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Shale Gas

New conventions for unconventional


development for the engineering and
construction industry

Optimizing the play


The successful development of tens of thousands
of shale basin wells requires speedy and efficient
responses to complex challenges. PwC, through
its industry-focused shale gas publications,
is tracking the opportunities and the rapidly
evolving management practices that are aimed
at addressing these issues. To broaden the
perspective we have developed a new three-
part series, Shale gas: New conventions for
unconventional development for the engineering
and construction industry, in which we discuss
the related implications. In this second part
of our series, we outline key considerations
for delivering greater returns in shale well
development by aligning operating expenses,
capital investment, and resources across the
full portfolio of development and production.

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In the first installment of our shale an E&C company can help relieve E&C companies can respond by
gas series, Reducing the drag to that burden by acting as a general leveraging acquired skills and core
achieve speed and efficiency, we contractor for any given project. In competencies that they have devel-
examined an integrated planning doing so, an E&C firm can meet its oped through managing large-scale
approach aligning functions and customers most urgent needs for engineering projects. The latter
resources around a common set of project assistance while gaining typically require companies to
processes across the production life access to projects that ultimately may address unexpected developments
cycle. Rather than thinking about the require a longer time commitment across a wide spectrum of processes.
process as a series of discrete projects, and will drive greater revenue. Ultimately, an E&C company can rely
oil and gas companies would benefit on its well-practiced flexibility and
by viewing it as a holistic task; the In this second installment of our existing skill set to take a leader-
integrated planning approach helps publication series, we delve into the ship role in shale development while
companies eliminate the broken next step that is involved in driving serving as an optimal partner for its
hand-offs between functions that improvement through the shale gas oil and gas clients.
impede drilling and production value chain: How best to optimize
programs. Reducing the drag also theplay? Optimizing the play hinges on devel-
helps companies increase returns on oping a process for managing oper-
capital by improving asset utilization, When developing shale wells, an ating expense, capital investment,
reducing cycle times, and eliminating oil and gas company should ensure and resources across the entire devel-
waste. Through a clear link between that it is able to proactively adjust opment and production portfolio. The
strategy and execution, land drilling to the ever-changing dynamics of optimization process is based on three
and production operations can gain managing the process elements, broad steps:
greater consistency, predictability, whether related to the supply chain
Balancing supply and demand
and efficiency across the basin. or otherwise. A company should
expect the unexpected and plan for a Advancing performance
When, for instance, an oil companys variety of circumstancesincluding
Finding the efficient frontier
leadership feels as if its resources the timing of wells coming online
are being strained in the course of and design issuesthat will arise at
managing all of the moving pieces unpredictable times as shale fields are
inherent in shale development, beingdeveloped.

New conventions for unconventional development for the tax:


Assessing engineering
2013 taxand
rateconstruction
benchmarkingindustry
study 1
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Balancing supply and demand

