The absurdity of risk aversion

Nov. 1, 2003
Wall Street is to blame. Somehow those big money players, who many suspect don't even understand the principal drivers of this industry, got the ear of the operating companies. Or maybe it's simpler than that.

Wall Street is to blame. Somehow those big money players, who many suspect don't even understand the principal drivers of this industry, got the ear of the operating companies. Or maybe it's simpler than that. Maybe the stakes just got too high. People expect a conservative attitude from the largest companies in the world. It's one thing for a Mom & Pop operation to gamble its future on new technology. If it goes bust, Junior doesn't get to go to college. If a major operator makes a bad call and damages or delays production on a billion-barrel deepwater field, the economic consequences move like a shockwave across the industry.

So as they grew, and consolidated, and grew again, the majors and supermajors had to be more and more responsible, more and more careful, more and more conservative. They no longer supported R&D internally, leaving this risky venture to the service sector. Service companies would come up with innovative technologies, develop them, prove them up and then try to sell them to the operators. If a technology didn't prove as valuable as first thought, then the service company would bear the brunt of the cost. On the other hand, if the technology was a success, the operator would have full access to it on a project basis.

3D and 4D seismic offer unprecedented intelligence on what is going on subsurface. Gradually, the unbearable risk of drilling dry hole after dry hole in the deepwater is reduced three fold. Reservoir management optimizes early production with an eye toward the future of a project. Production facilities are designed not only for the field that bears their name, but other fields likely to be found in the same area down the road. These subsea tiebacks spread the risk. If a major field plays out sooner than expected, others will come online to take up the slack, minimizing risk.

The oil companies have done a world-class job of identifying their core competencies and driving down the risk associated with finding and producing hydrocarbons.

The problem is that in the process, they have closed the door on a number of innovative technologies that could unlock the potential of deepwater faster and cheaper.

Granted, no one wants to take an untested kit and put it on the critical path of a billion-barrel giant. But there has to be a better balance if the industry is to ever give Wall Street the kind of returns that keep investors' interest.

Consider subsea separation, for example. The concept is absurdly obvious. When deepwater production facilities are running in the range of $1/lb, why would anyone pay to produce, process, and dispose of one more drop of water than is absolutely necessary? How many existing platforms could free up processing space if they suddenly didn't have to deal with the tons of water drawn from offshore wells each day? Additionally, wells last a lot longer if the pressure is maintained by reinjecting produced water. So, adding some basic seabed components miraculously converts a major negative to a positive.

Experts in this area of technology insist that the components involved are simple, robust, and modular. Even in the case of a complete failure, such a system could be easily bypassed. Any failed component could be replaced without a workover rig, and the system brought back online without interrupting production.

In defense of the oil industry, it is clear this technology will be adopted eventually. Two advanced pilot programs are in place and performing well. The problem is that these are pilots. It's a safe bet that when this technology is applied, it will be used on smaller or older fields where a total failure would not impact the operator in a major way.

The big question is, "How much money could have been saved, and how much additional production would have been brought online if a supermajor had implemented this technology across the board on a large, high-profile project?"

Big returns come from big risks. It may be too much to expect giant, multinational companies to roll the dice on technology without an exhaustive series of field tests and pilot programs, but the delays that are associated with these programs force other, less elegant solutions in front of a company's most valuable resources.

When a supermajor steps back and applies the latest innovations to all of its world-class projects, it will see the kind of return on investment that makes Wall Street listen to the energy industry, rather than the other way around.

William Furlow