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Rising costs take center stage at opening-day plenary session

Posted on 05 March 2008

For service companies, personnel represent 25% to 30% of total revenue but 50% of total costs. Consider the fact that the average number of employees at Schlumberger has risen from about 51,000 in 2003 to an estimated 78,000 in 2007. If subcontractors are included, that numbers grows to just under 99,000. Then consider that the average cost for a field engineer’s first-year training runs about $148,000. And that, given attrition, a company must train about 1.2 people for any given position. Additionally, consider that a new Schlumberger training facility in Abu Dhabi, for example, will cost more than $200 million when it’s completed. It’s not hard to see why service costs have risen. 

One trend the industry is starting to see is operations support centers (OSCs), which allow experts to make real-time drilling decisions from remote locations. Schlumberger already has 45 internal OSCs and 11 customer centers, Mr Coates said. Industry will see more and more of these centers because there simply aren’t enough people to service all the rigs coming on-line, and companies must leverage their experienced personnel.

Stuart Ferguson, senior vice president and chief technology officer of Weatherford International, pointed out the difficulty service companies face in aligning technology with customer needs in a cyclical industry – a product development cycle is much longer than the short up-cycles the industry has seen historically. Now, the industry is in a prolonged up-cycle, and activity levels are increasing the frequency and consequences of unplanned events. “Technology will be the key to minimizing unplanned events,” he said. 

However, in a time of rising commodity prices, the cost of failure for new technology is more than just the cost of deployment. This has led to difficulty in setting up field trials, he noted. The strain on experienced personnel also means there’s less time available for new technology training.

But the industry must recognize the potential for added efficiency in giving employees new technologies to perform old tasks, Mr Ferguson said. He cited the implementation of production automation and optimization software and of compact wireline through drillpipe as examples where technology has succeeded in driving down costs. 

Speaking from an operator’s perspective, Kevin Cary, Chevron general manager – global deepwater and complex wells, said operating costs have increased significantly since 2005 and are impacting operators’ ability to develop many projects. Offshore rigs account for the biggest increase, he said.

On the other hand, faulty equipment and inexperienced personnel have led to value loss. He cited one $400 million-plus project where equipment and personnel caused AFE to be over-expended by 51%. In another project, rig/vendor downtime made up 39.6% of nonproductive time on a single $240 million well, while weather/operator NPT only added 2.6% more. 

Mr Cary also pointed out that a significant portion of the 50 biggest deepwater fields in the Gulf of Mexico are 200 million bbl or less. As reservoirs get smaller and wells get more complex, reliability and costs will become more critical. The industry, he said, needs:

  • • Simplification of equipment and processes.
  • • Standardization – global standards need to be developed.
  • • Communication – early involvement by service providers.
  • • Training – to make sure that people don’t negatively influence projects.
  • • Accountability – companies must make sure that the people they’re sending into the field are true professionals who know what they’re doing.

Shifting the focus to North American land drilling, Kevin Neveu, Precision Drilling CEO, noted that there’s been a 208% increase in dayrates from 1999-2007. Labor costs, which is one of the largest components of expenses in the servicing business, have increased by 50% to 140%, depending on market. That alone may not justify the increase in dayrates, but have drilling contractors delivered value for that price increase? He reviewed for indicators – people development, safety, reinvestment and drilling performance. 

  • New people. About 27,000 new employees have been added, a 261% increase, to 1,345 more rigs since 1999. Training these new workers and accounting for the learning curve to get them productive and safe has been “a tough challenge for drilling contractors, and I think they’ve done a great job,” Mr Neveu said.
  • Safety. Recordable incident rates for land rigs in the US in the late 1990s was running around 14 – “abysmally high” – but that has continued to trend downwards even in times of high dayrates. 
  • Reinvestment. While not many new rigs were built between 1984-1999, rig building has increased significantly since 2005 –  $1.5 billion was invested in 2005, $4.5 billion in 2006 and $3.5 billion in 2007. That’s $8.5 billion in new rigs alone, Mr Neveu said, let alone reinvestments put back into the rigs with refurbishments, upgrades, larger-capacity mud pumps, etc.
  • Drilling performance. This may be harder to measure in numbers, he said, but upgrades that make rigs more mobile, with integrated top drives, AC control systems and larger mud pumps, are clearly delivering better well-by-well performance.

 

Michael Holly, executive vice president of business consulting firm The Highland Group, discussed the current state of complexity in the drilling industry. Drawing from examples in the rail, pharmaceuticals and nursing industries, Mr Holly cautioned against information overload by using too many KPIs (key performance indicators) or metrics or collecting too much data. Gulf of Mexico operations supervisors are showing that pattern – most spend the majority of their time on administrative tasks (such as filling out paperwork) and little time on active supervision. “We must get some of that complexity out of that environment,” Mr Holly said.

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