Slow pace to implement emerging innovations leading to missed or delayed opportunities to reduce costs, NPT
By Jerry Greenberg, contributing editor
Julio M. Quintana is president and CEO of TESCO Corp.
What are the challenges facing the service sector in the present business and economic climate?
As a whole, the oil and gas industry struggles to adopt technology at a fast pace, and as a result we spend years operating inefficiently, waiting for commodity prices to justify taking risks. Eventually we adopt the technology, but along the way we destroy its value.
For example, today a fracture stimulation technology revolution has taken place, which has led to a resource play global expansion. However, most of these technologies were available 10 years ago, but the drive was not there. The country suffered through unnecessarily excessive energy costs and the industry through less than optimal returns.
Is that primarily due to low commodity prices during the previous 10 years?
High commodity prices are the primary catalyst that encourages people to take a risk they otherwise would not normally take. Invariably, when we look back, we realize that we actually could have taken the risk 10 years earlier. We would have been better prepared and driven the change faster than just waiting for high commodity prices.
For example, we have developed a liner drilling system that is an off-take on casing while drilling but is aimed at deepwater, which has huge amounts of nonproductive time (NPT) and significant amounts of cost associated with salt, tar, high pressure, etc. Liner drilling could be a game changer.
The E&P sector should be pulling in the service sector, asking how we can facilitate the entry of this technology to solve these problems faster; instead, we find ourselves as the lone ranger pushing a rope uphill.
Is it because E&P companies know what to expect from the technology they are already using?
One component is the nature of our business. It is such a high-risk, high-capital cost and highly cyclical business that it leads industry professionals to become more conservative in their decision-making. Mostly engineers make these decisions, and they are ingrained to basically take no chances, to take no financial risk that is not perfectly quantifiable, and then they study it for years before they consider taking the risk.
As an industry, we do not realize just what these delays cost us. We know what an operational mistake costs, but we do not know how much money we lose from our lack of aggressiveness in pushing technology. Having spent my first 20 years in the industry on the E&P side at Unocal, we had an extensive R&D group that eventually disappeared. Their role was to come up with ideas, study our fields and go out into the industry and pull in technology. A lot of that is gone. You have R&D in some of the large multinationals of the world, but probably 80% of the E&P innovation investment is gone and was transferred to the service sector.
The service sector is incentivized differently; they are incentivized only to beat the competition. They develop just enough technology to have a tool that is more desirable than the competitor’s tool. The service sector is not incentivized to radically change; it is incentivized to incrementally change.
For a certain period of time, you will make money with some differentiation, maybe. But the E&P companies are very quick to make sure that there is competition. Someone else will come up with a tool and compete, and soon you lose that differentiation. In the long run, 90% of the value generated from the technology goes to the E&P companies.
Maybe that is how it should be because they are carrying most of the risk, but the point is that, because of that dynamic, service companies are not incentivized to hurry to make radical changes. I am incentivized to hurry to make incremental change to stay ahead of the competition. There are a few players that are trying to make radical changes, but it becomes this herculean task to try to make that happen.
Is the slow pace of adoption the service company’s fault or the operator’s fault?
It is more a result of operator attitude than service company attitude. The service company business model is to generate shareholder value by “living in the margin.” They can’t afford to think radically, because radical thinking is too expensive and takes too long. If it is going to take 10 years to bring a technology to market, then how many of those radical technologies can a company support?
Invariably, a service company starts to focus on what it needs to make its revenue and margin next year or next quarter. The E&P company does not realize the cost to their business by not pulling in that technology. The E&P customer pays for it one way or the other. It is a generally accepted rule today that 25% of all drilling costs are wasted in the form of nonproductive time. The question is, “Can the industry reduce this inefficiency to 10%?” Technology is the driver.
What solutions are being developed to reduce NPT?
As we move toward directional and horizontal wells, there is a need for solutions that lead to lower drilling costs that can also push a 7,000-ft lateral into a 12,000-ft lateral by being able to overcome torque and drag problems. There is a need for technologies that push the horizontal distances and do it in way that is cost-effective and yields a high-quality completion, meaning a high-quality cement job.
Because of wellbore instability problems, the E&P company, particularly in deepwater, can end up installing 10, 12, 14 strings of casing to get to the bottom. Invariably, the customer ends up with small casing, which can restrict production.
The thrust with casing while drilling and liner drilling is to eliminate strings of casing. Instead of installing six liners, we can do three or four liners because, with this technology, we are able to push the casing seats lower. One of our Latin American E&P customers helped fund testing of our liner drilling system. They spend $120 million per well drilling subsalt deepwater wells in Brazil, and they are convinced that if liner drilling works to eliminate one or two strings of casing, it will save them $10-$40 million per well.
Are you encountering the same lack of technology adoption internationally?
Over 60% of our total revenues come from international operations and an even larger percentage of our Casing Drilling revenue. We are beginning to get involved in Poland and Romania, where the operators are basically drilling source rock. I am not sure the industry understands the geological applications of these plays on a global scale, but I would say there is a fair amount of openness to looking at resource plays as a viable alternative for development around the world. You are seeing it in pockets in Argentina, Mexico, Poland and elsewhere; it will take hold.
E&P companies are chasing resource plays internationally because they don’t have the 5-Darcy Middle East rock available to them – even though such rocks are getting harder to find, even in the Middle East. If an operator is going after these tight rock plays, they are already telling themselves that technology is the only way to succeed. This creates a customer more open to what might be perceived as higher-risk technologies. That open attitude would tend to yield quicker value for the customer and drive our business faster.
Have you seen any political constraints internationally?
