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Will The Petroleum Industry ActuallyChange How It Works?

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One of t$e 'ost dangerous p$rases in t$e in&est'ent business is; <$is ti'e is

different= We are wondering w$et$er t$at p$rase $as 'eaning for t$e petroleu'

industry as it struggles to deal wit$ t$e collapse in global oil prices #n interesting

e>c$ange we were part of on t$e Oilproco' website was about t$e price decline Onewriter 'entioned t$at few people recogni(e t$at t$e current industry fall is less a

collapse and 'ore a reflection of t$e industry co'ing down fro' an e>tended boo' #s

s$own in t$e track of futures prices since 1!?@) current oil prices in t$e AB%-a-barrel

range are essentially back to le&els e>perienced in 2%% #t t$at price) oil is trading at

slig$tly 'ore t$an twice t$e le&el it was during 'ost of t$e early years of t$is century

7ut) at AB% a barrel) current prices are about t$ree ti'es t$e le&el t$ey traded at during

'uc$ of t$e 1!!%s $e response fro' t$e industry is t$at we need a $ig$er oil price

because t$e cost of finding and de&eloping new reser&es $as increased) especially in

due to t$e re&olution in uncon&entional oil and gas resources

Dtili(ing oil price data fro' 7P plc E7P-/FG) we decided to e>a'ine $ow oil prices

'o&ed following t$e pre&ious 'ost significant boo' 3 t$e 1!%s Conditions during

t$at period were dri&en by structural c$anges in t$e industry t$at predated t$e

e>plosion in oil prices but set-up t$e industry for t$at e>plosion $e decline in do'estic

output 'ade #'erica &ulnerable to outside forces 'anipulating t$e oil 'arket W$en oil

prices e>ploded) an industry boo' was kicked off) alt$oug$ t$e D and global

of 8Will The Petroleum Industry Actually Change How It Works? - il!ro

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econo'ies saw oil de'and fall $e de'and drop was 'issed by petroleu' industry

planners) 'anagers and analysts $e 1!%s boo') w$ic$ lasted se&en years) was

followed by a fi&e-year bust w$ose full i'pact was not o&erco'e for anot$er $alf

decade $e 1!?% oil price peak was 2 M ti'es $ig$er t$an t$e oil price base establis$ed

o&er t$e 1!?%s and 1!!%s

,t is interesting t$at t$e 1!? a&erage oil price beca'e a floor despite a brief e>cursion

below t$at floor during t$e 1!!-1!!? #sian currency crisis #s t$e worlds econo'y

reco&ered and en*oyed t$e ebullient econo'ic and stock 'arket en&iron'ent

associated wit$ t$e dot co' bubble) oil prices cli'bed back to a le&el twice t$e 2%-year

floor price le&el #s >$ibit s$ows) t$e oil price) after declining during t$e 2%%1

recession) began cli'bing and t$en e>ploded $ig$er in response to t$e dra'atic 2%%4

global oil de'and increase) w$ic$ was dri&en by C$inese consu'ption as it prepared for

$osting t$e upco'ing Oly'pics

$e 1!%s boo' and bust produced 'any co'plaints about t$e $ig$ cost of oilfield

eNuip'ent and ser&ices t$at dro&e finding and de&elop'ent costs up sNuee(ing t$e

operating 'argins of t$e oil and gas producers 7eating down ser&ice costs was t$e

initial reaction of producers) but w$en oi l prices collapsed in 1!?) e&eryone but energy

consu'ers suffered Cost pressures in t$e energy sector forced producers to reconsider

$ow t$ey operated $e 'ost significant c$ange e'erging fro' t$at re-e>a'ination

was 6oyal Iutc$ $ells E6I#-/FG <Irilling in t$e !%s= progra' $ell and ot$ers

wanted t$e ser&ice industry to consolidate Ea strange focus since t$ey $ad successfully

used co'petition fro' start-ups) often sponsored by petroleu' co'panies) to beat

down prices during t$e boo'G so one co'pany could offer 'ore products and ser&ices

at lower costs "or t$ose ser&ice co'panies wit$ li'ited offerings) t$ey were forced to

often align wit$ ot$er ser&ice co'panies to be able to bid t$e full range of products and

ser&ices t$e oil and gas co'panies reNuired in t$eir bid docu'ents

,n t$e case of contract drillers) $ells approac$ called for t$e' to secure t$e drill bits)

drilling fluids and directional drilling ser&ices needed to successfully drill wells Iuring a

late 1!?%s conference of t$e ,nternational #ssociation of Irilling Contractors E,#ICG at

w$ic$ we were speaking) t$e progra' 'orp$ed into a discussion of t$e Irilling in t$e