Balancing supply and demand lets their supplier base to align processes company to accomplish its goals.
an organization link its capabili- and standards, developing what the Because E&C companies are accus-
ties, capacity, and extended supply industry refers to as a horizontally tomed to tailoring a supply chain to
chain to the requirements of field integrated supplychain. the needs of any given project, they
work execution. When it comes to can readily bring that skill set to bear
shale development, this balance is The flow of timely and accurate on shale development.
known as manufactured drilling, information allows for demand data
which is increasingly on the radar of to pass through the horizontally However, shale development has four
shale basin operators. Manufactured integrated supply chain of compa- significant, non-manufacturing char-
drilling allows for balancing the nies. This leads to an appropriate acteristics that need to be addressed
forecast demand for resourceslabor, amount of products and services to in order to realize the benefits of
equipment, rentals, and mate- pass through the system. Changes in an efficient, horizontally integrated
rialswith the constraints in the demand or delivery are quickly identi- supply chain.
organization and its supply chain. fied, and revised signals move up
1. Rather than being a sales-driven,
The end game: the right resources and down so the system can adjust.
or pull, process using funding
are available in the right place at the Enabled by enterprise technology,
and resources to meet sales
righttime. the process is anchored on standard
goals, shale development is a
processes and information.
push process. It is driven by
Drilling down into manu- capital investment and it depends
factured drilling Although shale basin development
primarily on the availability of land
and production are admittedly not
access and capital funding.
In manufacturing, the process of manufacturing, the development of
balancing supply and demand is each well shares a key manufacturing 2. Land drilling, completions, and
known as sales and operations characteristic: a general process that production operations can vary
planning (S&OP). The goal is to repeats tens of thousands of times. significantly from well to well. In
align resources and activities so That repeatability lies at the heart addition, the work scope of each
the company can optimize profits, of applying S&OP concepts and well can evolve unexpectedly.
while effectively managing supply processes to shale. Changes from plan are inevitable
and demand constraints and fluc- and should be addressed quickly.
tuations. In doing so, issues related Repeatability dictates the supply
3. Shale developments constraints
to inaccurate products, location, chain. Having a dynamically adjust-
vary significantly from those of
timing and resources are minimized. able supply chain that can adjust to
manufacturing. From permitting,
In traditional manufacturing, end unexpected changes in any of the
lease terms, and land boundaries
producers work collaboratively with process areas allows an oil or gas

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to geology, geography, and infra- to the immediate problemdevel- large-scale projects. And an E&C
structure (power, roads, water, oping the shale wellswhile also firm that has a static or non-flexible
and pipelines) to the availability strategizing to pursue development model, or a modeling approach that
and quality of mobile resources on the desired land later, when the is not dynamically changeable, might
(people, equipment, tools, land becomes available. Consequently, consider upgrading or adjusting its
and supplies), a wide array of the oil or gas client will be able to approach to better serve its customers
constraints can hamper a compa- continue to move forward in a cost- and win largerengagements.
nys ability to balance shale devel- effective manner.
opment supply and demand. Applying the S&OP model has proven
The bottom line: E&C firms can help to reduce cycle times and costs in
4. At the basin level, operators
oil and gas companies build flexibility shale development. To achieve these
manage a hybrid model that
into their approach to managing benefits, however, companies should
combines continuous processing,
risk or change for any given project. consider transforming S&OP into
such as producing wells that
By doing so, firms can provide real investment and operations planning,
still require project attention,
value to their clients and, as a result, or I&OP. Next, we turn to how this
and discrete manufacturing,
can gain the opportunity to support transformation occurs.
such as new well drilling. These
continuous and discrete processes
rely on a single pool of funding
andresources.

E&C firms routinely address these


types of challenges. For example,
with a large construction project, a
client may decide that while there
are not enough funds to complete
all aspects of the project, the plant
nevertheless should be made opera-
tional. How, then, must the delivery
plan and schedule be adjusted to
accommodate the new reality?

Similarly, perhaps because of a spill,


the discovery of an archaeological
site, or insufficient purchasing
power, a client may no longer have
access to develop any given field.
An E&C firm can rely on its project
modeling techniques to address the
problem by taking a broad view of
the issue and seeking ways to adjust

