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The Oil Industry's Data Revolution

Matthew DiLallo, The Motley Fool

Oil drilling has evolved over the years. Companies used to make educated guesses on where to drill new wells, hoping they'd hit a gusher. Today, they target wells with pinpoint precision into the sweet spot of an oil reservoir. That's making wells increasingly more productive, enabling oil companies to pump more oil for less money.

They're able to do that by using data to drive drilling decisions. That trend was on full display during the first quarter as several drillers delivered stronger-than-expected results, in large part because of the increased use of data and other technology to improve well productivity.

A man in a suit holding icons representing oil drilling and data.

Image source: Getty Images.

Drilling down into the data

Oil companies have traditionally relied on their technical know-how to solve complex problems. The industry, for example, spent decades working on ways to unlock the treasure trove of oil and gas trapped in tight rock formations like shale. The solution turned out to be a combination of two legacy methods, horizontal drilling and hydraulic fracturing, which work together to open a pathway to produce oil and gas.

Drillers, however, continue to adjust this process to optimize output. One way they're doing that is by analyzing data to improve their operations. Oil reservoir specialist Core Labs (NYSE: CLB) is among the companies helping drillers analyze data to improve well performance. On the first-quarter conference call, CEO David Demshur discussed one of the ways his company is assisting oil drillers.

Demshur noted on the call that among the problems oil companies are working to address is the optimal spacing of wells so that they don't interfere with each other underground, as well as proper well size:

Upsizing is today's watchword. In 2019, our technologically sophisticated clients will drill fewer wells but better wells. Most importantly, their returns will increase.

He added:

Core is uniquely positioned to provide technology-driven data to determine optimal well spacing and upsizing to all but eliminate the deleterious effects of horizontal well interference. Detailed analysis of core and fluid samples provide information to the operator on micro-lithologies, rock competence, rock mechanics, crude oil types and qualities, all data necessary to determine optimal well spacing and well positioning.

In other words, the company is using data to determine the optimal well locations and sizes so that drillers can get the most oil out of a reservoir. That's enabling its customers to maximize their investment in new wells.

Oil Industry Pump jack with one oil worker and laptop.

Image source: Getty Images.

Data-driven oil drilling

The increased use of data to drive decisions in the oil industry is having a clear impact on results. Among the leaders in this new way of operating is EOG Resources (NYSE: EOG). That was evident once again during the first quarter, as the company produced more oil than expected, even though it spent less money than anticipated on drilling wells. On the accompanying conference call, Chief Operating Officer Billy Helms drilled down into how the company uses data to drive decision-making:

I think part of that, the increased use of data in its field operations, goes down to the very culture of the company. We're always trying to get better at what we do. And the way we do that is we look at all the details, and we gather lots and lots of data and we've had these systems in place for some time. And then, the key part of that is delivering that data back to our team, so they can exercise good decisions on how to improve our operations and the way we just do our business in all aspects. And we're seeing that manifest itself on the drilling highlights that we offer today, as well as the completion highlight improvements that we're seeing.

So on the drilling side we're monitoring the daily rate of penetration on all of our drilling rigs, and making sure our drilling times are not just keeping up with what we're doing, but how do we continue to get better. And so the results we're seeing today are a direct reflection, our ability to gather the data and transport that back and analyze it and deliver it to the field and have the guys making the decisions. So it is part of our culture -- real-time returns-focused decision making.

Helms further noted that because EOG uses data in real time, it's not implementing "a cookie-cutter formula you can apply everywhere." Instead, the COO explained: "[It's] tailored, [it's] specifically designed by each well, by each zone, depending on the target zone and their offsets. It takes an integral approach to be able to analyze the data real time and make the right decisions." The company's ability not only to collect data but implement changes in real time based on its analysis is allowing it to drill more productive wells. That's enabling EOG to earn higher returns on its investments.

EOG isn't the only company using technology and data to drive the drill bit. Pioneer Natural Resources (NYSE: PXD) also pointed out that one factor playing a role in its strong production performance during the first quarter was "incorporating data from machine learning into optimized completion designs."

In other words, Pioneer Natural Resources uses data collected while drilling to design wells to maximize production from the reservoir. As a result of this process, "well productivity continues to increase annually, with average cumulative production greater in 2018 as compared to the 2017 program," according to the company. That's driving improved drilling returns, which is enabling the company to produce more oil with less money. That's freeing up its cash for other things, including share buybacks and a rapidly rising dividend. The success of EOG, Pioneer, and others have had with making data-driven decisions will probably lead even more drillers to join the data revolution. 

Data is driving returns

Oil drilling used to be done mostly by trial and error. Today, oil companies are collecting data as they drill and use that information to improve their results. That's enabling them to optimize well placement and size so that they can drill increasingly more productive wells. This approach is allowing them to produce more oil for less money, which is boosting investment returns. That will increase profitability, which could enrich investors in the coming years.

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Matthew DiLallo owns shares of Core Laboratories. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.