!%s progra' #fter 'uc$ back-and-fort$ discussion) we re'e'ber one crusty West

e>as driller speaking up and saying t$at t$e industry $ad always been doing t$is 3 it

was called turn-key drilling $e drilling contractor was responsible for c$oosing t$e

best drill bits and drilling fluids in order to drill wells because $e was responsible for

deli&ering a co'peted well to t$e producer for a fi>ed cost #ll t$e risk of drilling was

Page % of 8Will The Petroleum Industry Actually Change How It Works? - il!ro

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assu'ed by t$e contractor in contrast to day rate drilling in w$ic$ t$e producer

assu'es all t$e risk and pays a contractor by t$e day to use $is drilling crew and rig

ince 'ost of t$e drilling industry $ad gotten away fro' turnkey work) w$ic$ reNuires

t$at t$e contractor be $ig$ly confident in $is understanding of t$e geological

for'ations $e would be drilling into) t$is co''ent ended t$e discussion of t$e $ell

plan

$roug$out t$e 1!!%s and 2%%%s) e&ery ti'e t$e industry suffered a price and acti&ity

downturn) producers decried t$e $ig$ cost of oilfield products and ser&ices $oseco''ents were besides t$e fact t$at tec$nological i'pro&e'ents in t$e business were

contributing to reduced drilling costs 3 usually in t$e for' of greater footage per rig per

day

,n >$ibit B we s$ow t$e 7P oil price data fro' 1!!% to now) using a AB%-a-barrel price

for 2%1 We would note t$at 7Ps oil price is an a&erage for eac$ year 'eaning we dont

see t$e A14-a-barrel price spike in 2%% $at said t$e current oil price essentially'atc$es t$e a&erage of t$e 2%%?-2%%! decline during t$e financial crisis $e AB% price

is back to a le&el e>perienced in 2%% as we were $eading toward t$at 2%% spike ,f AB%

is a new floor) it is 4> t$e 2%-year floor ,t is i'portant to note t$at if we 'easure t$e

current oil price decline fro' t$e peak D futures price on .une 2%) 2%14) of A1%2B a

barrel) a % reduction suggests a floor of A@B@ a barrel Oil prices in t$is downturn

$a&e traded at t$at le&el and lower) but prices $a&e rebounded in recent weeks as

confidence wit$in co''odity 'arkets $as grown t$at D oil s$ale production is about

to fall leading to a future eli'ination of t$e worlds glut

Our Nuestion of <,s 4> enoug$0= raises t$e issue of $ow $ig$ oil prices 'ust be to sustain

current production and e&entually grow it Iisco&ering t$at 'ysterious price le&el $as

been t$e Nuest of analysts and forecasters e&er since audi #rabia orc$estrated an

agree'ent a'ong t$e 'e'bers of t$e Organi(ation of Petroleu' >porting CountriesEOPCG to sustain t$eir $ig$ output ustained $ig$ output $as created t$e global oil

glut) w$ic$ will only be corrected by less output andor greater consu'ption OPC

percei&es lower prices as t$e 'edicine to create bot$ outco'es) and despite t$e

financial pain) 'ost producers are c$eering for t$ose forces to work) and soon5

#lt$oug$ producers can do little about co''odity prices ot$er t$an take ad&antage of

upward blips to $edge future production) pro&iding t$e' greater financial fle>ibility and

cas$ flow &isibility) t$ey can and are attacking t$eir cost structures :ost readers of t$e

:usings are aware of &arious efforts by producers to force oilfield ser&ice co'panies to

roll back t$eir prices and for eNuip'ent co'panies to drop t$eir sales prices $is is t$e


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traditional producerser&ice co'pany ying and yang t$at occurs at e&ery industry

turning point W$at 'ay pro&e 'ore c$allenging t$is ti'e is producers belief t$at oil

prices will stay lower for longer ,t 'eans structural c$anges beco'e 'ore i'portant

t$an te'porary price rollbacks

W$ile producers are calling for furt$er ser&ice cost relief) are t$ey doing 'uc$ to $elp0

,n contrast to past downturns) t$ere is a recognition t$at energy co'panies need to

strea'line t$eir business operations since t$ey cannot assu'e e&er-$ig$er co''odity

prices will bail t$e' out :any producer actions in recent years $a&e been in responseto strategic business decisions >a'ples include ConocoP$illips ECOP-/FG decision

to split off t$e co'panys downstrea' refining businessQ >>on:obils EKO:-/FG

purc$ase of KO nergy and t$en allowing t$at unit to absorb >>ons s$ale drilling

operations and continue to operate as a separate co'panyQ and 7Ps reorgani(ation of

its ons$ore D operations into a separate unit operating outside of t$e e>isting

corporate structure

ac$ 'o&e) and t$ose of ot$er producers) was done in response to percei&ed structural

s$ortco'ings in t$eir operations i'pacting t$eir financial perfor'ance ConocoP$illips

