JPT: SPE/IADC Drilling Conference: Drilling Industry Faces Staffing and Financial Pressures May06

Vol. 58 No. 5

May 2006

SPE/IADC Drilling Conference: Drilling Industry Faces Staffing and Financial Pressures

Dennis Denney, JPT Technology Editor

Almost 1,400 people from 34 countries attended this year’s SPE/IADC Drilling Conference and Exhibition in Miami Beach, Florida. Students from places such as the U.K., Brazil, Ukraine, and Russia used the opportunity to learn and to network at the international gathering. Ninety technical papers were presented during the 3-day conference, while 79 exhibitors displayed and discussed their newest technologies with the attendees. In 2007, the conference will be held in Amsterdam during 20–22 February.

A plenary session highlighted each day of the conference, and each drew a large audience. A main concern voiced by panelists throughout the plenary sessions was manpower to sustain the industry. Although there has been much talk about the “big crew change” as baby boomers begin to retire, the real concern is finding qualified people to fill positions created by the boost in drilling activity that is expected during the next decade. From drill-floor hands to engineers, more than 12,000 new positions will be created. A point addressed in each plenary session is the need to provide knowledge gained through experience to the new people entering the industry.

SPE Drilling Award

Carl Montgomery receives the 2006
SPE Drilling and Completion Award
from 2006 SPE President Eve Sprunt.

Before the first plenary session, 2006 SPE President Eve Sprunt presented this year’s SPE Drilling and Completion Award to Carl Montgomery, an engineering fellow in ConocoPhillips’ Production Assurance and Optimization Group in Bartlesville, Oklahoma. He is responsible for the development and transfer of stimulation technologies for ConocoPhillips’ worldwide operating companies. Previously, Montgomery was Chief Completion Engineer and Engineering Fellow, and he has held several technical and managerial positions with ConocoPhillips, Phillips, Arco, and Dowell Schlumberger. Montgomery currently serves as SPE Technical Director for Drilling and Completions. His lengthy involvement with SPE includes Director of the SPE Mid-Continent Section during 1984–85, SPE Distinguished Lecturer during 1998–99, and Distinguished Lecturer Selection Committee during 2002–03. Montgomery has authored or coauthored more than 25 technical papers and holds more than 19 patents. He has been session chairperson at several SPE conferences; he also chaired the first SPE Applied Technology Workshop and served as Executive Editor of SPE Production & Facilities.

Performance Expectations

The drilling industry, especially offshore and specifically deepwater offshore, is extremely capital intensive. The current problem was highlighted in the first plenary session, “Wall Street Performance Expectations.” Moderator Allen Parks, a partner with Parks, Paton, Hoepfl, and Brown, pointed out that Wall Street has only a short-term focus because it is made up mostly of traders with few long-term investors. The motive of Wall Street is to make money, and it expects immediate gratification. But the time frame required to explore for and then bring hydrocarbon reserves to market and, finally, begin generating revenue does not fit Wall Street’s need for instant results, he said. Panelists included Jim Wicklund, Managing Director and Senior Research Analyst, Banc of America Securities; Stephen Hadden, Senior Vice President of E&P, Devon Energy; Jean-Marc Perraud, Executive Vice President and Chief Financial Officer, Schlumberger; Larry Dickerson, President and Chief Operating Officer, Diamond Offshore Drilling; and Pete Miller, Chairman, President, and Chief Executive Officer of National Oilwell Varco.

Wicklund emphasized that Wall Street looks for four things in a company. How much oil and gas reserves does it have? How fast will those reserves be produced? How fast will the produced reserves be replaced? And how much are the reserves worth? “If you have reserves in the ground that are going to be there 35 years, they really don’t care,” he said. “They want you to forward as much as possible and give them the net present value today and optimize that and nothing more.”

Hadden said that Devon’s objective is to create and grow value in the long term. However, “today’s decisions actually become the next 10 years of near-term results that Wall Street is looking for, so we have to be very conscious of that factor and continue to focus on not only the near term but also the long term,” he said.

Perraud pointed out that service companies require investment in long-term technology development, which also has a long uptake time. Service company challenges include investment in long-term technology development, capital expenditure in a cyclical industry, and communication. Long-term shareholders, corporate management, and boards of directors dislike stock-price volatility. However, the capital-intensive E&P industry is inherently unable to make long-lead supply additions to smoothly match short-term demand volatility, he said.

