Vol. 59 No. 7

July 2007

OTC Review

OTC Draws Surging Industry Facing Big Challenges

John Donnelly, JPT Editor; Joel Parshall, JPT Features Editor; and Erica Shillings, JPT Assistant Features Editor

The surging vitality of the oil and gas industry was abundantly evident at the 38th Offshore Technology Conference (OTC), 30 April to 3 May at Reliant Park in Houston. Attendance at the 2007 OTC reached a 25-year high of 67,155, as industry professionals from 110 countries met to learn about the latest technology to find and develop the oil and natural-gas resources beneath the ocean and broaden their knowledge of the complex, rapidly changing world energy environment. This year’s attendance marked a 13% increase from the 2006 level of 59,236.

The world’s largest offshore-industry event, OTC expanded its exhibition for the first time into the adjacent Reliant Stadium and increased outdoor exhibit space as well. The total exhibit area was nearly 530,000 square ft, about the size of 13 American football fields. Nearly 2,400 companies from more than 30 countries exhibited this year, up from 2,229 exhibitors in 2006.

The OTC technical program consisted of nearly 50 sessions and the presentation of more than 300 papers dealing with innovations and advancements in all facets of exploration and production (E&P) technology, environmental and risk issues, the accomplishments and breakthroughs of major projects, and the future development of alternative and nonconventional energy resources.

The conference’s two general sessions discussed the expected continuance of petroleum as the major world energy source for much of this century and the emerging effects that the national oil companies’ (NOCs’) domination of reserves ownership is having on the collaboration of NOCs, international oil companies (IOCs), and service companies. Three panel sessions in addition dealt with international offshore-technology transfer, new offshore construction benchmarks developed as a result of Hurricanes Katrina and Rita, and the special role that independents are playing in project development. A variety of industry breakfasts and topical luncheons covered numerous other subjects of interest to the E&P sector.

Attendance at the 2007 OTC climbed to more than 67,000, reaching a 25-year high.

OTC Awards

At the annual OTC Awards Luncheon, the 2007 Distinguished Achievement Award for Individuals was given to Marcos Assayag, leader of the successful Procap deepwater production-system technology programs for Petrobras. He helped develop technological processes that allowed the company to produce in water as deep as 2000 m and set the foundation to allow production in 3000 m. Assayag, Basic Design General Manager at the Petrobras R&D Center, called the award “one of the peaks of my career, if not the highest one.”

The 2007 Distinguished Achievement Award for Companies, Organizations, and Institutions recognized Anadarko, Helix Energy Solutions, and Enterprise Product Partners for joint development of the Marco Polo Project, the deepest application of tension-leg platform technology in the world. Heritage Awards, marking the 60th anniversary of the offshore industry, were given to three individuals who have provided distinguished service and significant contributions to the development of offshore resources: Jon Gjedebo, founder of Hitec; John Huff, Chairman of the Board of Oceaneering International; and Owen Kratz, Executive Chairman of Helix Energy Solutions Group.

In the keynote address at the ceremony, Baker Hughes Chairman and Chief Executive Officer Chad Deaton called on the industry to become more proactive in confronting contemporary challenges. Although some of the challenges are geopolitical and economic, many are within the industry’s grasp to change. “As an industry, we can control our own destiny,” he said.

Perhaps the greatest challenge is satisfying global energy demand, which is having a positive impact on the livelihoods of people throughout the world. “The real question is where the supply will come from,” Deaton said, noting that depletion rates are running as high as 11% per year.

Chad Deaton, Chairman and Chief Executive Officer, Baker Hughes, gave the keynote speech at the Awards Luncheon.

A paradox exists in the world’s thirst for energy, Deaton said. The world needs energy for better lives, but the logical consequence of increased energy use is production of more greenhouse gases. The question the industry must face is will it be seen by the public as part of the solution or part of the problem. If part of the solution, Deaton said, the industry will attract more people and alleviate the projected staffing crunch. Becoming part of the solution will require contributing technology to address greenhouse-gas emissions, while promoting better public understanding of what the industry does and how it contributes to global economic growth and the improvements in people’s lives.

In general, Deaton said, the industry should be commended for investing in and developing new technologies, including state-of-the-art seismic capability, advanced drilling rigs, rotary-steerable systems, horizontal-completion equipment, and intelligent-well systems. However, the industry still is slow to adopt new technology. “It can take years for a new technology to move from the prototype stage to becoming fully commercial,” he said. “We are finally seeing widespread application of intelligent completions after 10 years.”

NOCs are becoming increasingly powerful and control three-quarters of the world’s reserves, Deaton said, and they are increasingly interested in working with the service sector to have access to the latest technology. But the industry must adapt its approach to meet the NOCs’ needs. “It must work in a completely transparent manner and must also be comfortable that its investments are protected.”