'o&e forced its e>ploration and production 'anagers to rationali(e t$eir assets

following a $istory of 'isti'ed asset purc$ases >>ons 'o&e was to co'pensate for

its planning groups failure to foresee t$e s$ale re&olution 7Ps restructuring $opes to

enable its ons$ore 9P business to 'i'ic t$e successes of independent producers

W$ile petroleu' corporations $a&e 'ade strategic 'o&es) t$ey are also working to

lower finding and de&elop'ent costs t$roug$ boosting t$eir operational producti&ity

&eryone w$o $as li&ed t$roug$ t$is boo' en&iron'ent allowed t$eir organi(ations to

beco'e bloated by adding staff) aggressi&ely bidding up salaries of new e'ployees t$at

puts upward pressure on t$e entire corporate salary structure) adding benefits and

building new corporate facilities o'e of t$ese splurges are being rectified t$roug$

layoffs and salary reductions $e 'ost powerful cost reductions will be to cut drilling)

pro*ect de&elop'ent and production costs in ways t$at are longer lasting t$an t$e

i''ediate benefits fro' cutting staff

$e i'pact of t$e industry boo' since t$e early 2%%%s is reflected in t$e ,H upstrea'

capital cost inde> t$at e>ploded fro' 11 in 2%% to 2@% in 8@ 2%1@ and $as essentiallyre'ained t$ere t$roug$ 2%14 $at cost e>plosion $as been particularly de&astating for

offs$ore pro*ects and ot$er long-ter' pro*ects suc$ as oil sands de&elop'ents and t$e

construction of L/+ e>port ter'inals $e cost proble's of 'any of t$ese pro*ects

reflect oil co'panies desires for co'plete control o&er pro*ects and treating eac$ of

t$e' as uniNue Dnfortunately) t$at approac$ re*ects standardi(ation in fa&or of

uniNueness &ery ti'e co'panies elect uniNueness) unless t$ere is a p$ysical necessity)

costs escalate :any in t$e industry Nuestion t$is approac$) but it appears we are seeing

early signs of re*ecting uniNueness in response to t$e need to cut costs

Page $ of 8Will The Petroleum Industry Actually Change How It Works? - il!ro




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$e 'ost recent e>a'ple of t$is new t$inking is C$e&ron Corporations ECVK-/FG

announce'ent t$at it will accept two bids fro' contractors for its pro*ects 3 one based

on C$e&rons specifications and t$e ot$er based on t$e ser&ice co'panys design ,n t$e

early 2%%%s) >>on:obil created a Iesign One) 7uild :any plan for its #ngola

deepwater de&elop'ent in 7lock 1 $e plan in&ol&ed building two tension leg

platfor's and fi&e of t$e worlds largest floating production) storage and offloading

&essels $e plans success broug$t t$e field into production earlier t$an e>pected and

wit$in budget $e progra' was recogni(ed wit$ an award fro' t$e Offs$ore

ec$nology Conference in 2%11 One wonders $ow e>tensi&e t$ese efforts are in t$e

industry today because deepwater costs continue to rise $ere are still 'any e>a'ples

of uniNueness do'inating standardi(ation

Wit$ t$e ad&ent of t$e 'anufacturing process of drilling and co'pleting s$ale wells) t$e

operating p$ilosop$y $as beco'e t$at e&ery well s$ould be t$e best well in t$e field

$at p$ilosop$y $as forced ret$inking all aspects of t$e work process We $a&e co&ered

so'e of t$ese successes in pre&ious articles) but t$is is an area for furt$er researc$ and

in&estigation How successful t$ese efforts are and $ow 'uc$ t$ey are e'braced will

s$ape t$e future of t$e petroleu' industry

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Terry O'Donnell ! "#d ago ! $eply ! i%e !

