Project delays, re-bids fact of life, but substantial recovery coming in 2000
Despite strong commodity prices, the offshore petroleum industry still has a way to go before contracts and drilling begin reflecting product prices. Such is the consensus of Offshore's 1999-2000 Editorial Advisory Board. In individual state ments, written and verbal, board members report that companies are still feeling lasting effects from the downturn, but that recovery is on the way.
"Its timing and scale has been slow and timid. The recovery will strengthen before the summer (2000) and exit the year at an impressive growth rate," predicted Bernard J. Duroc-Danner, Chairman, President and CEO of Weatherford International.
Exploration seismic, which generally leads the business in chronological terms is experiencing one of the "worst downturns ever," exclaimed Gary Jones, President of Western Geophysical. "As ours is a cyclical industry, the upturn will undoubtedly come."
The following are key factors noted by board members that will affect the recovery in the the year 2000:
- Oil and gas producers are moving slowly in resuming exploration, drilling, and development, causing the service companies to continue to adjust plans.
- The natural gas market will remain strong and help drive the recovery in 2000.
- Project delays and re-bids will remain a fact of life for the coming months.
- Teamwork and technological innovation are keys to reducing costs and adding value.
- Service companies must continue to focus on reducing delivery costs, as well as managing efficiency and capacity.
- Consolidation in the drilling industry is highly desirable.
The following forecasts and statements from four members of the 1999-2000 Editorial Advisory Board elaborate on these summarized predictions.
Focusing on cost, innovation
Bernard J. Duroc-Danner
Chairman, President, CEO
Weatherford International
With their long-term perspectives, the major and national oil companies, which dominate the offshore domain, will react slowly to currently favorable prices for oil. Service and equipment companies, which exist two derivatives away from commodity prices, will continue to adjust.
Likewise, the laws of commodities will keep governing our existence. How?
- Prices decline in real terms over long periods of time, making cost reductions an existential priority.
- Intensity of commodity use is inversely related to wealth, making GNP trends in Asia/South America critical.
- Commodity capacity comes in scale increments, which drives cyclicality.
In the near term, the focus will continue on reducing organizational costs at the oil companies. Project delays and re-bids also will remain a fact of life, as exploration and production companies are absorbed in mergers attempting to redefine the economics of the business.
For service companies, the focus will be, and needs to remain, on reducing delivery costs. In this kind of environment, technological innovations become more, not less, important. They must, however, be focused and relevant. This requires effectively managing the innovation process to accelerate the evolutionary, advance the revolutionary, and deliver better reservoir recovery in general and deepwater capabilities in particular.
Much of the forthcoming technological improvements will be mechanical more than informational. Two areas where we will see major mechanical advances in the year ahead are in sand control and underbalanced drilling.
The development of expandable tubing technology applications has been successfully commercialized for sand control. These new products are true alternatives to gravel packs because they are capable of reducing costs 25-60%, improving flow rates and allowing easy access for remediation at later dates. The first horizontal installations have already been made.
Underbalanced drilling, once thought suitable only for shallow land drilling, is beginning to prove itself in offshore environments in the North Sea, Far East, and Latin America. Technological advances in rotating pressure control, compressible fluid, downhole modeling, data acquisition, and in the reduction in size and weight of surface packages are making these applications possible. The benefits are obvious and significant: faster rate of penetration, limited formation damage, and minimal costly fluid loss. Underbalanced technology also has been particularly successful for enhancing production in maturing reservoirs with flow rate improvements of four to six times conventionally drilled holes having been achieved.
Though notable individually, these are among a wave of continuing technological advances. We see technological change as a permanent trend in our industry.
As to the recovery, its timing and scale has been slow and timid. Looking at the capacity to demand ratios in hydrocarbons, together with accelerating decline rates and absent a collapse in worldwide GNP, the logic of a substantial increase in activity is compelling. The recovery will strengthen before the summer and exit the year at an impressive growth rate.
Improving the E&P process
Peter A. Goode
Vice President, General Manager
Schlumberger IPM
This time last year, we discussed teamwork and technology as two key elements that would define the future of the exploration and production industry. Let's look at one way this combination is encouraging innovation and leading to value creation.
Because of new technology, the industry has been able to reduce finding and producing costs, and increase reserve recovery. In the 1980s, the game-changing technology was 3D seismic. In the 1990s, it has been horizontal drilling.
In the next decade, the challenge will be to proactively adjust the well completion, through intelligent downhole devices to match the behavior of the reservoir, thereby allowing consistently higher recovery factors. Part is vision, but many of the tools already exist and are in use today.
We have the characterization methods to paint a detailed picture of the reservoir to predict production potential. In turn, this provides a basis for informed decision-making about well placement and well trajectories to tap the reservoir most efficiently. And, as we know, well placement options are extremely rich and varied.
The extended-reach option, well known from BP Amoco's Wytch Farm successes, allows the exploitation of reservoirs several km from the surface wellsite.
Another option is the use of multilateral wells, consisting of two or more branches, that can provide improved production flexibility and economic return compared to single, vertical wells. Novel methods are available to provide integrity at the difficult Y-junctions in the completion's hardware of these wells for reliability, even in unconsolidated formations.
