At the close of the old millennium (2000) and approach of the new millennium (2001), the global economy is strained. First World developed countries are operating at capacity, and Third World undeveloped nations are struggling to re-work dysfunctional economies. Oil supply and demand are in balance, but the economic engines are tired and throttling back to regroup.
Thus, demand will slacken and moderate mid-$30/bbl oil prices downward into the high to mid-$20/bbl price range. This is good for both sides: solid prices for oil company activities, acceptable prices for consumers. Moderation, however, is a short-term phenomenon.
The longer term view is for continued rising world oil demand. Finding and developing new and replacement reserves will require major new investment from outside the industry. Even with high oil prices, the industry (and that includes many of the largest producers) will not be able to fund projects strictly on internal cash flows. New stock or debt issues will be used to support major projects.
Unlike moderating crude oil prices, winter product demand (and prices) for heating oil and natural gas will remain high because there is no short-term way to increase the supply of either fuel. Rationing of industrial supplies to support household heating could moderate industrial growth until the end of first quarter 2001.
Going forward into the new millennium, the emphasis will be on responsible use of hydrocarbons. "Greenness" will be required of all industries, especially fossil fuel producers. The political class has designated carbon dioxide as the culprit of all the world's ills and will attempt to legislate it away - to ultimate failure.
No Third World developing economy will sacrifice its growing energy usage (for a growing economy) to satisfy a perceived First World problem without major concessions to transfer wealth into Third World economic developments.
Next year (2001) is shaping up as a banner deepwater drilling year. Currently, rig utilization is up over 1999 and should remain high throughout 2001. As world economies regroup, capital will shift into the oil industry to spur the finding and development of new oil and gas fields. This will spark a new round of capital equipment spending (needed for several years) and draw more people into the service side of the industry.
The industry will not be able to fully ramp up because of two primary constraints: equipment and people. Equipment deliveries are already being hurt by longer delays and lack of storage of spares. When primary fabrication and manufacturing is required, more time also will be needed because there are few trained machinists and industrial mechanics to speed up production. Even manufacturing is beginning to reflect many of the problems in other petroleum business sectors.
Boats, materials, specialty equipment, and crews all need to expand as the search for new oil and gas reserves intensifies. Attracting new people to the oil and gas industry is becoming a major challenge that could defy attractive salaries and benefits. In general, recruits and educational institutions are shying away from cyclical hiring situations where salaries lack the dramatic upside that competing businesses can offer.
With people constraints, the trend of computerization and multi-tasking of individuals will continue and intensify. Mergers may continue, but the wholesale release of experienced people will slow as companies try to fill project positions. Barring the recruitment of experienced people, companies will bid salaries up or turn to outsourcing to fill their project teams - perhaps without real satisfaction this time around.
Service firms can expect to grow in this area because oil companies will have more projects than they can handle with existing staff. Most producers will have to outsource for staff or forego profitable projects. With money flowing into the industry again and replacement production beginning to fall off, few companies are likely to postpone projects too long.
The people problem is systemic. Though the industry is entering a growth phase, its base of professionals is dwindling. The age of the average professional is in the 46-47 range. These people will be considering (or forced into) early retirement within the next 5-7 years. Without a change of policy in fairly short order, the industry will lose its "brains" very soon.
With regard to the technology component in the next millennium, surface production processes will gradually be moved to the seabed. Separation technology, dual-gradient drilling, and cuttings handling have all made substantial progress and are ready for routine use. AUVs (autonomous underwater vehicles) will increase in number, size, and capacity as the industry develops fields in water depths beyond 5,000 ft. Here, where specialists require 7-10 years to train, the shortage of engineers and technologists will be even more acute.
Reservoir monitoring and control will increase in importance. New digital "nervous" systems for wells and long-lived sensors will be extended into deepwater wells to create intelligent oil fields. This technology is driven by high upfront project costs and the need to tie daily production into company's integrated cash flow models.
It will be critical in some of the larger drilling and development projects to assure the financial community that routine daily problems can be identified, managed, and remedied with a minimum of unscheduled non-productive time.
Seismic reprocessing of shallow 2D and 3D surveys for deeper targets will be a growth industry in the coming year. This is especially true for the Gulf of Mexico, once the MMS approves a deep-drilling royalty relief program for the GOM Shelf. This new program will be based on its successful deepwater royalty relief program, which spurred deepwater exploration over the past 10 years.
Pore pressure prediction from seismic will be another growing need as shelf-based drillers attempt to emulate the success of their deepwater-driller brethren. The improved success rate (fewer dry holes) in deepwater has set a new standard for the offshore industry to maintain. Better seismic is critical to achieving this goal.
Which leads the industry to new high-density proprietary 3D surveys. The problem of geophysical transfer fees will not go away. Seismic survey control is the primary issue. Non-exclusive surveys are owned by the acquisition company - not the oil company that licenses the data. All derivative products of the non-exclusive surveys are an extension of the original seismic data and are subject to future licensing problems.
To overcome this issue, the oil companies will have to shoot proprietary 3D seismic once their discovery well opens a new field. Time-lapse 3D surveys (4D) have proven their worth, but there are problems normalizing datasets. Gathering a high-density proprietary 3D survey prior to field development will solve many problems:
- The company will own the data outright.
- The survey will be a tight baseline dataset for full earth model development of the field.
- A multi-year, multi-survey contract with an acquisition company will create the survey consistency needed for reservoir production tracking and will control long-term development costs.
- Partners can come or go in the project as long as the operator maintains a single earth model for tracking project development.
- All proprietary data can be linked to the earth model without future legal problems.
Millennial oil company: efficiently using all forms of capital
With all the constraints and potentials of the new year, what will oil and gas producing entities be like in the new millennium? Certainly, they will be an efficient and effective users of capital and significant profit generators. The markets will demand it. The millennial oil company will:
- Optimize intellectual capital in a different corporate structure. The entity will be smaller in administration, though its capital base will be large and its projects scattered across the world. It will have fewer people, but its people will be more tightly linked with computer and information technologies. It will have a "cloud" of professional help outsourced on a project basis because such sourcing lowers the company's overhead. Software resources will not be owned, but "rented," so that updating and maintenance costs are minimized.
- Optimize monetary capital. It will be high-tech and project optimized. Prospect portfolios will be optimized to risk tolerance levels set by the governing board. Existing assets will be constantly valued and available for sale. The institution will constantly seek properties that fit its profit targets and strategic plan.
- Optimize operational capital. It will own fewer assets, but those assets will produce more profit for the company. Its fields will have optimized processes and procedures to keep extraordinary expenses at a minimum. Equipment tracking technology will schedule repair/replacement of worn units, so that downtime is controlled and fewer unscheduled events occur.
- Diversify away from fossil fuels. It will have a spectrum of energy sources to choose from and to distribute to its customers. Hedging strategies will allow the company to sell its production forward to maximize profit and minimize risk in turbulent price environments. It will be "green" and promote itself as the societal good that it is. It will be proactive, not reactionary.
When will this company appear? Pieces of it already exist, but no one company has yet put all the pieces together. The majors are working toward it, but continue to struggle with legacy systems and internal turf battles. Agility must be added to size in the land of energy.
What is required is a clean break with the past - a totally new approach to the business of energy. The millennial oil company most likely is in someone's head. It may evolve from a small- to medium-size independent with a record of successful technology implementation, or it may spring forth as a new player.
All the needed technologies exist today. What is required is the vision and will to rally around a new paradigm of the oil business to produce - the millennial energy company.