Dickerson said the three biggest challenges facing drilling companies are weather, product prices, and inventory. New rigs must be built at the proper time to prevent unbooked time. Communication is key: “you need to be open with everybody, you need to respond, and you need to constantly tell everybody your message.” Miller discussed the supply of rigs over the past 30 years. In the early 1980s, enough new land rigs were built to last 25 years. The drilling industry spent the next 25 years catching up with the supply; “new” rigs were built from stacked rigs. Companies have announced that rigs built in the next 2 years will use the latest technology. “Technology really can define how your rigs can drill,” he added. What is important is “that you’re taking care of your people, you’re taking care of your customers, and you’re taking care of your suppliers. If you do those things, Wall Street will follow.”

The plenary session, “Wall Street Performance Expectations,” was moderated by Allen Parks (left) and highlighted panelists Jim Wicklund, Banc of America Securities; Stephen Hadden, Devon Energy; Jean-Marc Perraud, Schlumberger; Larry Dickerson, Diamond Offshore Drilling; and Pete Miller, National Oilwell Varco.

Staffing Challenges

The second plenary session, “People—Getting, Training, and Retaining Them,” addressed the problems at all levels of the drilling industry. Moderator Dean Oliver, Director and Eberly Chair Professor, U. of Oklahoma, described how students are better trained at graduation than in the past. Internships, sometimes several, are required almost universally to graduate. Panel members at this session were Kevin Lacy, Vice President–Global Drilling and Completions, Chevron Corp.; Jose A.L. Fernandez, Subdirector of Human Resources, Pemex; Roberto Munoz, Vice President Latin American Operations, Halliburton; Mike Stice, President, ConocoPhillips Qatar; and Gene House, Senior Vice President Operations, Noble Corp.

Lacy said that since OPEC abandoned its oil-price basket in January 2005, stacked rigs have been put back to work, but there were no “stacked workers” available to work on those rigs. One estimate of the need for people (crew contingency, onshore support people, and service company personnel) for the rigs coming out of the yards (deepwater and jackups due out in the next 2 to 3 years) is roughly 12,000 people. Over the next 4 years, companies will have to adjust methods of recruiting and retaining people, he said. They will have to find new drivers, adjust their approach and work processes, and determine the effect of the current labor market on safety, operational, and financial results. One question is: Who will teach the next generation? “You can’t fix a mess in 1 year that took 20 years to create,” Lacy added. “I just hope we recognize we have to solve it jointly.”

Fernandez stated that from 2006 to 2010, Pemex plans to drill 5,322 onshore wells, 465 offshore wells, and 51 deepwater wells by use of an average of 111 rigs/year. The result is a need for approximately 13,200 people: 2,100 in various engineering disciplines and 11,100 in technical, operations, and support positions. The main challenges will be technology training for deepwater, high-pressure/high-temperature, and extended-reach drilling; systematic application of multilateral and horizontal drilling; coiled-tubing drilling; and intelligent completions.

Munoz described how the industry is experiencing the most pressure in 30 years for human services. Many of the activities used to recruit personnel are of 1970s vintage, although new methods are available with today’s technology such as Web-based job-search systems. Historically, hands-on training was provided for new hires, and this tradition is still valid, he said, although in remote or offshore environments this approach is too slow. Therefore, hands-on training is supplemented with simulations that give new hires an understanding of the variety of risks and methods to mitigate or manage those risks. Retention requires placing people in appropriate career opportunities, providing continuing education by new methods such as Web-based courses, challenging people with appropriate team tasks, and providing flexible compensation, Munoz said.

Stice said that, on the basis of exit interviews, most people leave a position to find more challenge or because of “soft issues” such as lifestyle, location, dual careers, and, for baby boomers, aging parents. International companies will have to become more culturally diverse to draw new talent, he said, and a big issue is language. Currently, 54% of people in the industry speak only one language, but cultural diversity will require that employees be multilingual.

House said that approximately 70 new-build offshore drilling floaters and jackups will be delivered by 2007, and each rig will require 200 to 250 people to operate and support. Because companies will want the most-experienced people, they all will be chasing the same workers. The new rigs will require solid understanding of higher technology, so higher standards will be required for new personnel, he said.

