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2015 Predictions: Allen Gilmer Interview Transcript
James Hahn II: Joining The Tribe on the podcast today is Allen Gilmer. Mr. Gilmer is the Co-founder, Chairman, and CEO of Drillinginfo. Prior to co-founding the company in 1999 Allen was an independent oilman for seven years and he co-founded three profitable E&P companies. He began his oilpatch career with Marathon oil Corporation as a geophysicist working in research, seismic acquisitions, and South American exploration. Allen is active in all aspects of Drillinginfo’s new product development, and is widely recognized for his industry leadership and vision. He holds several patents in the field of multi-component seismology and received his BA in geology from Rice University right here in beautiful H-Town, Houston, Texas baby! And his MS in geology from University of Texas at El Paso. Mr. Gilmer you are the first repeat offender on the podcast, so thank you for being crazy not to join us again!
Allen Gilmer: It was my pleasure. I remember how much fun we had first time.
James Hahn II: I was saying this before we got on, you can judge me and see if I’ve improved or or regressed. I think we have a heck of a lot to talk about though because oil prices have gone down or regressed in a certain sense, and that seems to be a really good talking point to jump off from. What’s the environment like right now from your perspective, and where do you see things headed in 2015?
Allen Gilmer: I think oil prices are certainly down. I think they’re going to stay below $100 for as far as I can see. But I do think that probably second half of 2015 we’ll see some hardening up to probably the 70s, maybe even the low 80s. I think it’s important for people to keep perspective that $75 and $80 oil is pretty pretty good if in fact you can continue to bring the cost down to produce that same oil. And I think that with the with a softening price environment the cost come down.
One of the hardest things I had to convince my parents and friends that were not in the oil business that the wells that I drilled, that participated in, at $40 a barrel were no more economic than the wells at $100 barrel because the oilfield service companies did such a fabulously good job of taking all the oxygen out of the room with regard to cost on the way up.
I’ve noticed that they’re not as quick to respond on the way down, but I do believe there’s going to be a softening in oilfield services in the prices of that. Not all the way in a percentage difference down there, but enough so that it’s an interesting place to drill. And I have to say that in my career I always liked drilling economic wells in the bottom part of the historical value band because it told me that I had a lot of upside potential for my long leg stuff way beyond what I could ever I go out and hedge. That meant there was a lot of opportunity to go get more value in the future. Whereas when you’re drilling at the very top of the price deck you don’t really have a whole lot of upward pressure. As I told somebody earlier today, at $50 a barrel the opportunity for your asset to double in value is relatively high over the next two or three years, whereas the opportunity at $100 to double in value is very low.
James Hahn II: Besides efficiencies because those in the obvious things, how else might this be a good environment for people? Are you are you talking terms of recovery as well?
Allen Gilmer: Recoveries primarily, actually. What we’ve discovered in the unconventionals are that even the very best operators are probably leaving 10-20, maybe even 30% of potential recoverability per dollar behind. And that’s the best. And the worst are leaving 70-80% of the recoverable value behind. So there is a lot of money to be extracted from the rocks that we’re already in from doing things a bit differently. And it’s no one particular item, but it’s doing things a little bit differently in four or five different ways. That’s one of the things that’s been very interesting. We’ve been able to quantify those differentials across the board in various plays. If you’ve got this kind of rock in this play, then here is how you should basically go out there and try to maximize that. And the percentages are quite interesting.
James Hahn II: What are those? Are they, okay you should acidize the well this way, or what are some of those indicators? Because I know that y’all grade acreage, right? And then grade within Drillinginfo, or at least in some of the premium products, it’s grading acreage and then some of the operators in that acreage, is that correct?
Allen Gilmer: That’s right.
James Hahn II: What are those handful of things they’re doing different, or does it just depend?