New conventions for unconventional development for the engineering and construction industry 5
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Push versus pull robust risk management processes Hybrid production
to all investments. Second, busi-
Instead of sales driving the amount nesses should quantify risk. This In shale development at the basin
of goods produced, the pace of shale involves determining the cost levels level, regional or asset teams should
development is based on availability and schedule contingencies that are manage a discrete manufacturing
of, and access to, capital and land as needed to deliver the project within business (drilling and completions)
well as land production projections. the risk tolerance of the organization. and a continuous business process
This difference has two implications: Finally, robust change management (production operations) in parallel.
First, capital planning, land activity helps to quickly identify alterations To do so requires a common busi-
planning, and evaluations should to the plan, and their impact on cost, ness infrastructure platform and
be closely integrated with drilling schedule, and resources. With that pool of resources. Integrated plan-
plans, and updated dynamically on knowledge, companies can determine ning extends beyond land drilling
a continuous basis to identify and how to best manage thisvariability. and completions and includes the
address changes. And second, activity activities and resources of produc-
planning for land drilling and comple- Managing constraints tion operations. Each function has its
tions should be made with standard own cadence and drivers; however,
models. Activities should account for All drilling programs and capital with integrated planning, a basin-
resources using a standard structure projects activities have dependencies, level view of all activity provides
that maps to supply chain require- both internal and external, such as insight into capacity and performance
ments and generates accurate and when one activity cant begin until in to more effectively link strategy
timely demand signals. another either starts or is completed. andexecution.
If the labor, materials, and equipment
Variability and arent available in the right place
uncertainty at the right time, work on a project
grinds to a halt. Integrated planning
For each well and project, drilling identifies these constraints and builds
programs and capital projects vary them into the plan. Activities must be
greatly. To effectively manage linked to their resource requirements,
the variability, operators should both within the project and as related
deploy three project management to other functions and stakeholders
fundamentals. First, the organiza- inside and outside of the company.
tion should apply risk profiles and

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Advancing performance

Once a company has applied I&OP, it suppliers a predictable view into what because processes are standardized
can focus on improving financial and they need to supply and when. That and companies can respond to changes
operational performance. The ultimate predictability allows them to be more quickly, projects require less senior
goal is to increase return on capital efficient and share the resulting cost expertisethose who know how to
employed. That goal is driven primarily savings with their customers. get things doneand can leverage less
by three factors: costly junior professionals.
Better utilization of labor and equip-
Project costlabor, equipment,
ment can further contain costs. With a When all pistons are firing, these
andmaterials
clearer view into resource needs, it is processes can help eliminate 20 to 30
Project schedulethe amount of no longer necessary for companies to percent of a businesss costs. And cycle
time needed to complete the project supply every crew with all the equip- times can also be reduced; if an E&C
and turn it over to operations ment it might ever require. Instead, firm can help reduce the cycle time of a
equipment can be held in centralized well development project for its oil and
Asset revenuethe product, price,
locations and provided on a just-in-time gas company client by 30 percent, it
and rate of production
basis. The impact of eliminating equip- can help the client deliver the results of
ment duplication can be profound: it a producing field all the more quickly.
With a clear and forward-looking view
can help trim inventory costs by 20
into all plans and activities, an organi-
percent or more.
zation can reduce its costs by becoming
more strategic in its sourcing and more
Labor utilization can also become much
efficient in its deployment of labor and
more efficient. Knowing the composi-
equipment. As is the case with manu-
tion of crews and when they will be
facturers, an accurate and consolidated
needed, for example, can significantly
view of demand can create closer
reduce downtime when crews are no
relationships with suppliers. Knowing
longer assigned to sites that arent
in advance what will be needed along
ready to receive them. Moreover,
with potential demand changes gives

New conventions for unconventional development for the engineering and construction industry 7
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Finding the efficient frontier

The efficient frontier provides a value. Valuation models normally Commodity price risk: As liquid
systematic, birds-eye view into the include quantitative inputs of finan- and gas prices swing, the fluctua-
information needed to optimize cial performance, such as produc- tions can guide decisions about
the investment portfolio, helping to tion expectations, development and sweet spots and where to priori-
determine which projects fit, which operating costs, and the net present tize investments in light of market
dont, and why. Oil and gas compa- value of cash flows. But in shale devel- forecasts. Unlike reserve risks,
nies should make these decisions opment, two types of risk valuation which are independent from site
in the face of uncertainty, project should also be added to the equation: to site, commodity price risks
interdependencies, and changing affect the entire shale investment
Reserve risks: With shale, the
economic environments. In the shale portfolio. As a result, they warrant
extent and makeup of ground
basin, investment decisions center on additional attention and portfolio
reserves are uncertain, and the
three elements: choice of well to drill; stress-testing.
rate of decline from one well to the
choice of facility, pipeline, or road to
next can also be difficult to predict.
construct; and choice of maintenance As an oil or gas company begins to
Probabilistic modeling can account
activities to perform. develop a shale field, it could benefit
for these risks, which can have
from understanding commodity price
considerable impact on value and
Portfolio optimization requires calcu- risk and the potential for fluctuation.
the assumptions used to
lating each investments potential What are the potential risks and the
calculate it.
possible impact? The best approach
is to leverage those insights to build
the supply chain and establish the
pace of development and source of
labor. An E&C firm can help an oil or
gas company build in the costs and
take appropriate steps to blunt the
impact on the supply chain if the price
suddenly declines steeply, or in a situ-
ation where adverse weather condi-
tions affect the transport of materials.

