MANAGEMENT & ECONOMICS
Oil price volatility, consolidation, workforce demographics
Robert F. Heinemann
Mario Andretti has been quoted as saying, "If things are under control, then you're just not going fast enough." This certainly rings true with most people in the upstream petroleum industry where business is changing like never before and where no one can expect the change to slow down.
There are several factors driving the change we are experiencing. Most influential among these are the volatility of oil prices, the need to improve investment returns, industry consolidation, the pace of technological change, and workforce demographics.
Historically, the price of oil has set the mood within the industry. At this writing, prices were about $30/bbl for crude and $6.00/MMcf for gas, but the mood is at best cautiously optimistic. Some are predicting a steep price decline later this year. Many companies continue to assess project economics using low crude price assumptions, remembering the rapid price changes over the past 15 years and slowing the pace of deepwater development.
Investors are demanding that energy companies improve their financial performance regardless of price. Consider a group of companies consisting of General Electric, Cisco, and Microsoft, and another group made up of ExxonMobil, British Petroleum, and Royal Dutch Shell.
At the end of 2000, the market capitalization of the first group was about twice that of the energy group, although the earnings from the energy group will be almost one-third higher for 2000. If, as Peter Lynch reminds us, "earnings drive the market," then one must conclude all earnings are not created equal, or at least the market is skeptical about the prospect of sustained high prices in their evaluations.
The drive to improve returns has motivated, at least in part, the era of mergers that the industry is currently experiencing. The mergers have been extremely well received, even when the larger resultant company has a dominant market share of a product or service. The reception is again driven by the need for cost reduction and better capital utilization.
Optimization at the portfolio, regional, asset, and even operational levels can enhance capital efficiency. These opportunities must be captured in deepwater, where we all know development costs are high, and reservoir and project execution risks are significant.
The need to improve efficiency has also impacted the industry's investment in technology. From 1987 to 1997, the U.S. Department of Energy estimated that R&D spending by operating companies was reduced by about $1 billion. Of course, 1997 signaled the beginning of the mega-mergers of oil companies where overlap in technology spending is always stated as one of the most likely sources of overlap between merging companies.
At the last SPE meeting, speculation was that another $500 million of R&D investment had been eliminated, leaving the total now in the neighborhood of $2 billion. The need to improve efficiency and return from this investment is changing the way companies work together to develop and deliver new technology.
Capital intensive technologies like those needed in the deepwater are being jointly pursued by oil company and service company collaborations. Technological advances will continue to have a significant impact in the development of deepwater assets:
- Reservoir management: Breakthroughs in fundamental geophysics will enable the seismic discrimination of oil, gas, and water. The risks surrounding reservoir performance will drive improvements in 4D seismic imaging as well as the integration of these advances with reservoir simulation. This will allow operators to have an ongoing visualization of the performance of these assets and enable real-time reservoir management decisions.
- Fewer wells/reservoir: In today's deep-water, development plans call for the use of fewer wells in the exploitation of the reservoir. These wells must produce at higher rates, using advanced construction technology. We believe this portends the use of expandable casings, multilateral wellbores, and intelligent completions with infrequent and low-cost interventions. At some point, both the computer and telecommunication will move into the wellbore, along with fluid processing to facilitate smart wells that transport only hydrocarbons to the surface.
- Composite materials: Contributing to the goal of reducing the size of the development and production platform or vessel will be the use of new, strong, reliable, and lightweight composite materials that can handle the rigors of a deepwater environment.
- Wellbore information: State-of-the-art wellbore information technologies for system control, telemetry, and real-time communication enable oil companies to make rapid decisions in real time from either the drilling location or remotely. It requires less space and weight, can reach further into the reservoir and uses fewer people to operate than conventional drilling systems.
- Smaller fields: In any basin in the world, the field size distribution indicates that there are more small fields to develop than large ones. While large reservoirs motivate developments in the ultra-deepwater, 3,000 ft of water depth still presents challenges for the development of smaller fields. The use of extended tiebacks, minimal facilities and remote operations will continue to receive considerable attention in these situations.
- Flow assurance: Technologies will be developed that predict conditions for the formation of hydrates and waxes. Both chemical and mechanical technologies will be developed to alleviate potential flow assurance problems without intervention.
