OTC Focuses on Downturn-Led Innovation and the Bottom Line

Technical papers and panel presentations at this year’s Offshore Technology Conference (OTC) reflected the times, with a clear focus on doing things more efficiently and cheaply and how innovation and incremental improvements in technology can help.

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Technical papers and panel presentations at this year’s Offshore Technology Conference (OTC) reflected the times, with a clear focus on doing things more efficiently and cheaply and how innovation and incremental improvements in technology can help. The annual conference, held in early May in Houston, attracted just under 65,000 attendees from more than 100 countries. Below are highlights from this year’s conference. More extensive coverage can be found at www.spe.org/jpt.

Thinking Like Shale

One of the most important questions asked at this year’s conference was how deepwater projects can compete with shale developments. The answer, according to at least one executive, is for the deepwater sector to become more like the shale business.

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Roger Jenkins, chief executive officer (CEO) of independent producer Murphy Oil, said it is not necessarily about technology transfer. “It’s an attitude around needing to have continuous improvement, and that is what onshore has brought to the table,” he explained. “Every day, you have to improve and go faster.”

Jenkins stressed that more synergies are needed between these two arenas, not so much to benefit shale production, but to protect the investment viability of deep water, which he said needs higher margins of returns than shale due to the risk factor.

Murphy Oil is one of the few US independents that maintains a balanced portfolio of shale fields in North America and deepwater operations offshore southeast Asia and in the US Gulf of Mexico.

Jenkins said the company’s hybrid model has helped the “unconventional mindset” migrate into its deep­water operations. However, he pointed out a number of areas where this attitude has yet to take form. The list of shale sector attributes that need to cross over included: shorter production cycle times, a trend of lowering costs, greater field efficiencies, and the use of commonly available types of equipment.

There has been one critical area where both the unconventional and offshore sector have recently become similar: drilling times. Jenkins shared that benchmark offshore drilling times have improved from 8 days per 1,000 ft drilled a few years ago to just over 4 days per 1,000 ft today. “The percent of improvement that is taking place onshore, is taking place offshore as well,” he said.

Fresh off being awarded an exploratory block in the Mexican Gulf of Mexico late last year, Jenkins said Murphy Oil is just beginning to get back into deepwater work. He emphasized that it is time for others to do the same. Jenkins said operators should start by contracting more underutilized offshore rigs so they can take advantage of low day rates, but more importantly, so they can achieve new efficiencies. His point being that working more rigs while prices are depressed will help operators make better use of them when prices go up again.

Zinke Pushes for Review of Interior and Regulations

US Secretary of the Interior Ryan Zinke praised America’s resource potential and regulatory framework during a session at the conference and signed two secretarial orders.

Zinke pointed to the quality of regulation in the US. “The United States has the most stringent, toughest, best regulatory framework for safety and environment for extraction of our resources in the world. Undisputed.”

At the end of his speech, Zinke was joined on stage by a group of hardhat-clad workers to sign two secretarial orders. The first order directs the Bureau of Ocean Energy Management (BOEM) to develop a 5-year plan. In addition to ordering BOEM to quickly consider leases in the Outer Continental Shelf, it directs the bureau to work with the Department of Commerce’s National Marine Fisheries Service to consider requests for seismic surveys quickly.

The order also directs BOEM and the Bureau of Safety and Environmental Enforcement (BSEE) to review a host of other rules. “We’re going to look at everything. We have to look at infrastructure. How is it we extract wealth from our public lands in a meaningful, responsible way?”

Zinke added that the resources in North America put the US in a special position. “How do we incentivize American energy dominance?” he said, adding, “I choose my words carefully: dominance.”

“There’s a difference between energy independence and energy dominance,” he said. “We’re in a position to be dominant. If we, as a country, want to have national security, an economy which we all desperately need, then dominance is what America needs.”

The second order Zinke signed on stage created the position of counselor to the secretary for energy policy, which is designed to coordinate the Interior Department’s energy portfolio.

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US Secretary of the Interior Ryan Zinke signs secretarial orders on stage at the Offshore Technology Conference.

For Pemex, Partnerships and Profitability are Key

The new head of Mexican state oil company Pemex explained his plan to reverse the direction of the company’s financial and production situation.

Appointed a little more than a year ago, Pemex CEO Jose Gonzalez-Anaya told how the historic energy reforms of 2013 have freed his company to implement an “aggressive farmout strategy” with oil companies from around the world. The aim is to boost Mexico’s oil production from 1.95 million B/D to 2.2 million B/D by offering these firms a piece of the upside, something that was previously unconstitutional.

“That’s the way all the oil com­panies in the world do it—and that’s the way we’re going to do it,” Anaya said, noting that the first Pemex farm out to ­Australian-based BHP Billiton for a subsea field in the Gulf of Mexico had no other way of being developed.

“We could not finance it on our own, we don’t have the technology to do it on our own,” he added. “With our new partner we have the finances and the technology, and that’s the way we’re going to move forward.”

When asked about his plans for Mexico’s unconventional prospects, which are largely unexplored but thought to have significant potential, Anaya said that farm outs will also be used to get shale and tight-rock projects running.

In addition to farm outs, Pemex is looking at new types of contracting schemes for service companies to drill and perform other operations that will include risk- and profit-sharing terms, options also not allowed under the previous energy law.

Private Equity Firms Remain Cautious

On the face of it, the offshore oil business and private equity investors have needs that should bring them together.

“This is a business that needs money and there are people who have money; the world is awash in capital,” said Dan Pickering, chief investment officer for Tudor, Pickering & Holt, during a lunchtime speech. “There is room for an intersection if like-minded people can get together.”