The exhibits during the 2006 IADC provided an opportunity for attendees to learn details of new technologies from 79 companies.

An audience poll showed that 38% of those in attendance work for oil/gas companies, 38% for service companies, and 16% for drilling contractors. Some 48% of attendees indicated that keeping people is the most pressing problem in today’s and tomorrow’s markets. When asked what most attracts them to a job, 42% indicated challenge, and 41% indicated money; job security and location ranked low.

Looking to the Future

The third plenary session, “Planning for a Successful Future,” centered on how operators and service companies plan and work together. Moderator Cary Moomijan, Vice President, General Counsel and Secretary, Ensco Intl. Inc., showed how OPEC’s spare production capacity has decreased from 26% in 1983 to 2.4% in 2005. “The challenge to replace depleted production, meet demand growth, and rebuild production-capacity surplus will be costly and will take years of drilling to address,” he said. Panel members for this session included Scott Sigurdson, Well Manager–Gulf of Mexico Production, BP; Mark Phillips, Vice President–Gulf of Mexico, Halliburton; Marion Woolie, Senior Vice President–Operations, GlobalSantaFe Corp.; Don Jacobsen, Director, Global Well Delivery, Shell E&P; and George Dotson, President and Chief Operating Officer, Helmerich & Payne Intl. Drilling Co.

Sigurdson said that exploration- and appraisal-spending levels are increasing at BP and will drive increased development activity in 2008 and beyond. BP’s overall plan for a successful future includes the following.

No accidents, no harm to people, no damage to the environment.
Consistent, reliable performance.
Relationships focused on value.
Access to the best skills and equipment.
Development of the next generation of people.
Use of the right technology at the right time.

Phillips said it takes 9 to 18 months to build and move new capital equipment around the world. Therefore, careful planning with service companies is required to get that equipment to the right place at the right time. And if new technology is required, the lead time could be 1 to 3 years for development and delivery, he said.

Woolie cited three key factors from a contractor’s perspective: people, investment, and relationships. People will be the controlling factor in the next 10 years because of the number of people due to retire. There are two schools of thought regarding rig investment. One is, “If you build it, they will come,” he said, but the economics of speculative rig building are not favorable for GlobalSantaFe. The second basis is, “If a contract is made, build the rig.” Regarding safety, Woolie said that drilling contractors have matured to accept that they can operate as an injury-free workplace, but that workplace will come under extreme pressure with the rapid influx of new people. Companies will have to learn that it will be necessary to take time to train people properly before starting up new rigs. Planning between operators and contractors is a value-added practice, he said. Contracts are covering longer time periods than ever before. But when the first 3 years of a 5-year contract is spent building the rig, the result is stress, which must be managed.

Performance-Based Contracts

Jacobsen described how aligning with a drilling contractor and a service company improved performance. Performance-based contracts align with certain activities such that having a single provider enables continuity of supply and allows planning and purchasing in quantity to reduce cost and ensure availability. These arrangements have allowed cooperation levels that have improved efficiency of operation and safety, he said.

Dotson provided insight into a contractor’s view about anticipation and alignment. Contractors that anticipate and align are rewarded. For specific projects, complete alignment enables a collaborative environment to work with the operator on fit-for-purpose equipment, providing the best value and greatest safety. In the speculative market, the use of a basic design that can be adapted with new ideas and technology provides value in the drilling process. However, the investment community wants immediate return on money invested in new rigs. So, today new rigs are built in-cycle with firm contracts. The requirements are that the company is committed to the alignment, the prizes are known, and the plan is aligned with both the company and the customer. The result is significant value to shareholders and satisfaction for the contractor.

According to an audience poll, 67% indicated that it is extremely important for operators, drilling contractors, and service companies to coordinate planning for future projects. When asked the area of highest current E&P activity, 36% responded onshore North America, 24% Gulf of Mexico, 12% Africa, and 11% South America. Regarding the use of performance-based contracts in place of traditional day-rate contracts, 32% were positive, 18% negative, and 47% liked the idea but believe that it would be hard to implement. When asked if contractors and service companies actively work to anticipate trends and align themselves with operators, 62% indicated “some of the time,” and 31% indicated “most of the time.”