Rig contractors urged to make improvements during upturn


Sam Fletcher
OGJ Online


HOUSTON, Mar. 13�The future success of the oil and gas drilling industry �rests on our ability to change our cost structure and engage the best talents,� the chairman of the International Association of Drilling Contractors said here Tuesday.

Thomas P. Richards, president and CEO of Houston-based Grey Wolf Inc., said, �The upturn that we�ve been looking for is now in full swing. Oil prices are up by 31%. Natural gas prices are up over 170%. And rig utilization has risen by 91%.� He spoke Tuesday at a joint meeting of the IADC and the Houston chapter of the American Petroleum Institute.

�Many of us see this up cycle as another opportunity to build cash reserves to weather the next downturn,� said Richards. �But if that�s all we do, we may be missing the real opportunity.�

Drilling contractors now have the chance �to position ourselves to be the most efficient and profitable sector of the upstream oil and gas industry. Our long-term survival and our ability to attract people and capital depends upon recognizing that opportunity and correctly addressing three major challenges,� he said.

Those challenges include:

� Safety. �A poor safety record can put a company out of business more quickly than poor performance for an operator, poor relations with shareholders, or lagging technology,� Richards said.

Management must set the tone for safety programs by rewarding positive and penalizing negative performance, he said. The National Safety Council estimates that each fatal work injury costs $800,000 in lost wages, medical insurance and other costs. �The average cost of injuries that result in even only 1 day of lost time is $21,000,� Richards said.

� Personnel. �We have a real opportunity during this upturn to hire the next generation of drillers,� said Richards. But contractors also must emphasize development of the next generation of managers to lead the industry, he said.

� Technology. With improved rig rates, drilling contractors can �generate high enough returns to invest in technologies that will forever reduce the costs of finding oil and gas,� he said.

�To weather the downturn, we�ve all worked smarter,� Richards said. �Because of improvements in technology, the comparative cost of finding oil has trended down from $8/bbl to $5/bbl over the past 15 years.�

Further refinements in technology can trigger similar savings and higher productivity, he said.

Meanwhile, Richards said, �The world�s oil fields are experiencing steep decline rates. And the improving economies of Southeast Asia and Latin America will further tighten supply.�

Analysts foresee a 2%/year increase in demand for oil and a 5%/year decline in production over the next 5 years, he noted. �Simple math tells us we will need to replace in excess of 26 million b/d of oil production by the end of 2005,� said Richards. �US gas consumption and production are in even closer lock-step.�

Like others in the industry, Richards doesn�t expect�or want�a large leap in oil and gas prices. But he does foresee an improved drilling market for the next few years based on the fundamentals of supply and demand.

Contact Sam Fletcher at Samf@OGJonline.com

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