Completing this revolution is precise steering of wells to access economically viable oil and gas deposits. However good the reservoir image may be, fine-tuning of the well trajectory is necessary during drilling. The latest directional, logging, and measurement sensors at the drill bit guide the process toward the most productive parts of the pay.
However, such improvements are not sufficient for complete reservoir optimization. Once production begins, the reservoir often behaves unexpectedly. This means that intervention is required, which in complex geometry wells, particularly subsea wells, becomes prohibitively expensive or even impossible.
So, how do we eliminate, or at least mitigate, the need for surface well intervention? Success depends on building into the completion one or more reliable valves that can open or shut off production downhole using simple electrical or hydraulic commands from the surface. This is the first step of an intelligent completion. Today, technology is rapidly advancing beyond the simple opening and closing of valves, as illustrated by this example.
The Troll Field in the Norwegian North Sea is the largest offshore gas field in the world, with a thin oil accumulation below the gas reservoir. The oil sand has an associated gas cap above it, and a water zone below. Economic oil production from the subsea wells requires minimal gas production, but can accommodate water pro duction. Traditional well construction and completion technologies cannot develop the 40-foot thick layer of oil economically, so a unique approach was adopted by the asset team.
Horizontal, extended-reach wellbores were drilled close to the aquifer, as far from the gas cap as possible, and an intelligent gas-lift system was installed to assist well production. Hydraulically operated, surface-controlled valves provide variable injection gas volumes on demand. The gas is drawn from the gas zone, depleting it in line with production and avoiding gas-cap expansion and mitigating coning. The gas is then produced into the tubing to help lift the oil, thereby accelerating production. No gas compression equipment is required at the surface, reducing cost, but more importantly, improving ultimate recovery, perhaps by as much as 5%.
Whether or not remote valves are needed for innovative applications such as this one, or whether simply for opening and closing multilateral well branches, the long-term goal remains proactive reservoir management. This means anticipating and controlling reservoir fluids before they reach the completion, preferably in real time. Recent experiments have suggested that manipulation of valves in the completion of a given well can control the even advancement of fluid fronts in the reservoir.
Early experiments using resistivity arrays have demonstrated that water accumulations can be observed remotely, and 30 years ago, long electrical arrays indicated that careful modeling could be used to identify events far from a given wellbore. Last year, deep-monitoring experiments began in a small oil field in the Midwestern US using a new type of downhole permanent monitoring device attached to the outside of the well's casing.
The sweep of water being injected from the well is now being monitored, and its' observed progress matches model predictions. When the sweep is observed from a neighboring - and similarly instrumented - well near the end of the year, a large-scale, real-life proof of concept will have been completed. The pieces of the puzzle are at our fingertips:
- Precision drilling techniques to put the well where we want it
- Remotely controlled downhole valves to protect the well and to promote better reservoir exploitation
- Sensors that monitor both fluid flow into a given wellbore and fluid movements remote from the well.
Technology is now a given. Teamwork is employing that technology in ways that benefit the industry as a whole. Innovation is the result, with the added benefit of value creation. I firmly believe that reservoir management will move to the next level within just a few years.
Stability will nurture seismic services
Gary Jones
President
Western Geophysical
The seismic industry is currently under siege in the most difficult period since the downturn of the 1980s, and perhaps the worst downturn ever. As ours is a cyclical industry, the upturn will undoubtedly come. But the current economic environment is exacting a tremendous toll on the seismic industry's ability to plan research and development programs, support ongoing proprietary and non-exclusive projects, and provide satisfactory returns to the shareholders.
As a result of OPEC production controls and other market factors, oil and gas commodity prices have recovered to a more comfortable level. However, while oil companies have been able to improve their financial picture, we have yet to see these gains translated into exploration and production budgets that can effectively support a healthy service industry.
Just as oil companies seek a comfort zone for oil and gas prices, the seismic industry needs a comfort zone for its products and services. Otherwise, we will always be alternating between over-capacity and shortages and between downsizing and recruiting. Due to excessive new building during the last ramp-up, the market is currently experiencing over-capacity and low pricing.
This pricing situation is extremely serious. Service companies are providing high-value services at low-dollar prices, and in the long term nobody wins. If the major service companies are to continue to provide the research, technology development, and operational expertise that clients require, then we must be able to operate in a financially viable environment.
Downturns, such as the one we're now experiencing, impact both the oil companies and service companies. As our destinies are inextricably linked, we must find solutions that are mutually supportive. The service companies should better manage efficiency and capacity through both the up and down periods of the business cycle. This will lead to pricing levels that sustain the service industry's research and operations, which ultimately ensures the oil companies' success. As a colleague of mine once put it: "we're all in the same leaky boat together."
Seismic technology offers significant value-adding opportunities for the oil and gas companies now and in the years to come. "Reservoir management of the future will depend on geophysics," said Gustavo Inciarte of Petroleos de Venezuela, the retiring president of the Society of Petroleum Engineers (SPE) recently. Inciarte's statement is remarkable since just 10 years ago, most reservoir engineers did not even think of geophysics as a component in their tool kit. As we progress towards active reservoir management through geosteered re-entry drilling, intelligent completions, and downhole oil/water separation, seismic imaging is the technology that will serve as the guiding light.