The degree of intersection has been limited to date due to the differences between those doing  deepwater exploration and production (E&P) and those running investment funds that put up large sums of money to start businesses, do buyouts, or play a major role in project financing.

Private equity firms are looking for sure things, while Tudor Pickering estimates that only 15% of the offshore wells drilled produce enough to be commercial. Investors are looking for a return level that is higher than E&P operators generally get, want to be able to ensure that the companies they invest in follow a strategy compatible with their profit maximization target, and would like to see that return with a set time frame.

With oil prices in the USD 50/bbl range, there are tempting offshore projects, but even the best prospects will not generate the cash flow needed to pay for the project using more traditional financial options if that venture is not a major company.

Private equity companies have the money to invest. As of last fall, investment firms followed by Tudor Pickering were capable of raising USD 150 billion for energy investments.

“At the end of the day, someone will come up with a unique structure and ­figure out innovative ways to do this,” Pickering said.

There are examples of private equity money put to work in offshore exploration, such as Talos Energy, an independent with holdings in both the US and Mexican sides of the Gulf of Mexico. It was founded with backing from two big private equity firms, Apollo Global Management and Riverstone Holdings.

During a later panel discussion on offshore development, Tim Duncan, the founder and CEO of Talos, said that it is important to go into such a deal with an understanding of the realities of private equity financing. Those include being aware that the money invested plus a significant return is expected with a few years, which often requires selling the company or going public.

Risk-Based Cybersecurity Critical for Offshore Automation

Automation is playing an increasingly vital role in oil and gas operations, including offshore assets. Operating companies can use automated systems to augment and replace human effort in dangerous locations, increasing on-site safety. However, an expert said that automated systems bring additional vulnerabilities with potential safety impacts, thus requiring an updated risk-handling approach that allows companies to better understand these risks.

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At a presentation, John Jorgensen discussed the merits of risk-based security. Jorgensen is director of cybersecurity and software at the American Bureau of Shipping.

A risk-based approach is one where companies make a conscious effort to understand the variables that could affect assets, people, and outcomes. It involves a risk assessment that provides the basis for the prioritized application of cyber protective applications and measures.

When performing a risk assessment, Jorgensen said companies should determine which functions of an asset are mission-critical (essential to the operational performance of the asset), business-­critical (essential to the financial performance), and safety-critical. This requires an understanding of the collective requirements that link systems together into the process flows that provide input and output.

Managing assets in a risk-based security system requires a catalogue that examines the cyber complexity and business attributes of each asset along with relevant cybersecurity documentation. Jorgensen said some of the biggest vulnerabilities can be found in the interfaces between one system and another.

“We have to look very carefully to understand where those interfaces are so that we know what happens between the two,” he said.

“Performance monitoring that we put on individual systems is valuable, but that only tells us so much. We learn much more when we look at the interfaces between systems and then monitor the traffic that goes between and among systems as they operate.”

Risk-based security often involves the installation of automated systems that can interface with safety-critical manual systems. Jorgensen said these converged systems present new challenges for companies to consider beyond the basic priorities—confidentiality, integrity, and availability—associated with information technology (IT). He said that, in many cases, process control systems have confidentiality as a lower priority than an IT system.

Industry Not Yet Using Digital for Disruptive Change

The digital disruption is here, or is supposed to be. Panelists at a session discussing digital disruption related various ways the oil and gas industry is using digital technology and expects to be using it in the future. However, the panelists were largely unconvinced that the industry is thinking of how it can use the disruption in full to achieve a fundamental transformation.

Eric Abecassis, chief information officer (CIO) at Schlumberger, said that the industry has “the opportunity to rethink and take advantage of the digital transformation that is happening everywhere. And this is the opportunity not only to work on efficiency, but from making the work more efficient to transform the work itself. That, I think, is the challenge we have before us.”

The industrial revolution focused on how to amplify the human muscle through automation, and this has been extended by robotics. “My central vision is that what will be happening in the next few years is that we amplify the human brain,” Abecassis said. I think that machine learning and artificial intelligence will be the most disruptive of the technologies.”

Machines are now learning by themselves and can have an advantage over humans in some types of decision making because humans think by analogy, but a machine that gathers and processes information is free of that influence and may be able to find a more efficient solution, he said.

As an example of how Schlumberger is applying digital technology to transform the services it provides, Abecassis pointed to seismic surveying. Advanced computer capability and cloud computing are enabling the future development of seismic processing that will occur in close to real time while surveys are in progress.

Archana (Archie) Deskus, vice president and CIO at Baker Hughes, asked, “Are we using digital to digitize our companies or are we using digital to bring about a disruption in our companies and our industry?”

Digital, she said, is the main reason that more than half of the companies on the Fortune 500 have disappeared since 2000. Disruptive companies such as Uber, Netflix, Amazon, Apple, and Google have some common trends. “They create incredible value for individuals, enormous leaps in efficiency, they all have value chain vision, and in many cases they operate with minimal physical assets,” Deskus said.

Companies become disruptive by thinking about their end consumer and about whole businesses, new value that they can create in the market, she said, adding that she struggles to name companies in the oil industry that fit that description. Having started late as an industry, “we are doing lots of different things within our own organizations,” Deskus said, “but I don’t think they’ve become true disruptiveness yet.”

JPT Editors Trent Jacobs, Stephen Rassenfoss, Joel Parshall, Stephen Whitfield, and Adam Wilson contributed to this report.