As the first century of the new millennium gathers steam, the 40-year old offshore drilling industry is set to change forever, a product of redefined core competencies, alterations in the service-supply chain, and consolidation.
As a result, oil and gas companies will look to the offshore drilling contractors for help in providing what can no longer be considered a core competency.
Instead, these oil companies will focus more on their true competency, telling others where to construct a well.
The future
Engineering, design, drilling, and completion activities, in addition to bring the well on stream, will increasingly become the responsibility of the offshore drilling contractors, and while oil companies will oversee well construction, they will likely be saved the task of searching for and bringing in a multitude of services needed to construct the well.
Additionally, the highly fragmented drilling sector will continue to consolidate, forming three dominant offshore drilling contractors who will operate in more than 50% of the market. These three drilling contractors will serve the mega majors, major oil companies, super independents, and smaller independents, each holding a worldwide fleet of about 120 rigs and 12,000 employees.
Subsequently, a significant amount of exploration and production spending will likely be directed toward the top three contractors, not through the drilling manager as is the case today, but more likely through the asset manager, who will increasingly be at the table directing drilling expenditures.
Complementing this vision will be a shift in buying focus from à la carte services to total drilling solutions, concentrating on best-in-class products and services.
Contractors vs. service companies
Offshore drilling contractors will not try to emulate service company models of the past decade, which offered pre-bundled services. Instead, they will tend to assemble best-in-class services, formed on a per-project basis. For example, Schlumberger, Halliburton, or Baker Hughes will remain significant vendors, allowing offshore drilling companies to accept tenders from the supplier they consider best for each particular wellbore, with the continuing objective towards drilling a more efficient and economical well.
This total drilling solutions' concept is slowly gaining acceptance. For example, those offshore drilling contractors that have acquired experience in offering the entire package - inclusive of well design, drilling, engineering, and completion work on a turnkey basis, as well as providing geological and geophysical expertise - will become the most attractive companies to work with.
Additionally, in a situation where the operator does not have adequate capital to invest in a project, opportunities will be created for the drilling contractor to bring its resources to bear on the project, much as Global Marine Inc. does today through its subsidiaries, Applied Drilling Technology Inc. and Challenger Minerals Inc.
The next millennium
Thus, offshore drilling contractors of the next millennium will form the outsourced drilling departments of major oil companies. And those drilling contractors, who have earned the oil companies' trust through a proven drilling-management track record, will take total responsibility for a given wellbore.
Yet those who have not yet moved beyond the rig-and-crew-for-hire model will have to adapt to this new business model. This will be a difficult task, because a company can only get better at drilling performance through experience, day after day. An effort that cannot be learned from books.
Therefore, those with the most experience drilling wells in this expanded, total drilling-solutions model will achieve the greatest success as they will offer greater efficiencies and lower costs by bringing their knowledge to bear on the wellbore.
Catching up to this new business model will be costly and painful for the inexperienced. In this business, one does not compete with other service providers; instead the contractor competes with a drilling manager's authority for expenditure (AFE). Thus, the contractor that provides the lowest price under that number will be the company that wins.
Additionally, those offshore drilling contractors that can develop buying advantages through volume discounts and prearranged purchasing agreements will be able to bid more effectively, achieving a significant cost edge. This must be coupled with the reality that huge margins cannot be maintained in this business, because if the offshore drilling contractor's bids become too high, the oil company will not drill the well on a drilling-management basis.
Rather the operator will calculate a lower AFE on a day-rate contract and drill the well in house. The key then is to capture the learning-curve advantage, allowing the company to bring economies and efficiencies to bear on the project that enable the driller to keep margins as low as possible while making a reasonable profit.
For the newcomers, beating out the more experienced competitors will become a difficult task as safety, environmental protection, and operational standards will still have to be maintained at high standards within a very tight cost structure.
The big three
Looking to the future, the big three will act as the oil companies' drilling departments, with oversight from the operator. There will never be just one offshore drilling contractor, however, because no single driller will be able to cost-effectively keep up with the type of work and the demands of every wellbore.
During the next century, margins should expand somewhat and balance sheets should become stronger. In addition, the oil industry will likely be more disciplined when it comes to capital decision making. Today, managers who are quick to build a new piece of equipment face two major consequences. First, it drains the industry of available funds that may be put to better use elsewhere. Second, it adds capacity to the industry that may be unnecessary in the long term.
The way around that is to have fewer players, resulting in greater scrutiny and discipline applied to the capital decision-making process. This trend of mergers and mega-mergers among the operators will probably continue because larger producers will be forced to replace produced reserves by searching for larger-and-larger oil and gas reserves.
As a result, they will continue to look for the bigger payoff of "elephant-sized" reservoirs and push to deeper-and-deeper water in this quest. The continued shift to deepwater drilling by the majors will mean that their shallow-water portfolios will eventually fall into the hands of the independent companies.
As shallow-water reserves increasingly come under the ownership of the independents, an interesting phenomenon will occur. The independents will become much more aggressive in the development of these areas and the majors will become even more focused on the forefront of technological development in the deepwater frontier, where most of their wells are being drilled.
