Centralized structure provides resource sharing, expedites company learning

A GLOBAL DRILLING ORGANIZATION-1

George F. Boykin
Amoco E&P Technology
Houston

Amoco E&P Technology's (EPTG) centralized drilling organization effectively contributes to the company's bottom line by maximizing its human resource potential and sharing its drilling knowledge on a global, company-wide basis.

Drilling is not simply the act of boring a hole, nor the ownership and operation of earth boring tools; it is instead the management of drilling and completion activities, consistent with the corporation's success factors and financial goals.

Under this definition, drilling includes:

Developing the well's technical and financial requirements-based on exploration, production, health, safety, and environmental goals
Designing plans that effectively achieve these goals
Supervising and managing well-site operations
Improving the drilling processes.

In short, drilling is not limited to well-site operations or drilling a borehole to a specified total depth. Rather, it includes all the steps required to plan, implement, and analyze the well's life-cycle process, beginning with prospect development and ending with abandonment.

This first of a two-part series describes the importance of human resources for a global drilling organization. The second part will provide details on how drilling efficiencies affect a company's return on capitalized costs, resulting in increased profitability that can be quantified.

People are key

EPTG believes the key to the future is summed up by the following equation:

Technology + Process + People = Value Creation.

Thus, technology is an important and necessary component of the value creation process and a core competency. Today, Amoco remains one of the few major operators that maintain an internal drilling research group.

Technology, however, does not create value by itself; it must be properly applied. This requires well-trained and innovative people and an effective process that allows them to create value from technology.

If value creation is thought of in these terms, it becomes clear that the limiting success factor for the industry's future is dependent on human resources. Technology will continue to advance, and the processes for providing technology to people will improve. Yet, without a well-developed work force, technology will become an ineffective tool.

Over the next 5 years, EPTG believes the most important challenge facing the drilling industry concerns human resources as follows:

The industry is becoming an increasingly global business.
The market's excess people capacity has been consumed.
Demographic analysis shows there is an upcoming "crew change."
Flatter organizational structures make motivation through traditional means difficult.
The current boom is primarily technology driven.

Taken alone, any one of these issues presents a challenge. Together, they create an industry barrier to excellence. The following discussion describes each issue in more detail along with Amoco EPTG's strategy for addressing them. It is hoped this article will stimulate further industry dialogue on addressing the challenges the industry now faces.

Global drilling organizations

A global organization used to be defined as a company that simply operates in many different countries around the world. Based on this definition, many organizations in the petroleum business have been global for the last 90 years.

In the 1970s, a global organization meant having nationals take on significant staff roles in their home countries. From this perspective Amoco, and other operators, have operated as a global organization for about 25 years.

More recently, being a global organization means having staff members from many different countries making significant contributions throughout the organization, regardless of location. Amoco has been building a global drilling organization based on this definition for about 6 years.

EPTG believes globalization of the drilling organization is the key component to continued success. The reasons are many, but they boil down to one underlying premise: "It makes good business sense."

Activity in the industry moves around the globe as technology, economics, and exploration/development cycles change the attractiveness of competing plays. To gain the most value from technology, it becomes imperative for companies to move highly trained drilling professionals to areas of high activity so they can apply the latest technology.

To do this successfully, drilling professionals must be highly skilled and willingly mobile. They must also be capable of dealing with cultures different than their own.

This means that EPTG must recruit people from countries around the globe, and it must discontinue focusing only on recruiting North American graduates.

But recruiting is not enough. Once personnel are in the organization, they must be provided with training, challenging career options, and compensation that is competitive in the global marketplace.

Excess people capacity

Fig. 1 [46,341 bytes] shows the offshore rig utilization rate since 1986. As can be seen, U.S. rig utilization has been at its highest level in 10 years and is one indicator of many that shows how excess resources are disappearing. As the rig count increases, the need for people increases proportionally.

For the first time in 7 years, the 1997 Reed Rig Census listed crew availability as the industry's number one concern. Operators and contractors are finding people in short supply as they search for enough trained professionals to manage the increasing rig commitments.