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Valuation can also include financial availability of resources and infrastruc- that can help to mitigate pain points
and performance metrics to assess ture, and these dependencies must be and challenges associated with shale
scenarios with apples and oranges factored in. With the I&OP approach, development.
comparisons, where less tangible they can be dynamically linked to inte-
factors are considered in making grated activity planning and reflect the As illustrated in each portfolio scenario
investment decisions. Numerous resource constraints in the valuation. produces an expected value at an
strategic issues that are difficult to expected cost. For shale development,
quantifyincluding public perception, With a holistic perspective regarding each point on the chart represents a
brand reputation, regulatory compli- the value of any mix of potential invest- different mix of capital investments,
ance, and environmental impact and ments, management can step back and including wells, roads, gathering lines,
safetyare just as critical. take a portfolio view of opportunities. process and storage facilities, and
Of all the projects that can be under- water and power supply. By picking the
Although these are non-standard taken, which combination drives the right projects, and analyzing the level
measures of value, they can be calcu- maximum return on the investment, and mix of investments, a company
lated. For example, a projects safety and how much investment is required can generate the maximum value for a
risk can measure how many workers to maximize the returns? In addition, given budget constraint.
may be exposed, and the potential a portfolio view allows a company to
impact of that exposure in each inci- stress-test its options under different
dent. Including the steps and costs scenarios. If a company must reduce its
needed to mitigate these risks captures budget, or ifcommodity prices drop, for
their full impact. example, it can decide which projects
should be eliminated or downgraded.
An optimal portfolio should also take
operational constraints into consider- An E&C firm, because it already
ation, including those related to people, has a risk management model, can
tools, equipment, and infrastructure. increase its value to a client, who may
The rate of well completions and be working with multiple partners,
subsequent production depend on the by acting as a general contractor

New conventions for unconventional development for the engineering and construction industry 9
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Figure 1: Points along the efficient frontier

The portfolios on this line


(the efficient frontier) create
the maximum possible value
for any given budget level
Each point represents a
2,500 (horizontal axis). The goal is
different funding scenario
to select a portfolio on the
(i.e., a different portfolio).
efficient frontier.

2,000
Total portfolio benefit ($M)

1,500 The current portfolio is


an inefficient allocation of the
resources. More value can be
generated for the same
1,000 budget level by selecting
different projects
(and move up the arrow).

500

0
200 300 400 500 600 700 800 900 1,000 1,100

Budget ($M)

Each point represents a different


portfolio scenario corresponding with
a particular cost (horizontal axis) and
benefit (vertical axis). The portfolios
along the curve generate the greatest
shareholder value for any given
budget level. Companies should seek
projects that are on, not below, the
efficient frontier.