On top o t(is, I'd also say t(at t(e industry is particularly pressed to adapt )eo*politically aswell+

it( increasing demand or (ydrocar-ons on one (and and criticism o (ow we deliver it ont(e ot(er, I'd say t(e -all is very rarely dropped -y t(e industry at large+

William Edwards ! "#d ago ! $eply ! i%e ! #

Fine article, Allen+ .(e perspective t(at you provide mig(t -e instructive to t(ose w(ose world-egan in t(e t(e year #/// and w(o loo% at today's action as a radical transormation+ I agree

wit( t(e implied advice t(at wit(out identiying a reason or a step*unction (ig(er price levelt(e current price level is suspect+

TJ Dillingham ! "/d ago ! $eply ! i%e ! #

I you don't %now w(o 0ic(ael Porter is * you s(ould+ 0ore importantly * read t(e recentlyreleased 1arvard Business2Boston 3onsulting $eport on t(e win*win approac( or 454nconventional O&) and a greener environment+ .(oug( I agree t(at t(e transormation int(e last decade is no-le6 it's ar rom ade7uate+ Adjacent industries and mar%et sectors movee8ponentially aster * t(e e8cuses are wearing t(ing+

oo%, I get it * i'm O&) all t(e way6 -ut capital*intensive and (ig( ris% are not e8clusive toO&)+

.(e ocus is on oil price * -ut you're loo%ing at a lagging indicator+ 9ou don't (ave to -e anengineer to -e a systems t(in%er * so loo% at t(e contri-uting actors to t(e production+

Bottom line * t(e industry will (ave to c(ange+ .(e window o opportunity is coming to aclose, stop t(in%ing internally * get engaged wit( t(e call to educate t(e pu-lic in t(emisunderstandings concerning t(e oil and gas industry+

.(e lin% to t(e study is (ere: (ttp:22(-sw%+(-s+edu2item2;<#"+(tml

Paul Parsons ! "#d ago ! $eply ! i%e ! "

Interesting title considering t(at t(e industry (as gone t(roug( its most radical transormationever over t(e last decade ** tec(nologically, organi=ationally, geograp(ically and inancially+5ome o your (ips(ot criticisms o t(e industry just don't ma%e sense+

James Daidson ! >d ago ! $eply ! i%e ! "

I don t think any of the new or old oil exec s, will ta%e (eed o t(e -oom2-ust lessonst(at (istory clearly s(ows in t(e article a-ove+ (en t(e oil price goes up, t(ey will revert totype+++++ .(e voices across t(e oice ta-les in A-erdeen, will -e (eard saying, ?(ow muc(@,never mind, I need it, just get it? .(e companymen on t(e rigs will -e (eard saying, ? I %now itdoes not wor%? ?-ut t(e -oss in town says, we (ave to use it? .(e drilling superintendant, (ewill note (is o-jection in an email, t(at will reac( t(e urt(est parts o (is company+ 5ervicecompanies will ill t(eir poc%ets, men and women will -e in demand+ 5o -egins a small -utroutine part o t(e ne8t -oom, w(en it (appens+ 5adly at t(e moment we are wallowing in t(emire o (istory, telling eac( ot(er, ?its o%, we (ave -een t(roug( t(is -eore, good times arearound t(e corner, t(ey wont ma%e t(at mista%e again?

Ron Wilson ! Cd ago ! $eply ! i%e ! "

Dery well written article+ One o your last comments states t(at a p(ilosop(y coming out ot(e manuacturing process o s(ale development is t(at eac( new well is supposed to -e t(e-est well drilled in t(e ield+ I would c(ange t(at and say t(at t(e real p(ilosop(y is t(at eac(new well s(ould -e t(e c(eapest well in t(e ield+ I (ave seen muc( more eort and timespent on dropping t(e ?manuacturing ? cost o t(e well and less on ma%ing it moreproductive+ I you investigate t(e E4$ distri-ution in a large development you ind a 0Onormal distri-ution rom low to (ig(+ 4nortunately you can ind t(e same distri-ution in t(emulti well pads+ Our industry drills great wells ne8t to poor wells on t(e same pad, sometimes

Paul Ja!"son ! ""d ago ! $eply ! i%e

o, we are victims o our own success@ I t(in% not++++





OIP$O 5PON5O$5

nly a ew ((undred eet away, and we don't seem to care+ As long as t(e well cost is in lineit( projections+ Our pendulum (as swung rom t(e ?-est well? regardless t(e cost to ?anyell? as long as t(e cost is in line wit( estimate+ 31EAPE$ is not always -etter+ It is just