Although drilling activity has slowed in response to the recent downturn in oil prices, price cycles are shorter than the people-development cycles, and companies that wish to compete in the future cannot afford to stop hiring and training people in response to short-term price fluctuations.

Drilling professionals have a unique blend of theoretical and practical knowledge. However, it is not easy to increase the available pool of talent, because this knowledge and experience takes time to develop. After completing college, it generally takes 6 years before a drilling professional has the knowledge and skills needed to handle typical drilling challenges unsupervised.

The resulting shortage of experienced people has led to the current game of shuffling people between companies. EPTG is also a participant and victim in this game, especially as it becomes more and more difficult to find people with the right qualifications. From the end of 1996 through 1997, EPTG has lost 12% of its staff to other companies.

In trying to replace these people, the company has received 500 drilling resumes. Of these, 50 met EPTG's initial screening standards, 40 warranted job offers, and 25 accepted positions.

The question is, where will the industry find qualified people? Only 170 U.S. petroleum students graduated in 1997, and many have expressed limited willingness to move around the globe from project to project. It is clear the industry needs to look beyond the U.S. to meet the demand for quality personnel.

The industry must recognize that the surplus of qualified people has disappeared and will remain a limiting factor on the performance of drilling organizations for the next 5 years.

A crew change looms

Compounding the personnel shortage problem, EPTG recognizes that an industry-wide "crew change" is looming. Fig. 2 [54,266 bytes]shows that over the past 15 years, the energy industry has lost half its work force.

Until very recently, college undergraduates have recognized the lack of demand for petroleum engineers, and fewer potential candidates have prepared themselves to join the drilling industry. Fig. 3 [81,285 bytes]shows the gap for SPE and EPTG professionals with 0 to 10 years experience in both the Society of Petroleum Engineers (SPE) and Amoco's EPTG drilling organization.

Over the next 5 years, most of the people with more than 20 years' experience will be eligible for retirement. Even if all personnel with experience in the 0 to 10-year range remain, there still will not be enough of a feeder pool to replace half of the attrition created through retirement.

This places the industry in a serious situation. Competent people are an essential component to continuous improvements in operational and business performance. A lack of people limits growth, a problem that will be exacerbated over the next 5 years as people with more than 20 years of experience begin to retire.

Motivation

The industry has faced such challenges before. However, organizational structures are quite different now than in the past. Most companies have moved away from hierarchical to flatter or more horizontal structures.

This has brought about a new challenge in finding ways to motivate people. Only 10 years ago, EPTG, like many other major operators, had five or six layers of management between entry level engineers/foremen and the drilling manager.

EPTG now has only two such layers (Fig. 4 [68,566 bytes]and Fig. 5 [68,968 bytes]). Improved telecommunications, faster and cheaper transportation, and low-cost information technologies mean that several layers of management are no longer needed to communicate the organization's vision, coordinate group activities, or to check manual technical computations.

Because a greater percentage of the workforce now directly serves the customer, flatter organizations are more efficient than vertical. Flatter organizations allow more experienced people to function in a direct value-adding customer support role much longer into their careers.

Flatter organizations also communicate more effectively, are closer to the customer, and can react more quickly to change. In fact, there are numerous benefits to today's flatter organizations, and only one serious drawback-maintaining motivation.

Ten years ago, most technical professionals were motivated through promotional opportunities along the corporate ladder. This served hierarchical organizations well, as there were many management positions to fill.

Today's flatter organization, however, has limited the number of opportunities for professionals to enter the management path. Unfortunately, personal success is still measured and perceived by an individual's position along the corporate ladder.

This situation gives rise to another industry challenge: How can EPTG create an environment where people maintain job satisfaction, when it is no longer possible to climb the ladder to apparent success?

This issue is especially critical when viewed in context of our industry demographics, which show that over 65% of our industry personnel have more than 15 years' experience.

In Amoco, as well as in other organizations, the following typical scenario describes this issue:

The Amoco EPTG drilling organization has about 370 highly qualified drilling professionals, each with about 20 years experience.

Having survived the 1980s, all of these individuals have proven themselves to be superior performers. EPTG has seven drilling manager positions that are removed from the front line by only one management layer (Fig. 5).