Allen Gilmer: For instance, for most of the drilling completion technologies out there the lower the quality of your, the lower the grade of your acreage, the less bang for the buck you get for effort. If you’re doing a frac of a certain size and you’ve accidentally walked into a rock that’s two or three grades lower then you may be spending a lot of money on effort for not a lot of return. In those cases you really want to go with a much lower effort type of situation because even though you’ll make less hydrocarbons the hydrocarbons you make per dollar spent become much higher. We did one little study in an area a couple months ago and it was really fascinating. We calculated out of 110 wells that were drilled out there that there was about $150 million that was spent doing things that added no value, or negative value. Which meant that you either spent a dollar that didn’t make you a dollar in return or you set a dollar and got nothing in return, maybe even got less than you should have because of some physical parameter of the rock. Well that was pretty fascinating.
What we also discovered was, if you think about it that’s $150 million or more that’s actually been donated. $150 million donated to service companies for nothing, and maybe some part of that was actually spent to try to hurt your well. So I thought that as a pretty fascinating result. And then the other thing we found was that if you had taken $50 million of those dollars and if you had allocated those to some other engineering practice in that well then you could have increased the overall return on that set of wells by over billion dollars. So a huge return on investment and internal rate of return.
James Hahn II: Did you say billion with a b?
Allen Gilmer: Yeah.
James Hahn II: That’s extraordinary. Is this predictive analytics at work? How are people able to make these findings for themselves?
Allen Gilmer: I think we’ve done this big effort to create a framework, so you start with that. But then you can bring in your own data if you have your own seismic data or what have you to get a much tighter pick on the rock. One of the things we looked at was the benefits of how close or how far away from a fault should you be? So if you’re shooting seismic data in these areas, is there a quantifiable differential between fault proximity of your wellbore and production. We found there was a very discernible differential, and the father away you are from a rock the better your well was going to perform and we can quantify that.
Now that’s not the case in every situation, but it is a case that we seen you across the board. Some tell you it’s good to be close to them, sometimes it’s good to be far away from it. But the reality is you can answer these questions. And some of these metrics add 5 or 10%. We have a workflow that a group of our engineering scientists came up with in which we were looking at frac interference. We basically identified the fact that, yeah there’s an interference. Once you get below a certain stage you start seeing interference, but then there’s an area and a timeframe in which there is very positive interference. Which means that even though you’re interfering with the well next-door you’re actually adding more production to the two of you all than is subtracting away. And then a certain point where it breaks over into what we call negative interference, which means that for each additional well in their you’re getting less and less incremental production. But just maximizing or optimizing on that is something that is a 5 or 10% improvement right off the bat. So optimizing just your spacing programs.
Allen Gilmer: One that was a huge one we looked at was some work we did with some microseismic. We don’t shoot microseismic, we just have a system that allows us to go out there and do all sorts of analytics on the microseismic. These guys were in the same area, wells that were right next to each other, same quality of rock. They were comparing three different techniques, completion techniques; sliding sleeve, various other ones. One of them was a very low effort, low-pressure 16 stage frac. The other two were high-pressure 24 stage fracs. All done on consecutive days. And 16-stage low-effort frac ended up outperforming the other two by 50-150%. That was interesting because that 16-stage frac essentially cost them $1.5 million less than the 24 stage fracs.
James Hahn II: So there’s a very obvious law of diminishing returns?
Allen Gilmer: It goes down into the details. Exactly what technology are you deploying? How does that actually result in changes to the rock? There’s a lot of things you can do with our system without doing any experimentation right out of the box. But we also provide a heck of a good platform for you to go do some completion experimentation to be able to optimize in a big way. And I can tell you there’s so much value being left in the ground right now that if in fact the people that were below the average over here could implement it they would be living in a much better world than they were at $100 a barrel.
James Hahn II: It’s really shocking, though, how consistently the best performers perform and how consistently the low performers perform. I’ve seen a few different different numbers whether in your presentations or in my own perusing of things out there. Is it that they just don’t want to get better or don’t understand how to get better? What is it that really separates the men from the boys in the oil patch?
Allen Gilmer: I think it’s this assumption that the oilfield service companies can tell you how to basically drill and complete your well. I think the work that we’ve done has completely discredited that whole concept. If you notice that the best operators out there they have their own playbook. They’re not dependent on the oilfield service company to provide it to them. This has been been a meme in this industry that no one really needs to worry too much about engineering because the oilfield service companies do it all, and they do all the R&D, and they are really great technology transfer agents. I think what they’re really good at is they’re really good at selling their solution. Not necessarily the solution that maximizes your return.