(eaper+

John C# $ilne ! "/d ago ! $eply ! i%e

Anot(er ine contri-ution+ 0y only complaint is t(at you include so muc( (istory and in suc(ine detail t(at it is diicult to add urt(er comment+ Nevert(eless t(is (as w(etted myappetite+ I (ave already commented to some incredulity t(at t(at t(e late ;/'s ?-oom? w(ic(led to t(e 0ajors over*stoc%ing on just a-out everyt(ing also led to some unoreseenpro-lems in t(e immature os(ore drilling mar%et wit( premature retirals and imaginative

diversiication+ 5ome o t(e e7uipment s(ortages encouraged some suppliers into anciule8pansion plans and t(e li-eral e8ploitation o e8pense accounts t(at would ma%e ?0admen?appear mundane+ .(ere (as -een a lot o (eat generated over t(e current recession -ut yourall encompassing summary puts it all into perspective+ .(ere (ave -een more successes t(anailures in our industry over t(e past ity years and t(ose w(o (ave learned rom t(e lessonso t(e various downturns will provide t(e resilience to re-ound to urt(er prosperity+

Ro%ert $athes ! >d ago ! $eply ! i%e

At eac( o t(ese downturns t(e industry always responds t(e same way: irst t(ey s7uee=e t(esuppliers, t(en t(ey s(ed personnel and only i t(e downturn lasts longer t(an t(e "# to "<mont(s w(ere t(e standard two responses stop -eing eective, t(at is w(en we see -iggerand more trascendental c(ange (appening: in t(e eig(ties, oil companies got rid o all t(eir in(ouse services and pus(ed t(em out to t(e service companies, later wit( ew e8ceptionst(ey dumped t(eir $&G allowing t(e -ig service companies li%e 5c(lum-erger and 1alli-urtonto pic% t(at up and -ecome a dominant orce+ In t(e late >/'s came t(e mergers to ma%eIO3's -ig enoug( to compete wit( t(e -ig NO3s rom OPE3+ Guring t(e s(ort downturns in>;*>< and #//<*> no major c(anges to t(e industry too% place+ .(is time we see t(e advent

o 5(ale and its ?ell 0anuacturing Process? and t(e c(anges t(at is -ringing to t(e industry+I geopolitics doesn't t(row a -ig spanner in t(e wor%s causing price spi%es, we could seeos(ore and deep water inally em-racing standardi=ation and colla-oration -etweencompetitors to ensure t(at t(ose assets get developed in a (ig(ly competitive commoditymar%et+ .(ere will -e mar%et orces controlling w(at (appens to t(e industry as everyproducer in t(e world all "C# o t(em will try to sell as muc( as t(ey can at t(e -est pricet(ey can get+ .(is will mean a paradigm c(ange or t(e industry: t(e end o t(e Era ounlimited and endless proits to enter t(e world o (ig(ly competitive players, li%e most ot(erindustries+ It will -e very interesting to see w(o survives t(is transition

&llen roo"s ! Cd ago ! $eply ! i%e

.(an%s or you comment $on+ 0ay-e my word c(oice was poor+ I did not say t(e c(eapestwell in t(e ield, -ut t(e -est, w(ic( to me and most o t(e people wit( w(om I (avediscussed t(is issue, it means t(e least costly in relation to t(e most E4$ and production+ Ionly cost was considered, i t mig(t lead to drilling only marginal areas o t(e ormation+ 9ourpoint is correct t(at ?31EAPE$ is not always -etter+?

estor an!he* ! #d ago ! $eply ! i%e

.(is time is dierent@ I do not -elieve t(at is t(e actual -ase case 7uestion+ Because, t(e oilindustry (as always -een t(e same independently o t(e oil price, it is a cycle process, startingor e8ploration, going t(roug( production, reining, and oil and products commerciali=ation+Every new project (as to demonstrate its economical success at any particularconceptuali=ation time, in order to -ecome a -usiness case or an oil production company+ Itis true, t(e cost o inding new reserves (as increased a lot, -ut, t(ere are a lot o mature giantoil reservoirs all over t(e world, wit( cumulative oil production -ellow H o its initial oil inplace+ .(ereore, w(at t(e variations in oil price really does, is to reduce investment in (ig( oilprice economically evaluate projects, and practically cancel new e8ploration ventures,unconventional oil, and en(ance oil recovery application in mature ields, -ecause o t(e poorvisuali=ation o some oil company managers+ I -elieve t(at oil companies s(ould ocus intoincrease oil production rom several very well %nown mature depleted oil reservoirs, wit(millions o -arrels o remaining oil in place at very well %nown locations, t(at only need t(euse o multidisciplinary integrated team tec(nology application approac( in order to identiypoorly drained regions, and opportunities to increase oil recovery wit( very low investment,only using ront end loading integrated teams reservoir reinterpretation to develop alternative

e8ploitation strategies using e8isting production*injection acilities+ .(at is w(at t(e w(olet(ing is a-out, ocus in w(at you got, and ma8imi=e %nown reservoirs oil reservesrecuperation economically+

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WillPetrol IndActually Change-Oilpro

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