Cost savings, experience are drivers
Brian Maxted, Vice President of Exploration for Triton Energy, said the key to making the most of the current market conditions is to convince management to take a long-range view of the business. When prices fall, it is too easy for companies to focus on the short-term outlook. By putting the emphasis on cutting costs instead of increasing revenue, these companies lock themselves into a downward spiral of diminishing returns.
Triton and other turnkey operators try to conserve cash in the short term, but Maxted said his company sees the low day rates for rigs and low service prices as an opportunity to discharge some of its existing commitments. The key is to make the most out of the fact that these valuable resources are currently available, and available at a lower price.
Maxted gave the example of a Triton project in West Africa. He said the well costs were $14 million for this project 6-9 months ago. This was more exposure than Triton was willing to face and at the time the company was interested in farming out the property. As the oil price dropped, operators began canceling projects and the day rates on rigs as well as other services dropped. In this particular case, the drop in costs was so dramatic that Triton was able to pursue it alone. "Because the rig rate has halved, we have effectively achieved the farm-out objectives within our budget for financial exposure," he said.
Access and pricesIn this way, the low oil price has allowed Triton to pursue projects that would otherwise be pushed out of their program due to budget constraints. The issue is not just the lower cost of these rigs, equipment, and services, but the availability as well. In the West Africa example Maxted said it has been a challenge over the last few years to secure rigs and equipment at any price. With the current downturn in activity Triton can gain access to this equipment quickly and at a lower price.
This lower price and high availability of equipment has allowed Triton to pursue more projects at a lower cost. In addition, there are a number of operators with rigs under long-term contract that are seeing gaps open up in drilling programs. As projects are cancelled, Maxted said Triton is in discussion with companies interested in farming out these rigs to cover gaps in drilling programs. Triton can take advantage of these gaps to secure rigs for short-term, low-cost contracts.
Maxted said the key for his company is to take a counter-cyclical approach to the downturn. By spending more money while most companies are cutting E&P budgets, Triton can take advantage of lower prices and high rig availability to drill wells cheaper. In addition, when the market does turn around, Triton will have the ready capacity to increase its output.
Other opportunitiesAs far as new turnkey contracts, Triton has not seen an increase in the efforts by contractors looking for business. There are tremendous opportunities out there to leverage operational capabilities and access values in other ways than traditional turnkeys. Maxted gave the example of a contractor taking a payment in kind or receiving equity value in blocks. The keys are creativity and pro-activity, seeking opportunities and receiving payment in a non-traditional form.
The longer the downturn lasts, the faster and steeper the upturn, Maxted said. "In a year's time, it may cost us twice as much to do this work, so let's get it out of the way," he said.
Jon Marshall, Chief Operating Officer of Global Marine and former head of Applied Drilling Technology (the company's turnkey subsidiary), said his company has not seen a dramatic increase in the number of turnkey contracts signed since the price of oil dropped.
He said turnkey activity was stimulated during the recent boom period as a method for operators to secure rigs and services needed to drill their wells. Now that the oil price has fallen, the turnkey market benefits from its experience and expertise to drill wells cheaper. Marshall said he sees turnkey operations as a form of risk management for the operator. In times of tight economic margins, oil companies look to turnkeys to provide a method to control capital costs.
As operators respond to the downturn in oil prices with layoffs, more and more of the responsibility for drilling wells will be taken up by turnkey companies. Even when these workers are eventually hired back, presumably when oil prices regain strength, there will be a gap in experience that will have hidden costs for operators.
The company focuses on experience, rather than degrees, in selecting rig personnel. Marshall said it is difficult to keep degreed engineers on rigs for the long term. The crews on these rigs have as much as 40 years experience and are a key asset of the company. To protect this asset, Marshall said he would not lay off his drilling foremen.
When times are tough and crew reductions are necessary, Marshall said ADTI has a "bump-back" method that lays off workers at the bottom of the experience tree. Other rig workers are then "bumped back" one pay level. ADTI gives these workers a six-month grace period before the pay cut. Marshall said this policy has been very successful in helping ADTI retain experienced workers. It also allows the company some flexibility in a cyclical market.
Marshall said he does not believe the current downturn will continue past three years, but it will take at least six months for a recovery in oil prices to be reflected in increased drilling activities and higher day rates for rigs. In the meantime, turnkey drilling offers operators a method for risk management.
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