Marcos Assayag (right), Petrobras, was presented with the 2007 Distinguished Achievement Award for Individuals by Arnis Judzis, 2007 OTC Chairperson.

Eyeing New Realities

The first general session on 1 May was “The Petroleum Scene: New Realities Ahead?” Panelists discussed a wide range of issues, including resources, investments, and supplies; opportunities and potential constraints; the importance of the downstream to the market’s stability; the role of producer/consumer dialogue; and how the industry should handle new environmental realities.

Keynote speaker Fuad Al-Zayer, Head, Data Services Department, OPEC Secretariat, discussed the future geography of oil supply, noting that non-OPEC conventional crude supply is projected to increase to a plateau of 48 million B/D and begin a gradual decline from about 2020. However, nonconventional crude-oil and biofuels supply from these countries is expected to increase on a combined basis from approximately 2 million B/D in 2005 to more than 10 million B/D in 2030. Much of this will come from Canada’s oil sands.

“From OPEC’s perspective, the amount of crude oil that it is expected to supply increases markedly post-2010, rising to 38 million B/D by 2020 and 49 million B/D by 2030,” Al-Zayer said. “Thus, going forward, the new reality is that OPEC MCs [member countries] will be increasingly called upon to supply the incremental barrel.”

The range of anticipated demand scenarios is sizable, which translates into “a huge uncertainty” concerning OPEC upstream investment requirements. “The risks have heightened recently,” he added. “For example, recent policy initiatives that discriminate against oil, involving subsidies for competing fuels and higher tax rates, may see even lower demand for oil products in general, and for OPEC oil in particular….While OPEC has offered in the past, and will continue to offer in the future, adequate levels of spare capacity for the benefit of the world at large, it cannot be expected to invest in what to all intents and purposes is a backup security policy in case alternative-fuel policy initiatives fail to materialize.”

Attendees had the opportunity to visit exhibits of nearly 2,400 companies.

These themes were echoed by Sadek Boussena, former Algerian Minister of Energy and Mines and Professor of Economics, University of Grenoble, and Nimat Abu Al-Soof, Upstream Oil Industry Analyst, OPEC Secretariat.

“OPEC should certainly maintain the spare capacity, but I think that the weight will be very heavy,” Boussena said….“Could we ask if this final, single, spare—big spare—capacity is not the responsibility to be coshared with other interested parties?”

The consumer countries need to “appreciate security of demand and the importance of this in determining the levels of spare capacity,” Al-Soof said. “Spare capacity levels that are too high are a concern for producers, and when too low, they are a concern for consumers. A healthy balance is the best way forward.”

Providing a global economic outlook, Chevron Chief Economist Edgard Habib noted that an indispensable element in the current expansion is “the symbiotic relationship between China and the US that seems to animate world growth.” In this process, the US buys some 30% of China’s exports, and China uses these proceeds to help finance US debt and make significant purchases from Latin America and Africa. Said Habib, “China is in a trajectory of growth that is analogous to the Industrial Revolution, the ’50s in Japan, to the late 1800s in the US. This can go on for a while, even though it may have blips along the way.”

Despite current discussion that globalization may be faltering, Habib argued otherwise. “If you think of globalization in terms of trade, money, and information,” he said, “the only thing politics and nationalism can influence is trade, or perhaps actually trade negotiations.” Habib also expressed skepticism that a global climate-change agreement is reachable. “A global bargain on climate change is very difficult,” he said. “In my estimation it’s not going to happen. Kyoto by 2010, if applied, shaves 2 percentage points off of US GDP. Let’s assume trend growth is 3%. That takes the US to 1% growth. That’s a tremendous decline…. That is not going to be tolerated while China is growing at 11%.”

Adrian Lajous, President, Petrometrica, and Chairman of the Oxford Institute for Energy Studies, discussed important shifts occurring in the sourcing of US heavy-crude-oil imports. “Mexican and Venezuelan supplies are declining,” he said. “Canadian heavy crude will eventually flow to the Gulf Coast, all the way down here to Houston, once pipelines are redirected and expanded.” The US has traditionally held a preference for crude supplies from the Western Hemisphere, which is the source for half of US crude imports. If this hemispheric share is to continue, Lajous said, “exports from Canada and Venezuela must increase, given the expected growth of overall imports…. Although Venezuelan exports to US have been relatively stable, growing political risk and uncertainty with respect to true crude production in that country are affecting expectations.”

Economic as well as security factors are involved in the current sourcing of hemispheric heavy crudes, as large investments in deep-conversion capacity were made at certain US refineries to accommodate these crudes specifically. These steps have added value to low-quality, low-cost crude, and refiners would incur high costs to change their crude slates, Lajous said.