James Hahn II: What are a couple of the things you see consistently that operators do that don’t maximize the return?
Allen Gilmer: I’d say one thing is to create a playbook and just say, “Okay, I’ve drilled these wells over here and I’ve gotten this return and now I’m going to go. I’ve got 60,000 acres and I’m just going to go drill the whole thing and maximize my my PUD values by using the same playbook.” I will tell you that the differential between how you should drill a lower quality rock and a higher quality rock is the difference between a well the doesn’t breakeven, which means no PUD value, and a well that has a very strong return on investment, which is a very high PUD value. So it leverages itself right across the board there.
James Hahn II: I know you are quite the capitalist as am I. I look forward to 2015 and I see a lot of opportunity because I firmly believe that even though we don’t have a free market thanks to OPEC and friends, we are still going through a market fluctuation and a cycle that’s going to washout some players that maybe shouldn’t be there. What is your perspective from the more economic philosophical side of things as far as what the future holds when you see down oil prices?
Allen Gilmer: Well, I’ll tell you an interesting fact. At $60 a barrel, not down in the $50s. But at $60 a barrel in the plays we were looking at there is no fundamentally, the number of locations that we lose from just being fundamentally uneconomic. Which means at the best practices we know are uneconomic. We’ve only lost a few percent.
What we saw, for instance our G-Grade acreage in the Eagle Ford. The average operator it was breakeven at $100 a barrel. The best operators it was breakeven is $60 a barrel. So what we’re going to see is a movement of properties into the hands of those that can actually produce them in a way that’s economic. So, are people going to drill $60 breakeven today? Well, probably not. But I do think it’s an exciting time.
I had an old mentor when I first went out on my own and he told me something I’ve never forgotten. He said fortunes are built in the downtimes. They’re only realized in the uptimes. I think that’s absolutely true. Six months ago it was hard to find entry points into this industry. Because the industry at $100 a barrel is like Lake Wobegone; all the children are above average. And today there is fortunes to be made because there are people that literally can make a lot of money on the same acreage that other people are losing their pants on today.
James Hahn II: And then from that perspective as well, I think you mentioned earlier as far as cost coming down. I have heard one particular small Independent operator out in California who said that given the costs structure he could actually make more money when oil prices were down just because he could get work.
Allen Gilmer: Absolutely. Access to crews, access to rigs. Looking at it on a dollar basis instead of a time basis. You have to reformulate. But somebody told me one time when business changes you then have to craft a strategy for how do you deal with the new environment? And that is what I think all of our clients are looking at. And putting your head in the ground is not a strategy. Figuring out how you’re going to play the game better than anybody else is a strategy. And we think we’re a very valuable component in that whole side. Shameless plug, we hope people call us up to help them out on that. But whether it’s us or anybody else this is a really important time and it’s a great time for this industry to really be able to get into the kinds of projects and efficiencies that are going to make them big fortunes in the future.
James Hahn II: Thanks for that shameless plug because were all about being shameless here on the Oil and Gas Digital Marketing Podcast, as much as possible. Speaking of shameless and getting you to open up about the future at Drillinginfo. When I worked there I would walk down the product development hall. They had a huge map with amazing things on it that I would say, “Wow, I can’t believe they’re gonna do this.” It would be three years out and sure enough you’d you find a way to make them do it in three months. So, what are some of those initiatives that you have on the board for 2015? However specific you can get, what is in store for Drillinginfo as far as products that are coming out?
Allen Gilmer: Well, everything we’re doing is helping support bigger and bigger answers. We have this last year been heavily busy digitizing wellbores so that we know exactly where they are in the context of the geology. We have teams of geologists that are essentially building out geological models of all the basins we’re working in. And doing sequenced stratigraphic analysis, and cleaning up the data we have to the Nth degree so that it’s a very high quality. We know what the rocks look like in terms of where the wells are being drilled. We know where the perforated intervals are with regards to that, so we can really analyze this. To that extent we’re digitizing thousands or tens of thousands of well logs every month in order to support this whole effort. The answers that we’re coming out with are staggering, and very valuable. Sure wish I’d known this when I was actually drilling wells.
