Storm clouds gather

Last year, I commented on the "Impact of Capex Migration on Oil & Gas Services." The comments are still relevant.

Last year, I commented on the "Impact of Capex Migration on Oil & Gas Services." The comments are still relevant. The "frontiers," as we call them, are the same – large, complex offshore projects in deepwater or isolated areas, the vast Commonwealth of Independent States frontier, re-emerging projects in OPEC countries, and gas-to-market, perhaps the biggest industrial challenge now facing the global energy industry.

These frontiers require a transformed oil service contractor with a powerful tool kit. Engineering, procurement, installation, and commissioning competencies, excellent equipment, local content, and low cost are all key requirements. The environments are more extreme – deeper, shallower, colder, hotter – and frequently much more sensitive. Clients need contractors who can meet these challenges and meet them globally. The people challenge towers over all. The fundamental requirement of an oil and gas services contractor is a talented, trained, motivated, multinational workforce, with the correct balance between experience and potential, organized to be near clients, to provide local employment, and to assure a cost effective service.

This requires a lot of money from the "humble plumber." The risks are massive, and based on the results so far, the rewards are dismal. Oil and gas services contractors, already an endangered species, risk decimation, just when they are most needed. It is indeed difficult to make a case for continued contractor investment in the present risk/reward climate, but it is equally difficult to see how the frontier challenges can be met without it.

Other recent portents for the immediate oil services capex investment climate are not comforting. One concern is exploration, or rather the lack thereof. The oil price is high, and few major oil companies have recently improved their operating reserve replacement ratios. Exploration should be ramping up, but it's not. There are several reasons. Oil companies' perceptions of the future – principally regarding oil demand and the roles of Iraq and Russia in supply – may have much to do with it. But recent exploration failure rates are part of the story. One oil company executive told me that, with the possible exception of the Gulf of Mexico, the oil industry was still a long way from unlocking the secrets of most deepwater provinces. This may be positive in the medium term, but for now exploration drilling is weak. This is disturbing in itself, and the potential consequences for development over the next few years could be even more so.

Another concern – one which should imply increased activity – is the looming platform abandonment challenge, in the context of the cost reduction that declining fields clearly imply. The primary goal of the new lean and mean asset management teams is reservoir depletion at minimum cost. The facilities are almost an "inevitable evil." This is understandable, but from a marine contractor standpoint, platform removal is a significantly tougher and riskier challenge than original platform installation. To date, it is a challenge that has not been convincingly addressed, and for which contractors are not well organized. Some recent accidents are a reminder that it is time for oil companies and authorities to think seriously on how to remove these enormous facilities in a structured manner.

Thus the storm clouds that were already gathering over the oil and gas contracting industry have darkened somewhat. There can't be many industries where clients are so wealthy and contractors so poor. Of course, contractors already involved in loss-making projects are not being asked to complete anything they didn't sign up for. Clearly, we don't understand the risks, especially on frontier projects. (The platform abandonment challenge has the same ominous feel to it.) During the negotiation process, a contractor is quite likely to "get hooked on the challenge." Given half a chance, the contractor will accept more risk and less reward. But at the very least, oil companies have been willing accomplices. Now, I believe, they are genuinely concerned with the shrinking universe of healthy contractors.

Recently, an oil company boss, with a genuine desire to play his part in stopping the carnage, inquired if there was anything they could do to help the contractor. The contractor said, "On the next bid, award the contract immediately on the basis submitted. Then negotiate the extras. The winner's price will probably already be too low for the risks involved. If it's us, please don't give us a chance to dig ourselves a deeper hole." The oil company executive appeared almost touched by such innocence. Six months later however, they were still negotiating. The oil company's team would like the contractor to survive, of course. But there is a more important goal: the project budget, based on $12/bbl oil. They won't really miss us till we're gone.

Hugh O'Donnell

Hugh O'Donnell, a member of the Offshore Editorial Advisory Board, is group COO and managing director of Saipem. He holds primary and masters engineering degrees from U.C.G. Ireland. He started work with Brown & Root in 1974 in Indonesia and joined Micoperi, the Italian offshore contractor, in 1977. During his international career, he has worked extensively in Brazil, Italy, Africa, North Sea, the Middle East, and Southeast Asia. He joined Saipem in 1996.

This page reflects viewpoints on the political, economic, cultural, technological, and environmental issues that shape the future of the petroleum industry. Offshore Magazine invites you to share your thoughts. Email your Beyond the Horizon manuscript to William Furlow at

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