- Semis vs. spars: As water depths inc-rease, the decision over the type of platform to be deployed becomes more important. A debate has begun over selection of semisubmersibles, versus spar platforms. The spar has become the preferred production platform for deepwater operators because they facilitate the use of surface trees and have had a good history of design and delivery. However, studies have shown that in depths of 6,000 ft, the net present value of a medium-to-large drilling production semi is usually equal to or better than a comparable drilling production spar. Since semis are relatively insensitive to increasing water depths, they do not incur the technical issues and costs involved with deploying spars in deeper water. Two major deployments of semis - one by Shell, and one by BP and ExxonMobil - have set the stage for a shift in the industry mindset toward a serious look at semis as a deepwater option to a spar.
- Reducing cycle time: The execution of deepwater projects also faces the challenge of reducing cycle time. Cycle time can be reduced using parallel, engineering activities (for example, Halliburton developed a fast track semisubmersible solution called FastDeep, which separates drilling from production and performs them simultaneously). Using this system, leased vessels pre-drill some of the wells and install the wet trees while the production platform is being built, a solution that could accelerate a schedule to peak production by a year for a billion-dollar field development.
The most interesting challenge facing the industry today is the people issue. After the hiring boom of the early 1980s, the industry experienced a decade and a half of downsizing. Over one million jobs have been eliminated during this time. The technical workforce currently numbers about 650,000 employees, and the trend is continuing downward.
Some are predicting that the workforce could shrink to as low as 100,000 by 2020 (see Ref.). Demographics from the professional societies directionally support this prediction. The data from the AAPG indicate the average of their members is 49 years of age with a tight distribution around the average due to minimal hiring during the downsizing era.
SEG data indicates 40% of their members are over 50, 75% are over 40, and only 11% are under 35. The aging of the workforce is steady, evidenced by the two-year increase in the average age of the SPE membership to 47 years of age, from 1996 to 1999. Today, a "young" worker is 43 and an "old" worker is 55. Given the increasing number of workers who are retiring at 55, the industry could easily lose over 50% of its most experienced workers by 2007.
The implications of this situation are quite important. Organization models within the industry will be impacted. The traditional vertically integrated structures have already giving way to more collaborative team-based organizations over the past few years.
Now, as intellectual capital becomes tighter and as companies want to use the "best and brightest" on their assets, organizations will become virtually integrated and highly collaborative. Organizational focus will be on enhancing asset value, real-time decisions, and core competence, regardless of its source or ownership. Accelerated training and development of new workers will become important in an effort to avoid the costly and potentially hazardous decisions arising from inexperience.
Certainly, much of the necessary advance in productivity within the industry will continue to come from information technology. Impressive leaps will occur in communications. Today, 10 gigabytes of information can be transferred in about 15 hours over a T1 link. This transmission time will be reduced to less than 100 microseconds by 2007.
Computational increases will also continue and at lower costs. Today, computers costing about $1,000 can perform 108 calculations per second. In his book, The Age of Spiritual Machines, Ray Kurzweil makes a plausible case that by, computer speed will increase to 1032 calculations per second.
Kurzweil goes on to speculate that combined with increased storage, this type of machine at an equivalent cost will have capability roughly equivalent to the human brain. These staggering advances will enable the increases in productivity that the industry needs for growth even as the technical workforce shrinks.
The next generation of workers will be trained using decision-based tools analogous to flight simulators. Web-based software will allow companies to locate, consult, and utilize experts anywhere in the world and make global collaboration a reality. Ultimately, an entirely new infrastructure will be developed by companies to take advantage of this power while addressing their productivity needs.
As we move into the next century, we will not be limited by technological ideas and vision and certainly not by computational and communication capability. Our limitation is more likely to be a curious mixture of experience, learned principles, values, and contextual information.
Knowledge and the ability to apply it in real time will be the performance differentiator for companies in the oil and gas industry. Coming back to Mario Andretti's challenge, knowledge will enable the winning companies to make the critical decisions that "keep things under control" in this industry with its ever-accelerating change.
Robert F. Heinemann is the Chief Technology Officer for the Halliburton Company.
Gibson, J., "Knowledge Management and New IT Architecture Will Maximize Upstream Value Creation," World Energy, Vol.3 No.2, 2000
Kurzweil, R., "The Age of Spiritual Machines," Penguin Books, New York, 1999.