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Oil and gas innovation keeps pace with high-tech world

What do you think of when you hear the word, "innovation?"

For most people, imagery of smartphones, computers and other high-tech gadgetry comes to mind. Sure they do; these are the things in our day-to-day lives that are leapfrogging through product generations. We're no longer surprised when something we take for granted – a camera for example – becomes four times more productive, runs twice as fast and takes up a fraction of the space that it used to – all in a matter of a few years. But would it amaze anyone to know that the same pace and magnitude of innovation is happening in the oil and gas industry, a business long thought to be as fossilized as the rocks it exploits?

The real-time changes in the way oil and gas is being found, developed and produced is stunning, with potential consequences to society as profound as the introduction of the smartphone.

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Over the past six years a typical North American oil and gas well has become at least four times more productive and can be drilled in less than half the time. Yet that's not all. In the past couple of years, "pad drilling" is a process change that is compacting the industry's geographic "footprint" too.

If you've ever looked out of an airplane window flying over Alberta or Texas you may have noticed the vast landscape dotted with small well sites, scraped into the ground like divots in a tee box. These are the cleared areas where wells have been drilled and completed. For land-based drilling, the historical norm has been one site, one well. But with today's horizontal drilling techniques able to reach long lateral distances, the trend is toward clustering multiple wells onto one site, or "pad."

It's common to hear about six or eight wells per pad, but some companies are now talking about 20 or more. So, instead of clear-cutting and bulldozing say eight well sites, the same result can be accomplished by boring eight holes in the ground from only one pad.

More productive, faster and now more compact; the trends in the upstream end of the oil and gas industry are keeping pace with consumer electronics.

Back-of-the-envelope calculations with average numbers reveal the size of the changes. A company that used to have to clear 100 sites to drill 100 vertical wells, now only has to drill 25 horizontal wells on only three sites (assuming four times productivity and eight wells per pad). The benefits of these new exploration and development processes are many: Efficiency and economies of scale are driving down per-unit costs, while the surface disturbance to the environment is dramatically reduced. Several companies leading the way on pad drilling are reporting at least a 20-per-cent cost reduction relative to past practices.

Yet disruptive change to an industry's processes is inevitably accompanied by disruptive change to the industry itself. While per-barrel costs of production may be reduced, the up-front capital to drill and complete these new types of wells is multiples more than before. And with pad drilling, companies are typically drilling and completing all wells on a pad before production begins, which means having to wait a longer time between investment and cash flow.

What this implies is that the benefits of drilling many, high-productivity wells on a pad is limited to those companies with patience and deep pockets. The converse is emerging to be true as well: smaller companies with limited access to capital may have difficulty remaining competitive without a change in their strategy. For sure, the barriers to entry are much higher now; the days of starting up an oil and gas company with a few million dollars scrounged up from friends and family are over.

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In the early 1900s, the oil and gas industry transitioned from bashing through rocks with a big chisel to boring deeper wells with a rotating drill bit. The scaled effects of the new disruptive technique vastly improved productivity, reduced cost and set up a century of oil and gas supplies.

Today's changes are equally disruptive. The paradigm of tapping into hydrocarbon reservoirs is shifting from away from rigs drilling vertical wells like a sewing machine stitching a patchwork quilt across the land. Now, we're seeing long horizontal threads stretching out kilometres below the geological fabric, all from one surface location. We haven't seen this type of innovation in over a hundred years – not since the dumb-phone replaced Morse code.

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About the Author

Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies. More

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