The huge influx of cash stemming from the spikes in commodity prices during 2004-05, coupled with diminished exploration results and the pressure to replace reserves, leaves oil and gas companies poised at the brink of another round of mergers and acquisitions.
After the dust settles, that will leave the surviving companies with an ever-growing cache of undrilled prospects and leads that already was burgeoning under the earlier rounds of M&A activity during the 1980s and 1990s.
At the same time, there persists a shortage of drilling rigs and other equipment available to tackle even the current portfolios. Demand for exploration services is beginning to outstrip the industry’s ability to supply those services. Couple that with an exploration service industry devastated by the busts of the past 2 decades and bloodied by years of low rates and dismal profits, and you have the ingredients for rising exploration service costs. It’s also the recipe for difficulty in business relationships.
The solution, say industry officials, is for operating companies and exploration service companies to establish long-term relationships.
“The optimum relationship [between operating and exploration service company] is one that is well-established and long-lasting,” says Prof. Terry K. Young, current president of the Society of Exploration Geophysicists and head of the geophysics department at the Colorado School of Mines in Boulder, Colo. “The two partners need to establish excellent communication, good rapport, and mutual respect.
“The people on both sides need to become so well-acquainted that they view themselves as working on the same team. Also, the business needs to be mutually rewarding for both sides to stay healthy financially-both in feast and in famine.”
Bahorich concurs: “Good communication, leading to an in-depth understanding of the goals and strategies of each company, will pay mutual benefits.”
Pilenko sees an optimal partnership between operating company and exploration service company as a sort of “mind meld.”
“As a service company, understanding our customer’s challenges and needs in detail is paramount to our ability to design, implement, and put into production the technology and service processes that can deliver an optimal solution.
“The most successful relationships require a long-term view, well-balanced risk-sharing, a clear definition of the ownership of the intellectual property that is potentially created by the partnership, and a good understanding of the business models of each partner.”
Pilenko maintains that the best way his company can add value for its customers is “to listen and allow what we hear to drive our research, discoveries, and innovations. This requires deep customer access throughout the organization and as close to the potential solution as possible. This level of customer intimacy drives real differentiation and ultimately improves the contribution that we can deliver to assist our customers in reaching their ambitions.”
What’s also needed is further recognition by operators of how much technology innovations have reduced their risks and concomitant costs, Pilenko contends.
“Today, despite the increasing geologic and geographical challenges of new prospects, our seismic innovations are continually lowering our customers’ risks and total costs by enhancing their ability to pinpoint ideal drilling locations and implement optimal reservoir development plans,” he says. “There is more to gain in increasing success rate and mitigating risk than in reducing costs of individual services.”
Jorge Machnizh, chief operating officer of Paradigm Geophysical, Houston, would like to see an improved use of the funded-development tool. This entails key customers funding the fast-track development of a vendor’s game-changing technology.
“Such a situation aligns both parties goals, focuses the development and delivery of a solution, and improves the pace of technology introduction and take-up in the industry.”
‘Brain drain’
Oil and gas companies also continue to struggle with the “brain drain”-the shrinking pool of qualified geoscientists and engineers who are critical to the future search for hydrocarbons.
The decimation of industry personnel ranks resulting from the downturns in the mid-1980s and late 1990s have left oil and gas companies squeezed for qualified professionals. More than 415,000 jobs were lost in US oil and gas exploration and production units alone during 1982-99.
The boom-and-bust cycles also have left their mark on the pool of future entrants into the industry, leaving petroleum engineering and geoscience enrollments in colleges and universities at depressed levels in recent years.
As a result, more than half of the workers in the business of oil and gas extraction in the US are between the ages of 35 and 54. And the ranks of younger explorationists aren’t filling up fast enough to fill the void. It isn’t too much of a stretch to say that no other major industry must contend with a need for so much productivity from such thinned ranks.
It all adds up to a growing need to rely on new technology to improve exploration success rates, reduce risks, improve efficiencies, and yield even more productivity from a diminished staff.
“Today, the key nontechnical challenge we face is a strain on the capacity required to meet growing worldwide demand and to stem reserve replacement concerns,” says Pilenko. “Within this challenge, everyone is aware that the most troubling limitation is an extreme shortage of qualified personnel. In the short term, I expect this will become increasingly restricting to our industry.”
“As we move forward and look to hiring the brightest minds, we must improve our ability, as an industry, to counter the impact generated from years of downturn in a cyclical business,” Pilenko adds. “There is a lot of competition for talent, and the pressure will continue to build up. It is not a problem that will solve itself with higher compensation. A number of factors must be addressed, including ethics, work environment, and lifestyle. Companies that focus on these issues can attract and retain the best talent.”
Young worries especially about the lack of support from industry for educating the future workforce.
“In relation to shortages in the workforce and our efforts to help solve this problem, I would be remiss if I did not comment that although the industry could see the shortage in human resources coming (the so-called ‘great crew change’), the industry generally has not made appropriate investment in higher education to help solve the problem,” he says. “With contraction in the number of operating companies and service companies through mergers and acquisitions, industry support for education has contracted, too.
“During profitable cycles in the energy business, it would be well for companies to invest in the colleges and universities to whom they turn when they are scrambling to replace an aging workforce.”