I would not expect the same political activism, for example, that we experience in the US. Here, mass media seems to skew reality. Internationally, the issue is more systemic difficulties in working through bureaucracy. In certain countries, unionized labor laws make the cost structure very high while bureaucracy associated with governmental agencies make it difficult in others. Every country has its own way of doing business. But in general, I think political issues tend to be more the domain of an E&P company than a service company.
Is it more difficult to work in the Gulf of Mexico since the Macondo blowout?
The speed of decision-making by the operator has slowed partly because of regulatory requirements. There is a troubling trend, which we have seen accelerate since Macondo. Operators have accelerated their efforts to pass risk on to the service sector, from well control risks to consequential risks associated with damaging the reservoirs. In the very short term, E&P companies might benefit. But in the long run, it will be like purchasing extended warranties on a new well-built car. The cost of these changes will be passed on to the operators in the form of increased cost.
Can you give a specific example?
Historically, the E&P company never asked the service sector to take on pollution risk. Today, some will ask for no-cap pollution risk. In that example, if a blowout occurs, the service company might be forced to cover the cost of repairing or replacing the rig and repairing the well. Our position on no-cap risk is clear; we are not risking all of TESCO to win service work. Unfortunately, some companies are willing to take the risk.
Are you seeing service companies, including yourself, raising costs to cover additional risk?
There are certain markets that get so aggressive that the service industry has drawn a line in the sand; it is a function of risk and reward. Generally speaking, I do not think it has become that explicit. It becomes more explicit on a macro level. You do your work, you look back a year later, and your margins are squeezed by five-percentage points as a result of taking on some of these risks. Service companies will respond to this increased risk by raising prices. Prices have been going up, but it’s difficult to say how much is associated with the risk.
It doesn’t seem long ago that E&P companies said that service costs are so high they can’t afford to drill a particular well. Do you think that could return?
There is no doubt that as long as activity levels remain high, the push for pricing will continue. Start adding additional risk into the service infrastructure, inflation will come that much sooner. My bet is that inflation cost of the E&P companies will offset whatever perceived risks they felt they were carrying.
What is the industry developing with regards to new technologies?
There is a whole movement toward automation of the drilling process, recognizing that the more we automate the drilling process, the more efficient we get. I think there is also a recognition that this concept of managed pressure drilling, figuring out ways to have more control over the bottomhole pressure, has real implications for drilling and production efficiency.
The goal is twofold: safety and drilling efficiency. Can we automate the drilling system enough to end up with a faster drilling process, faster tripping and faster pipe makeup? A lot of drilling rig efficiency in the last decade was more focused on small, compact, quick-moving rigs. We have done a great job with that. The focus now is on safety, efficient pipe handling and automatic management of drilling parameters.
Some of this technology shift has come from the offshore arena and is now migrating to land. A deepwater ship does not make up pipe very fast, but it is automated. Can we take some of those concepts and put them on a land rig to greatly speed up the drilling process? That is still to be proven, but I’m betting we will get there.
Another benefit to automation is modeling the drilling process and monitoring drilling parameters. For example, can we more dynamically manage weight on bit, RPM, pump pressure, etc? In some formations, you want to stack more weight on the bit, but in other formations you can take weight off and actually drill faster. We can model these variables, monitor performance and have a system that quickly adjusts whatever parameter is needed to try to always stay at the optimum rate of penetration.
Is there still a shortage of qualified people in the industry, and is it more prevalent on the operator side or the service company side?
There still is a shortage of qualified workers, but it is more of a North American issue than an international one. Generally, access to quality service personnel is better internationally than in North America. For us in the US, we are turning down work, particularly in tubular services, because we cannot find qualified people. I think it is because activity has developed in places with little population. Look at the places where development is taking place – South Texas, West Texas, Rocky Mountains – a lot of the rigs have moved to areas with small population centers so you have to convince a worker in Dallas, for example, to go rotate to Wyoming or South Texas.
If you believe the news, people seeking work are flocking to plays like Eagle Ford in South Texas or to Bakken in North Dakota or Marcellus in the eastern US.
That’s still not enough. We have a facility in Alice, Texas, to support our Eagle Ford operations. There is effectively 100% employment, and we still cannot find enough people. The employee base tends to be hourly workers who are happy to go to another company for an extra buck an hour. We try to focus on the long-term benefits of what we offer and the job satisfaction of being part of a very unique company.
Is the challenge finding “qualified” people, then?
I do not know that it is any different than 30 years ago. Maybe it’s a different work ethic, and this comment relates to North America, not necessarily the globe. Some may argue that our country has become a little bit too comfortable, and people are less likely to take on a sacrifice. The average kid today is just as intelligent and may be better educated than 30 years ago.
On the E&P side, we do have an issue. We have a huge population of older people leaving the sector, and the exodus continues. We have known that for a long time. Certainly geology, geophysics and petroleum engineering hasn’t been as attractive a career in the last 15 years as it was in the prior 15 years, so there is this gap that we are struggling with. But this is changing. More young men and women are taking notice and entering our industry.
People refer to the IT world generically as “tech,” as if technology was only invented with the computer. Yet, I challenge anyone to go see how we hit a 100-ft cube target three miles below the earth and three miles away. Go spend a day or two on a world-class deepwater operation, then tell me if our industry is not the most technologically advanced, forward-looking industry in the world. It is a great place to work.
The recent evolution of resource plays in the US is a great success story of innovation and capitalism. The benefit of this creativity is low energy cost for our children and grandchildren around the world. What a great success story.
Casing Drilling is a trademark of TESCO.