Yet the preponderance of the work for total drilling solutions will not be at the highly technical frontier areas, but more in the proven basins. Thus, the very top of the pyramid will include the major oil companies working in deepwaters. However, as one comes down the pyramid to shallower waters and older fields, the independents will prevail.
Technological impact
The offshore drilling contractors who will emerge as leaders will be those who have the flexibility to invest in technological development. The others will only play catch up, trying to learn how to perform turnkey and total management drilling.
They will be less able to adopt new technology as slow learning curves erode profits. However, more advanced technologies will be needed to reach ever-increasing depths with higher flow rate wells, and the market will insist that such developments continue. This does not necessarily mean that research and development spending will continue at today's pace. Less may be invested in this function, but more may be demanded of it.
Forward-looking offshore drilling contractors are involved in technological development for deepwater drilling, often taking the form of joint industry projects (JIPs). One example, called dual-gradient drilling (OGJ, Aug. 16, 1999, p. 32), is devoted to developing an enabling technology for drilling and producing wells in more than 10,000 ft of water while others concentrate on innovations such as smart well technology.
An offshore drilling contractor that wishes to remain on the cutting edge of these developments must become involved in the early stages of these technical programs. They will have to target cutting-edge technologies because as a drilling contractor, it is their rigs that the new technology will be placed on, and it is their people who will have to make it work (Fig. 1).
Besides, as the technology becomes more common, and as its functioning becomes more refined with reduced costs, its use will trickle down to the shallower drilling programs, also in need of advanced technologies.
Future fleets
Obviously, the fleets of the future will consist of a portfolio of assets that make money. Ideally, one might want to have all deepwater rigs, but that's not a reasonable goal. The oil company with whom the offshore drilling contractor partners up with would ideally move towards that end of the market. However, if a company is going to be one of the main players, it will have to offer a full spectrum of rigs and capabilities.
Additionally, it is unlikely that the oilfield service companies will want to acquire offshore drilling contractors for their rigs. This is because each service company is motivated to sell its own in-house products and services and integrating contract drilling in the business model does little to advance that goal.
The advantage offshore drilling contractors have is that they are not tied to any suite of services. They can design a well without any obligation to use a particular brand of services. Instead, they can bring to the job the absolute best in the business. This is what will make these future offshore drilling contractors different, and better.
Aside from the three or possibly four top offshore drilling contractors, the niche players' fleets will consist largely of commodity jack ups, barge rigs, and perhaps submersibles or platform rigs. The major mobile rigs - semisubmersibles, drillships, and jack ups - are the rigs in fleets that will tend to be consolidated.
Daywork, where most of the risk is assumed by the operator, and turnkey, where most of the risk is assumed by the contractor, form two extremes. The optimal risk assumption in the future will be somewhere in the middle, where each company takes responsibility and liability for those issues they control. For example, the drilling contractor should take responsibility for equipment downtime but should never take responsibility for the reservoir.
Challenges
Dealing with the blurring distinction between what a drilling contractor is responsible for, and what an oil field service company brings to the table, will form one of the major challenges of the next century. Once the service companies realize that the bundled services concept is not a viable solution, and once the drilling contractors concentrate on best-in-class, then the service companies will likely work more and more as vendors with the drilling contractors.
An offshore drilling contractor's greatest bane in the next century will be either extremely high or extremely low oil and gas prices. For an optimal business climate, oil needs to be in a band of $19-21/bbl in 1999 dollars. This price range is good for both the consumer and the producer; it is not so high as to encourage conservation and not too low as to discourage exploration and production.
If it goes too far above or below that for any length of time, it will be difficult to deal with the consequent business problems and decisions. Most likely there will be periods where prices will widely fluctuate. In these cases, it will take a disciplined drilling contractor to weather the over or under-abundance of cash.
But the biggest challenge will be taking all the necessary steps to evolve into one of the big three drilling contractors. One will have to be involved in technology development, without becoming overwhelmed by it. And one will have to make judicious, far-reaching capital investment decisions.
Finally, one will have to move credibly into the role of a major operator's outsourced drilling department. Such decision-making will affect all aspects of a driller's business and each will have to shoulder the rapid change and responsibility if the contractor wishes to emerge at the top for the next century and beyond.
The Author
Robert E. Rose joined Global Marine Inc. as president, chief executive officer, and director in May 1998. In May 1999, he was elected to the additional position of chairman of the board. Previously, Rose was president, chief executive officer, and director at Diamond Offshore.
He began his professional career with Global Marine in 1963 and served for over 13 years in various positions including manager of Global Marine's first purposebuilt drillship, the Glomar II. Rose was the 1994 chairman of the International Association of Drilling Contractors and was voted the "Contractor of the Year" in 1993 by that association. Additionally, he serves on the Department of Energy's National Petroleum Council, the boards of Superior Energy Services Inc., the American Bureau of Shipping, the Offshore Energy Center, the American Petroleum Institute, the National Ocean Industries Association, and the Sam Houston Area Council of the Boy Scouts of America.