Discussing a global approach to energy security, Cornelia Meyer, Chairman and Vice President UK, The British Swiss Chamber of Commerce, said, “To be secure, consumers need adequate capacity, as well as diversity of supplies. Consumers and producers need transparency, predictability of regulatory regimes, and universally agreed, reliable data. Producers need to be able to adequately predict demand. The world needs security, as well as environmental and social sustainability. These are the truly global public goods of the 21st century. To achieve energy security, we need to think big, we need to work across countries and regions. We have to work across disciplines to find solutions for the various aspects of energy security. We are all stakeholders. We are all in this together, consumers, producers, investors, the rich, the poor, developed, and developing nations.”

Sandrine Dixson-Decleve, Executive Director, International Sustainable Energy Exchange, spoke on energy and sustainability. “Primary energy demand growth is projected to be approximately 50% by 2030,” she said. “And although many policy makers are discussing the option of renewable fuels, predictions are that with all of those different policy plans that are already in the making, or currently in place, we will only be at 35% of new renewable energies that will actually replace our energy demand.”

Discussing the climate-change issue, Dixson-Decleve said that the developed countries should not be the sole focus of global efforts to reduce greenhouse-gas emissions. While the greatest growth in CO2 emissions has occurred in the industrialized countries, she said, “We are seeing more and more growth coming from developing countries, where over three-quarters of the increase in global CO2 emissions between 2004 and 2030 will occur. And therefore it is those countries that should also be trying to work on solutions in the area of climate change.”

Fuad Al-Zayer, OPEC, addressed a General Session on the new realities emerging in the world petroleum industry.

Olivier Lazare, Shell, addressed a General Session on the evolving nature of collaboration between national and international oil companies and service companies.

A New Collaboration Model?

The second General Session on 2 May was “NOC/IOC/Service Companies: Revisiting the Collaboration Model?” Panelists discussed the changes and evolution in the traditional business model of NOC collaboration with IOCs and service companies in light of the growing imbalance of reserves between the NOCs and IOCs and the increased pressure to produce as anticipated demand outstrips supply growth.

Moderators Amy Jaffe, Wallace S. Wilson Fellow in Energy Studies at the James A. Baker III Institute for Public Policy, Rice University, and Mark Greene, Executive Partner, Accenture, set the stage for the discussion.

The challenge for the NOCs is to produce at a high-enough level to supply the world’s growing demand, Jaffe explained, citing International Energy Agency (IEA) projections of USD 2.2 trillion in new investment needed to meet this rise in demand by 2020–30. “Over the past 30 years, some 40% of the rise in supply came from within the OECD countries and was managed basically by the IOCs, she said. “As we look out over the next 30-year horizon, however, 90% of the new energy projection [will] come from transitioning or developing economies, and a lot of that production and investment will be made by the NOCs.” These companies, she noted, have wider responsibilities usually and somewhat different priorities than the IOCs and service companies, which focus on return to shareholders. The NOCs may have to redistribute oil wealth domestically, subsidize fuel, or foster economic and industrial development, and Baker Institute studies have shown that such responsibilities in some cases “made it more difficult for the NOCs to replace reserves and expand production or to operate businesses in a very-efficient manner,” Jaffe said.

Greene discussed a study of the IOCs by Accenture. “The IOCs will need to be continually able to differentiate themselves from the competition,” Greene said. “And that competition is not just themselves anymore. It is both themselves and the NOCs.” The IOCs, he said, “will need to adopt a more market and service-provider mindset, something more akin to a customer strategy…than an engineering strategy.” Dealmaking may need to be more creative. “An offer based on commercial and technical considerations alone is not going to be differentiating,” Greene said….“To steal a line from another speech some of you may know, ask not what the NOC can do for you, but what you can do for the NOC.”

Panelist Rod Clark, Chief Operating Officer, Baker Hughes, noted that past questions about NOC reservoir expertise, project management, and access to technology and to capital markets justified IOC/NOC relationships as they existed. Today, he said, “many of those gaps have been closed due to the…spectacular gains in capabilities and competencies of the NOCs.” With wider national objectives, compared with the IOCs and service companies, many NOCs “are in the business of value conversion of a nonrenewable resource into a renewable resource…to invest in the education and development of the population and to create economic viability and sustainable infrastructure for the people.”

While the top five IOCs have 13% of production and 9% of reserves worldwide, the same five companies account for 23% of capital spending, noted Jean-Marie Guillermou, Senior Vice President, E&P Operations, Total. This suggests that their projects have the biggest technology content. “For IOCs, opportunities increasingly mean cooperating with NOCs,” Guillermou said. He identified three different types of NOC: those concentrating on developing domestic reserves, those interested in securing international supplies to meet domestic demand, and those becoming increasingly international companies competing with IOCs. “The main asset of the IOC is the risk-management capabilities,” he said. “That is the core business of the IOCs.” Other key assets are technology and the capacity of integration, including managing discovery and development from the reservoir to production, processing gas and liquids, and operating a downstream business, Guillermou said.