A decade ago, these very competent individuals would have encountered advancement prospects every few years, through a series of middle management jobs. Today those jobs, albeit for very good reasons, do not exist.

People limitations

During a technology-driven boom, people, not technology, limit business growth. Over the last decade, the industry has learned to make money at much lower real oil prices by applying improved technologies and business practices. Today, more can be done for the same cost than was possible 10 years ago.

However, as technology expands the limits of what is achievable, people resources become increasingly critical. Successful use of sophisticated technology requires highly trained and motivated professionals to find a better way to use these tools.

They must have the means to stick with an idea from conception through implementation. It follows then that the bottleneck to continued performance improvement comes not from inadequate technology, but from an inadequate supply of people capable of implementing today's technology.

Improved technology makes more and more prospects economically viable, but the capabilities of, and the rewards for, applying the technology must keep pace.

Keys to success

It does no good to create a list of ills without suggesting some possible cures. To address the people-related issues and improve the success in handling EPTG's worldwide drilling and completion activities, the following strategies have been adopted:

Maintain a central drilling organization.
Measure the contributions drilling makes to the corporate bottom line.
Show customers the value that has been created.
Recognize the need for competency-based pay on a global basis.
Place the right number of the right people in the right places at the right time.
Continue creating a global, multicultural organization.
Recognize that drilling is a value-creating profession with unique education, training, and work experience requirements.

Because drilling is a core competency, the company must find the best way to attract, develop, maintain, and manage personnel in a global organization. In the past, major operators reorganized their drilling functions into very different structures.

Some completely decentralized the drilling function into business units, and some scaled back the function to one of contract management. Others outsourced the function altogether. And a few, like EPTG, chose to use a central organization of drilling professionals.

Amoco believes that a central organization is the best way to address the human resource issues. In 1989, Amoco began restructuring production operations into decentralized profit centers.

Decentralized production operations, called business units or assets by various operators, provide geographically focused accountability for financial, business, and production processes. Recent performance across the industry shows that business units do a good job at achieving specific financial goals. Creating these business units has been a strategy that has increased shareholder value overall for most companies.

However, just because it is wise to decentralize production operations does not mean that it is wise to decentralize the management of drilling technology.

Decentralized business units, because of their more narrow geographic interests, find it difficult to properly develop and manage advanced drilling technology and professionals. They are created to focus on a local situation and to maximize production from a specific reservoir.

In contrast, a central drilling organization is better prepared to address these challenges and is well-positioned to manage the difficult issues associated with creating a global organization. The feeder pool for new hires is broader, the training opportunities are more varied, and the pooled resources are more extensive.

Amoco strives to become a successful global company in each market that it chooses to compete; however, this strategy requires moving beyond historical attitudes and processes developed from the North American perspective.

To achieve success in today's world, the best drilling professionals must be made available, independent of a person's country of origin. At the same time, in today's global economy, professionals have more latitude to determine what choices and personal sacrifices they will make for their careers.

This has led to the creation of a philosophy in EPTG called "global vs. local staff" commitments. Each professional is asked to choose which market he or she will compete in. If the individual chooses the global commitment, this means the individual will be available to work around the world wherever this person's skills are needed.

EPTG is developing a global payroll system that will support those professionals while increasing efforts to recruit and conduct research outside North America. These are all critical components needed to attract the best individuals from the global market place.

As the excess personnel capacity disappears, a central organization must find more-efficient ways to manage the company's resources. When qualified people are plentiful, it is easy for any organization to obtain drilling talent. When talent is scarce, like today, proper management of this resource becomes more important.

A centrally managed drilling organization can quickly reassign qualified professionals and share work in the organization. For instance, the North Sea drilling group manages scarce resources by developing and sharing best practices across operations in Norway, the U.K., and the Netherlands.

This arrangement allows EPTG to shift personnel and practices from one area to another, helping the company to respond to the customer's needs faster and better than a decentralized organization possibly could.

Career development for drilling professionals is more difficult in a decentralized rather than in a centralized organization. A central organization that employs drilling as a core competency can expose its drilling professionals to a broad range of field experiences.