The other thing is continuing on with our courthouses because I look at this whole thing as a holistic deal. If somebody basically goes out there and completes a well, and makes a decent well where they shouldn’t have, then I want to know what areas have now changed their value or their risk. With regards to what we’re doing with the courthouses where we have courthouses back to sovereignty in dozens of counties and back so you can do a lease check in hundreds of counties, the whole concept is who’s benefiting from this? And how do you find out about who’s benefited from this early on so that she can act on it?
We always approach all this from a holistic point of view and we continue to accelerate on all this. Some of the things that we’re rolling out very soon is a lot of our real time things with the geosteering and some of these workflows; the Fracit workflow is what we call it. And then the workflows around using microseismic to evaluate completion stimulation techniques for products. That’s done and on the shelf and ready to go. Some of the high science that some of our guys are doing are how do we go out there and interpret geological volumes? How do we find unconformities? How do we go and let the machines go start telling us, highlighting patterns that we probably wouldn’t look at as individuals. That’s the joy to me working of working with a whole bunch of Ph.Ds, math guys, engineers, and geoscientists is I get to go watch what R&D groups are doing and seeing things I couldn’t have even imagined three or four years ago.
James Hahn II: Geosteering; tell me about that. I remember that being brushed upon a year ago. When I was making my exit that was just being starting to be talked about. What are you doing in terms of geosteering?
Allen Gilmer: The geosteering solution we have have is one that allows a geologist or whoever’s really running the geosteering program to adjust the bit in near real-time. Basically you say here’s where we need to go up or down, staying in zone, and more importantly in essentially adjusts the geological model in near real-time as they’re doing that so that it doesn’t get out of whack and it’s iterative. It feeds back into itself. And this whole part lends itself to all sorts of interesting things with regards to identifying wellbore stability issues. Are you going to get stuck? Are you not? All these things that are being driven by this multivariate statistical engine that underlies the whole thing allows us to do things that were beyond imagination just a few years ago.
James Hahn II: Wow, so in real-time it’s giving you feedback you’ve got too much weight this drill string, or maybe we should go right instead of left kind of thing?
Allen Gilmer: Certainly keeping it in zone is the one thing. This other aspect is if we can collect enough of their old historical data that they’re probably not doing anything with to be able to help them identify when they might actually have run into some drilling problems.
James Hahn II: So, there’s an empty box and we can basically plug your data into it and run our analytics along with you while we’re doing it?
Allen Gilmer: Yeah. Tortuosity of the well, does that have an affect? Is there an impacted affect in your production? All this goes on towards the fact that we’re covering all these wellbores. We have GPS units on some of these drilling rigs today so that we know how long they’re on there. You at least time efficiency. Beyond time efficiency then it’s going to be wellbore integrity efficiency and drilling efficiency. Did they overweight the mud? There’s all sorts of pieces that once you solve one problem then a whole group of other problems present themselves that may have impacts on these things. That’s really what we look at ourselves as doing is quantifying the whole environment of uncertainty.
James Hahn II: I love it. What gets measured gets improved, as one of my other former CEO bosses used to say. You mentioned earlier who benefits, I think we have all benefited greatly from you taking the time once again to join us on the podcast as our first repeat offender, Mr. Gilmer. Thank you for coming back.
Obviously we know everyone should go to Drillinginfo.com. Where else would you send them if they wanted to get to know more or what other plugs might we get in here for you?
Allen Gilmer: Drillinginfo.com is a great place to come or send me an email [email protected] Any ideas or thoughts you might have. And congratulations on the continued success Tribe Rocket, James.
James Hahn II: Thank you very much. We are we are coming up on January 1, which will be one year and I know 99% of people aren’t able to say that. If it were for everything that you did in helping me get here. If anybody has any questions, as he said [email protected], and we’ll link everything up in the show notes. We will see you, at this point probably the next time we’ll you will be out at NAPE in February, so we’ll see you then.
Allen Gilmer: See you then. Thanks very much.