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Leveraging technology

Technology can help align long-term Expense plan: With industry-leading Revenue plan: Leveraging tech-
strategies, financial plans, and fore- planning and forecasting solutions, nology, companies can create several
casts with proposed and ongoing companies can perform expense revenue scenarios based on production
projects through the development of an planning at the account level (rentals, expectations, commodity prices, and
integrated financial planning model. shipping, travel, and depreciation) exchangerates.
Currently, there are several companies as well as the resource level (labor,
that provide software solutions as part equipment, and material). They can be Once developed, the integrated finan-
of their analytics and performance based on predefined drivers and used cial planning model can be used to
management product suites. These to analyze the impact of each category create income statements, balance
solutions can be integrated relatively on a project. sheets, and cash flow forecasts.
easily into ERP and project manage- Companies can also create scenarios
ment systems. They can also support These solutions also support the based on various assumptions about
driver-based planning frameworks, allocation of organizational overhead labor rates, commodity prices,
workflows, and approval processes to specific projects based on predefined exchange rates, and interest rates. This
as well as help prioritize and approve attributes. Overall expenses can be ability allows project managers, area
projects based on predefined KPIs and consolidated at the project level, and managers, and other stakeholders to
financial thresholds. managers can examine the impact of make informed decisions based on a
each expense category over the entire common view of the facts provided by
Technology can also help engage stake- portfolio. the I&OP approach.
holders from different functions by
providing a common view emanating To help with supplier negotiations, It is important to point out that in a
from the same systems. Additionally, the solutions provide overall forecasts dynamic environment, where supply
technology can also reveal the impact by category. All resource plans can be and demand needs consistent balance,
of project changes on financial state- integrated with other systems used for strong workflow integration is critical.
ments, which helps to build multiple procurement, workforce management, With hybrid production, for example,
scenarios for companies, based on one and capital planning and budgeting. companies need to integrate informa-
set of clearly defined assumptions: This allows for gaining insights into the tion management for both discrete and
availability and utilization of current continuous activities.
resources and new assets coming
onlinea key tool in preventing
resource hoarding.

New conventions for unconventional development for the engineering and construction industry 9
In terms of portfolio optimization,
some major vendors include analytics
models, but these may not fit a compa-
nys needs. When this is the case, the
business should consider building
technology platforms that integrate
their own, unique models. Designing
a technology platform should account
for a software vendors native capa-
bilities and how to integrate them into
the workflow, portfolio optimization
models, and dashboards.

Taking a cue from manufacturing,


weve analyzed how companies can
more effectively balance supply and
demand to ensure that the right
resources are in the right place at the
right time. By becoming more strategic
in their sourcing and more efficient in
their deployment of labor and equip-
ment , they can significantly reduce
costs. When operations and financial
planning are efficient, oil and gas busi-
nesses can confidently optimize their
portfolio of investments by under-
standing which set of projects provides
the best return on investment and
what that level of investment should
be. Technology eases the process by
providing a common, centralized view
of information andforecasts.

In the final installment of this shale


gas series, we will focus on speed and
agilityand how they are driven by
analytics.

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Contacts

To have a deeper conversation about the topics discussed in this paper,


pleasecontact:

John Doherty
US E&C Advisory Leader
Chicago, IL
+1 (847) 430 9028
john.doherty@us.pwc.com

Additional US Engineering & Energy sector contacts:


Construction leadership contacts:

H. Kent Goetjen Michael Matthews


US E&C Industry Leader US Energy Director
Hartford, CT +1 (713) 356 4615
+1 (860) 241 7009 michael.f.matthews@us.pwc.com
h.kent.goetjen@us.pwc.com
Manas Pattanaik
Allen Pryor US Energy Director
US E&C Tax Leader +1 (713) 356 8287
Dallas, TX manas.pattanaik@us.pwc.com
+1 (214) 754 4570
allen.r.pryor@us.pwc.com Sophia Kim
US Energy Director
Meta Wendt +1 (312) 298 2370
US E&C Assurance Leader sophia.kim@us.pwc.com
Los Angeles, CA
+1 (213) 356 6115
meta.wendt@us.pwc.com

For general inquiries, contact:

Diana Garsia
US E&C Marketing Sr. Manager
Florham Park, NJ
+1 (973) 236 7264
diana.t.garsia@us.pwc.com

New conventions for unconventional development for the engineering and construction industry 13
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