The application of new technologies such as seismic-while-drilling (SWD) and time-lapse (4-D) seismic for reservoir monitoring are extensions of our continuing success in the exploration phase. Recent advances, such as depth imaging and AVO (amplitude variation with offset) processing, have helped oil and gas companies make major discoveries in deepwater frontier areas as well as find sweet spots in mature fields. Enhancements to seismic acquisition will also provide better seismic illumination of the subsurface and aid imaging processes in the future.
The seismic industry can build towards this promising future, providing we sustain our resources through the present downturn. The success of the oil and gas industry depends on teamwork. Under business conditions that foster the wellbeing of all the team members, the service companies will be in a position to reward clients with lower exploration and production (E&P) costs and higher production - but only if we can achieve acceptable rates of return for our shareholders.
Current state, outlook for 2000
Paul B. Loyd, Jr.
Chairman & CEO
R&B Falcon Corporation
During the first half of 1999, the offshore drilling industry continued to experience the steep decline in utilization that began in the spring of 1998. The causes are certainly well documented - the dramatic fall in the price of crude and consolidation among the majors caused a significant reduction in oil companies' work programs.
Accordingly, drilling activity dropped from essentially full-fleet utilization of about 440 rigs working in the first quarter of 1998, to less than 325 by mid-1999. Profitability plummeted as contractors tried to maximize utilization by dramatically cutting rates. The rig count stabilized at this level for several months and has increased to about 340 rigs at present, a utilization rate of 72%.
A substantial part of this increase is due to improved utilization of jackup rigs in the Gulf of Mexico. This brings me to one of the trends we see unfolding - continuing improvement in the domestic natural gas sector. The significant decrease in drilling activity and accelerating depletion rates coupled with continuing increased demand, largely from additional gas fired power plants, suggesting that natural gas fundamentals will remain strong and could possibly result in a sustained pricing shift to the $3/Mcf level in 2000.
Approximately 80% of the drilling in the Gulf of Mexico is for gas, and our data show improvement in shallow water rig utilization from a low in April 1999 of 71 units, to essentially full utilization of a marketed supply of about 105 rigs today. This utilization improvement has resulted in daily rates increasing from a level of $2,000 below direct operating costs to rates being set today that provide about $7,000 per day cash flow.
Although the industry still has about 25 shallow water rigs "cold stacked" in the Gulf of Mexico, we are optimistic that the rate of increase in drilling activity will hold, resulting in these units returning to work in an improving day rate environment. One caveat is the potential for movement of jackup rigs from foreign markets, but our estimates show only approximately ten additional high-specification units would be likely to mobilize over the four or five now committed to move in. Barring a highly unlikely collapse in the gas price this winter, we believe jackup rates could return to very attractive 1997 levels during late 2000, with obvious positive profitability implications for companies such as ours with significant leverage to domestic gas drilling.
Another trend we have seen developing in very recent months is significant tightening in the ultra-deepwater market, which we define as water depths greater than 7,000 ft. In the 1996 time frame, oil companies made a significant commitment to this sector to access large reserves that could make a substantial contribution to reserve replacement.
As a fleet of rigs was never built to drill safely and efficiently in waters up to 10,000 ft, operators committed to long-term contracts with drilling contractors to supply the new class of vessels required - mainly large, dynamically positioned drillships. Of the 31 additional rigs ordered for this sector, only three were built on speculation. With the oil price collapse and merger activity resulting in slashed budgets, oil companies seemed virtually desperate to farm out their contracted rigs to other operators, even before the units were delivered. We have recently seen a reversal of this desire - clearly the operators are no longer willing to let their rigs go for any extended period of time, say one or two years.
They are willing to entertain farmouts for short periods, one to three wells, but will not subsidize rates in the process. We believe that oil companies now see oil price fundamentals as good or better as when they initially committed to these rigs, and they are ready to get on with their business of making the big discoveries necessary for reserve replacement. We are optimistic that the stronger oil price fundamentals will eventually improve the shallower deepwater market, but this sector remains weak relative to the ultra deepwater.
A final trend I would like to mention is that of consolidation. Although the drilling industry has consolidated to some degree, we are far behind other oil service and product suppliers. I believe further consolidation in the drilling industry is highly desirable in order to change the fundamental structure of the business, which should help reduce the dramatic volatility in earnings we have seen in previous cycles.
Paul B. Loyd, Jr. serves as Chairman and CEO of R&B Falcon Corporation. R&B Falcon Corporation was the result of the 1997 merger of Reading & Bates Corporation and Falcon Drilling, Inc. and the subsequent acquisition of Cliffs Drilling Company in late 1998. R&B Falcon operates a fleet of 135 marine drilling rigs. Loyd serves on the Board of two public companies, Carrizo Oil & Gas, Inc. and Frontier Oil Corporation, and has spent over 28 years in the offshore drilling industry, working extensively in international theaters. Loyd graduated from Southern Methodist University with BSBA in economics and received his MBA from the Harvard Graduate School of Business.