In addition, the advantages of a central organizational structure can help convince the corporation that drilling should be a core competency, as was the case at Amoco. It has been possible to maximize value creation by reacting quickly to changing business environments, and to capture and demonstrate the value that was created.

In EPTG's former decentralized organization, drilling professionals were viewed as service providers to each asset. Because they were seen as a support cast, many found it difficult to stay motivated. In a centralized drilling group, drilling professionals are part of a profit center that creates measurable value through the management of drilling and completion projects.

EPTG's drilling professionals understand they can impact the corporation's return on capital. Internally, they are able to manage their own salary structure and human resources.1 This means that the important motivational systems are better aligned to the specific needs of drilling professionals.

While individuals face the problems of a much shorter career ladder, they are in a better position to use other rewards besides promotions to reward competent professionals. For instance, stock options, retention bonuses, global pay scales, and time off for recreation and relaxation are offered as incentives for quality work.

A central organization must find the best ways to manage people and technology. Drilling technology develops too fast for any one locale to have a lock on the best way to do something. In the decentralized scheme, small drilling groups fend for themselves when it comes to technology application and personnel development.

This is a recipe for mediocrity. A central drilling group can concentrate on finding and developing the very best technical solutions and sharing them across the wide spectrum of producing assets.

Characteristics

A central organization does not provide a cure-all. In the past, organizations often succumbed to the classic pitfalls of central organizations by losing touch with the customer, becoming top heavy, and forming fiefdoms. Any company trying to build a central drilling group should be aware of these potential difficulties and intentionally design the organization to avoid them.

To become successful, centralized drilling organizations should:

Focus on and align itself with the customer (Amoco Exploration & Production business units). EPTG uses a process of frequent and systematic customer feedback used to tie performance with bonus pay. Each professional has a customer, and performance is rated on how well they meet this customer's needs. An inefficient, self-serving bureaucracy will not develop as long as the satisfaction and success of exploration and production customers create rewards for the drilling professional. Because EPTG is an internal-service provider, its goals are automatically aligned with the customer's through equity ownership and company success.
Deliver value through full-cycle project management. This strategy satisfies customer requirements instead of providing well site or engineering services that achieve short-sighted results based on depth, cost, and time objectives.
Become team based. Teams are accountable for engineering activities and operations. This means that the individual involved in managing the project is empowered and accountable for delivering a well that meets the customer's and the organization's objectives.
Utilize a very flat organizational structure. Flat structures facilitate individual initiative, decision-making, and efficiency. Managing a hierarchical bureaucracy creates too much nonvalue-added work.
Form close alliances with the customer.

Much of EPTG's organization has been centralized since 1991. In 1993, EPTG made another step towards its centralization efforts when it combined its U.S. and international drilling organizations. EPTG adopted the manage-centrally/serve-locally philosophy at that time.

While the philosophy has evolved in the following years, the basic premises of close customer relations, employee empowerment, accountability, and full-cycle project management still form the basic foundations of EPTG's business and operations strategy.

This philosophy has kept the company from experiencing any of the inherent negative consequences incurred by conventional centralized organizations.

Acknowledgment

The author wishes to express his appreciation to the entire Amoco EPTG drilling organization, in particular, the contributions of Mike Harris, Ken Tucker, Allan Hippman, and Merrilee Gordon. The author also wishes to thank Ford Brett and Nan Morris with Oil & Gas Consultants International for their help in generating and clarifying many of the ideas presented here.

Reference

Boykin, G.F., "The Role of a Worldwide Drilling Organization: The road to the future," SPE paper 37630, presented at the IADC/SPE meeting in Amsterdam, Mar. 4-6, 1996.

The Author

George F. Boykin is the general manager, Worldwide Drilling, for Amoco. He graduated in 1967 with a BS in petroleum engineering from Texas A&M. Boykin joined Amoco International Oil Co. as chief drilling engineer in 1979 where he had operational assignments in Norway, the U.K., the Seychelles, and Pakistan before moving to Denver as western region drilling manager in 1984. He began his current assignment with Amoco Worldwide Drilling in 1988. Boykin is a member and serves on numerous committees of the SPE, the IADC, and AADE. He is a member of Texas A&M University's Petroleum Engineering Advisory Council.