Hess Mirrors Toyota Manufacturing Process

Oil producer Hess Corp has turned to a manufacturing process developed by automaker Toyota Motor Corp to cut costs and boost production as crude oil prices lag.

Deploying a process called Lean manufacturing, and used by only a handful of other oil producers, the move has shaved roughly $400,000 off the cost of each North Dakota well in the past eight months, a savings that comes even as Hess adds more sand and frac stages on each well.

It has also sharply cut the time needed to drill a new well.

By mirroring Toyota, which pushed its employees relentlessly each day to focus on ways to produce cars cheaply and more efficiently, steps that helped it rival Detroit automakers, Hess hopes to emerge from the oil price slump stronger than peers.

The New York-based company believes that by using Lean manufacturing its 1,200 operated Bakken wells can remain profitable with U.S. crude oil prices above $40 per barrel, roughly $9 below current levels.

Hess also said it could go so far as to survive with oil around those levels for the next eight years.

"This stuff really does work when you have a culture that is behind it," Hess President Greg Hill said in an interview on the sidelines of the DUG Conference in Denver. "We haven't even scratched the surface."

Hill, who joined Hess from Shell in 2009, has data to back up his use of Lean manufacturing. Since the first quarter of 2012, the company's well costs have dropped 47 percent in the Bakken to about $7.1 million. For 2015, Hess hopes to cut that to $6.8 million.

In the same timeframe, the time spent to drill a new well has dropped 51 percent.

Hess management has been encouraging employees to eliminate waste by focusing daily on what did and did not work and quickly learn from mistakes.

Not as concrete or final as other methods, such as layoffs or contract cancellations, the process stresses softer metrics and personal accountability.

Contractors, especially, are pushed to improve efficiency and cut costs, a key part of the program like Toyota, which controls much of its manufacturing. Hess relies on Halliburton , Baker Hughes and other contractors to perform the heavy lifting needed to extract oil.

As part of finding what methods work best, for instance, Hess saw that using expensive ceramic proppant as part of its fracking process was not cost effective.

So, it stopped, Hill said.

"We are more optimistic and more excited than we've ever been on the Bakken," Hill said. (Reporting by Ernest Scheyder