Ali Al Jarwan, General Manager, Abu Dhabi Marine Operating Company, said, “NOCs are looking for a sustainable way of producing and exploring for these resources and being socially responsible, using capital really to protect the reserves. And this is not a contradiction for the IOC, as long as there is transparency. And in our case, they are our partner.”

According to Bernard Duroc-Danner, Chief Executive Officer, Weatherford, the change in the service companies’ relationship with NOCs and IOCs is easy to understand. “The reason there is a change is that the entire supply-chain system is strained,” he said…. “Strain in the system creates an entirely different set of objectives for both the NOC and the IOC.” For Weatherford, he noted, the new collaboration environment has meant not only developing a deeper knowledge of the NOCs’ organizations, but expansion in infrastructure and personnel. “We have to get involved in training; we have to get involved in academia; we have to get involved in the fabric of the societies to a far greater extent,” he said. Changes in the company’s IOC relationships have been narrower but have taken the same direction of cooperation and coordination. A key benefit of this, Duroc-Danner said, has been close IOC involvement to ensure the relevance of technology being developed.

Olivier Lazare, Vice President, New Business Development, Shell, cited IEA analysis showing that for every dollar invested in adding production, three dollars are needed to arrest the decline of existing fields. “The simple message of mine is that there is room for everybody, and we had better—all people across the value chain, across the industry—work together.” As NOCs in the Middle East begin to face issues such as secondary and tertiary recovery, IOCs and service companies can draw on extensive experience worldwide to assist these NOC producers, Lazare said. And with the shortage of skilled personnel industrywide, he added, the three sectors should work together to develop those skills in the workforce.

“NOCs were very limited in the past on developing their own technologies,” said Samir Passos Awad, Executive Manager, Americas, Africa and Eurasia, Petrobras. “They were very knowledgeable about their own capabilities in their own country, about the reserves, about the logistics, and how to operate in the culture. But they could not develop technology because the service company did it, the IOC would work it out, or they could all join together in a partnership.” This situation has changed for at least some NOCs, including Petrobras, which have repositioned themselves as international companies competing with the IOCs and have leveraged this into stronger technology assessment and know-how concerning technology use. “Petrobras has been developing its own technology,” Awad said….“Some of this technology can be shared with the IOCs and service companies.”

Syanga Abilio, Vice President, Sonangol, gave a very positive picture of IOC/NOC collaboration. “I think that the IOC will be always welcome, as they can bring expertise, share risk, bring a good training program for locals, and seek a cost-effective way to broaden reserves or fields. So as we experience those types of cooperation, all of those are welcome for us in our country.” With anticipated energy investment of more than USD 50 billion in Angola over the next decade, including gas-liquefaction development, Sonangol collaboration with IOCs is expected to continue, he said.

OTC expanded its exhibition for the first time into Reliant Stadium.

Hurricane Preparedness

In a session titled “Storm Warnings,” panelists examined how the industry is adapting to protect Gulf of Mexico operations from the devastating effects of hurricanes. While Hurricane Ivan destroyed a number of platforms in 2004, it was the effects of Hurricanes Katrina and Rita in 2005 that forced the oil and gas industry to contemplate new technology and guidelines that would ensure the location, performance, and quality of facilities. Half of the platforms destroyed in those storms were built before 1970, but approximately 20% of them were new and incorporated the most up-to-date technology, said panelist Frank Puskar, President, Energo Engineering.

The American Petroleum Institute formed a Hurricane Evaluation and Assessment Team to examine the impact those hurricanes had on offshore facilities. It recommended that operators raise platform decks and install stronger mooring systems to secure facilities to the seafloor, said panelist Pat O’Connor, Senior Advisor, BP America.

“The drivers behind the 2006–07 updated guidelines were … ‘monster’ wave-making storms, regional variability, limitations of early-storm characterization, and the need for better documentation of nonhurricane phenomena,” added panelist James Stear of Chevron.

The US Minerals Management Service (MMS) released a report in May on “Interim Guidelines for Tie-downs on OCS [outer-continental-shelf] Production Platforms for the 2007 Hurricane Season,” with information on securing rigs and equipment against hurricane conditions. “Overall, the industry is doing a good job in planning, response, and recovery,” said Alex Alvarado of the MMS Gulf of Mexico Region.

Last year’s quiet hurricane season gave offshore operators time to upgrade their platforms, but predictions call for an active storm season this year. In preparation for the hurricane season, “Operators have either lifted the deck or are lightening their load,” said Allen Verret, Executive Director of the Offshore Operators Committee, an industry trade association.