Upstream Unconventional Oil and the Chemicals Used in Drilling: A Supply Chain in Need of Improvement

Unconventional Oil includes shale oil and oil from tar sands. In producing oil, chemicals are injected into the ground to increase flow. The amount of chemical treatment is tied to the oil and gas production rates; treatments need to be adjusted as production rates vary. In many situations production treatment chemicals represent the second highest cost for producers. This market also tends to have a fairly unique supply chain in which suppliers determine the correct dosing rates based on current production rates, adjust the chemical pumps on each well site to reflect those dosing rates, supply the chemicals to be injected, and are accountable for any out-of-stock situations. So the supplier “owns” both the demand forecasting and the inventory management.

Approximately 190 production chemical suppliers supply the unconventional reservoirs – with four companies serving about 50 percent of that market. Thus, a large number of small operators compete for about half the market.

The overall objective for both producers and suppliers is to develop logistics and distribution management systems that optimize costs while minimizing out-of-stock situations.

This involves multiple challenges, and especially so when supporting the unconventional reservoirs.

The first of these challenges is simply the enormous areas over which suppliers need to operate; fields like the Eagle Ford are over 1,200 square miles in size. Another major challenge is that the current process is very manual; requiring gaugers to visit each well site to check chemical stock levels, adjust injection rates, supply the chemical, and check current production rates. Inventory control is very important because the chemicals start to lose their effectiveness once they have passed their defined shelf life, generally measured in a few months. Determining the correct dosing rates is also very critical. Under-dosing causes damage to the drilling infrastructure (corrosion), safety issues (hydrogen sulfide), and product quality (emulsifiers). Over-dosing increases cost, creates environmental issues (unneeded chemicals being introduced to the environment), and can potentially damage equipment.

Area of Operation for the Eagle Ford (Source: US EIA)

Area of Operation for the Eagle Ford (Source: US EIA)

The above challenges have multiple consequences for the chemical logistics associated with unconventional reservoirs.

The first is that demand forecasting is very difficult. Production rates determine the dosing rates and obtaining those production rates manually to accurately determine actual chemical demand is a very demanding and expensive task.

This lack of visibility into the supply chain also leads to inventory control issues. Inaccurate demand forecasts create inventory issues at the blending plants. Blending too few chemicals creates out-of-stock situations leading to under-dosing, with all the consequences mentioned previously. Blending too many chemicals and the inventory can exceed its shelf life.

Another inventory issue is properly sizing the chemical tanks at the wellhead sites. The tank size must be appropriate to match chemical demand at that well. If the tank is too large, the chemicals run the risk of aging past its shelf life. If the tank is too small, frequent trips to the well site will be required to supply chemicals, which also increases the risk of running out of stock of chemicals.

Clearly this supply chain would be improved with better visibility. Visibility can be greatly increased by using wireless sensors to record and communicate production rates, chemical injection rates, and chemical tank levels at the well site. Due to the wide geographic area involved and lack of established communications infrastructure, these types of measurements are good candidates for the “Industrial Internet of Things” (IIoT) approach. Visibility can also be greatly improved by using field force automation, with which field workers could record tank levels directly into tablets or smartphones and then communicate these back to a central system to provide near-real-time tracking of well site inventories.

Companies could also leverage a telematics system on the chemical delivery truck to automatically record the quantity along with time and location of any chemicals dispersed to the chemical storage tank. This would yield an automatic ticketing system that would great improve the accuracy and timeliness of data.

Finally, the production rates could be tied into the injection pump with a field control loop to automatically adjust chemical dosing based on changes in production rates.

Another opportunity to improve the supply chain is to increase the amount of collaborative planning between the operating companies and the suppliers. By providing chemical suppliers with more detailed planning information, operators can help them better anticipate demand and adjust production/ delivery accordingly. Operations such as shutting in wells, adjusting chock settings, and interventions in production rates can impact chemical demand. Cloud-based collaboration tools are good candidates for such efforts.

An excellent way to optimize the supply chain is to develop analytics-based demand forecasting tools using the improved visibility from wireless and field force automation. Not only can the inventory management be improved by more accurate demand forecasting, but chemical suppliers can use these analytic tools to help differentiate themselves in a fairly crowded market.

Finally, operators should explore taking back part of the supply chain by determining dosing rates, handling demand forecasting, and managing their own well site inventories. With the advent of wireless and field force automation, the cost of performing these tasks could be significantly reduced, so it might make sense for operators to start performing these tasks. Doing so would force suppliers to start pricing the chemicals as more of a commodity than a value-added service.

With adjustments to the logistics of the production chemical supply chain, there are significant opportunities to reduce costs while reducing the likelihood of out-of-stock situations. Leveraging advancements in mobility, wireless, and analytics can significantly improve the performance of the production chemical logistics.

Dave Lafferty was formerly a Technology Advisor in the Chief Technology Office at BP. He is an ARC Associate assisting the ARC Adivsiory Group with research on Oil & Gas technologies.

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