stands to benefit the most from benchmarking as these factors are often associated with high cost and greater cost variability from operator to operator.
When benchmarking reports are at a high level and are limited in scope due to their dependence on public information and interviews only, meaningful results and recommendations are often lacking. A more thorough examination, including production management practices, is also needed.
Financial Reports Can Cloud Understanding and Hide Operational Insight
When reviewing costs, Permian operators may limit their scope to financial reporting, which is not adequate for operational cost reviews. Instead of limiting the review to unit cost, key performance indicators need to be identified to help Permian operation managers make improvements. In other words, the focus should be on the workers actually operating the property and money spent instead of money made.
The scope may be limited due to goals and directives of Wall Street executives. “Financial engineering” makes it difficult to understand the net impact of decisions because it is being presented for financial purposes rather than management operating purposes. Financial systems in companies are usually monitored by finance professionals and used for regulatory reporting. The majority of these activities are used for financial controls to report to investors/shareholders and not for optimizing operations.
Pure financial reports are not often set up to be read and understood by operation management. As a result, those asked to reduce cost often don’t have a detailed breakdown to understand what activities are costing them. For example, company truck maintenance costs such as employee and parts costs are typically not broken down into meaningful parts like compressor maintenance, leaving operations management to perform guess work to interpret data and make decisions.
Unfortunately, some operators in the Permian prioritize the short-term view, limited to high initial production rates, over long-term growth and operational cost improvement opportunities. Company culture determines whether an organization focuses on short-term growth alone; companies that aim for continuous improvement utilize benchmarking as a management and decision-support tool for long-term growth and profit.
Why Use Solomon Benchmarking for Cost Analysis?
With a trusted and rigorous methodology, a wealth of both public and non-public data, and production operations experts, Solomon has a solid and informed view of what good looks like. Our benchmarking helps Permian operators identify and capitalize on opportunities for improvement that often go unnoticed.
Solomon’s actionable insights can help you more fully understand your Permian operations, set targets for improvement, and increase profits.
Note: This article is the third in a series that tackles specific operational opportunities in the Permian.