Life-cycle cost analysis for E&P infrastructure
JEFFREY TYSON, P.E., SCOTT ENVIRONMENTAL SERVICES INC., LONGVIEW, TX
THE DOWNTURN in the oil and gas market means operators around the country are working to lower their break-even through cost reductions in drilling, completions, and production.
Nearly all aspects of constructing, completing, and operating a well require some form of heavy trucking, and costs related to transportation management and logistics make up a considerable portion of total well cost over the life of a well. Whether trucking costs are billed directly or are lumped in with other services, the fact remains that each time a truck enters or leaves a well location, it costs money.
So how can E&P companies create savings related to their total transportation costs over the life of a well? Proper management of the infrastructure they own and understanding of the lifecycle cost of lease roads and drill pads are key aspects to realizing additional savings, increasing sustainability and padding the bottom line.
Economy of scale
According to data obtained from the Energy Information Administration, there were nearly 825,000 producing oil and gas wells in the US in 2009. In order to drill, complete, and produce these wells, E&P companies must construct and maintain roads to access well pads. Although no published data regarding the actual amount of lease road owned by E&P companies could be found, if you assume the average length of lease road for each well is 1,000 feet each direction, there are approximately 312,500 lane miles of lease road in the U.. To put this into perspective, the entire US interstate system is made up of only 221,229 lane miles (Source: Bureau of Transportation Statistics).
That means the oil and gas industry owns and operates 41 percent more road than the entire US interstate system. With the onset of directional and horizontal drilling, many companies have drastically reduced the initial construction costs of lease roads and drill pads by drilling on multi-well pads. This approach is a great start to reducing costs, as well as reducing land impacts, but it does not address user fees or do much in the way of reducing trucking costs. In fact, without taking increased traffic and loading into account, these changes may actually increase the costs to users, which are ultimately passed on to operators.
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Life-cycle cost analysis is a valuable tool
If you are like most engineers and managers in the E&P industry, you didn't train in transportation engineering; however, once you understand the costs involved, performing cost calculations for lease roads and drill pads is essentially no different than other cost analyses. The Federal Highway Administration promotes the use of Lifecycle Cost Analysis, or LCCA, which is a process for evaluating the total economic worth of a usable project segment by analyzing initial costs and future costs, such as maintenance, user, reconstruction, rehabilitation, restoring, and resurfacing costs, over the life of the project segment (Source: Transportation Equity Act for the 21st Century).
LCCA considers all costs over the life of the asset, not just the direct, up-front cost of construction, which is what most E&P companies focus on. Although there are some inherent differences between the costs and benefits between public and private facilities, these same guidelines can be followed to make economically sound decisions in the E&P sector. Following the LCCA guidelines will remove the guesswork in determining which design alternatives are more economical. Although the specifics will vary for each company in each region, one of the greatest contributors to the lifecycle costs for E&P roads is the user costs, e.g. trucking.
Design balancing the variables can reduce cost
Although each asset will have its own unique LCCA model, many of the variables and inputs will be the same. The person performing the cost analysis for E&P facilities should consider, at a minimum, testing and design costs, construction costs, maintenance and rehabilitation costs, and user costs. In some cases, restoration or reclamation costs should also be considered. Many E&P companies are organized in such a way that these costs, along with the responsibility of managing the costs, fall to different parts of the organization. The land department will typically work out details with the surface owners regarding location, alignment, speed limit and any other design considerations regarding layout. The drilling department is usually responsible for the pavement design and construction, and production is responsible for maintenance and rehabilitation. Each of these decisions directly affects the user costs, which spans drilling, completions and production.
When estimating user costs, the first step is determining the amount of traffic that will be using the facility. Dutton and Blankenship (2010) estimated that in order to drill and complete a single horizontal well, there would be approximately 1,975 one-way loads for heavy trucks and 1,420 one-way loads for light trucks. In plays where product and produced water must be transported via truck, there could be another 10-20 trucks per day during peak production or until pipelines are installed. When a lease road is relatively short, say less than a half mile, these costs may not be significant; however, the longer a road gets, and the longer it takes to get from the entrance of the lease to the well and back, the more material it becomes.
Take a five-mile lease road, for example, and assume 1,975 one-way loads for drilling and completions, and then another 10 trucks a day for the first 90 days after the well comes online. The total one-way truck count would be 2,875. With a 15 mph speed limit (a design specification), the total time spent traveling on that lease road is 1,916 hours. If, through proper design and construction, the speed limit for the lease road was 30 mph, a common speed in residential neighborhoods, the time spent on the lease road would be cut in half. Assuming a trucking rate of $100/hour, there are immediate savings of nearly $100,000 at the end of the first 90 days of production. In addition, getting trucks in and out of a location faster can have impacts on mobilizing rigs and completions crews to reduce costs even further. If the road is properly constructed, vehicles and equipment will also last longer, resulting in additional cost savings.
Proper cost analysis is key
Lifecycle Cost Analysis is a valuable tool in evaluating and selecting the most economical options for lease road and well pad construction. Leveraging existing data and applying proper design and construction practices can ensure that the overall cost, over the life of a well, is as low as possible, resulting in lower break-even prices and increases in sustainability. These savings can go a long way to insulating E&P companies from difficult downturns and help build them up through the good times as well.
ABOUT THE AUTHOR
Jeff Tyson began his career with the Florida Department of Transportation as a professional engineering trainee, specializing in Construction Engineering and Inspection. After completion of FDOT's Professional Engineering Training Program in 2013, Tyson moved to Longview, Texas to become the process controls engineer for Scott Environmental Services Inc. As the process controls engineer, Tyson has been able to expand on and apply his expertise into waste management and environmental remediation technologies. His research is focused on the chemical and physical sequestration of constituents using solidification and stabilization technology in upstream oil and gas applications. Tyson earned a BS in Engineering from McNeese State University in 2009.
