Panel: offshore industry grappling with challenges amid more-frequent market cycles

April 15, 2002
The offshore oil and gas industry's ability to grapple with the many issues facing it is being tested by continuing—and briefer—boom and bust cycles. Fluctuating market fundamentals, advances in offshore equipment, exploration and development moving more into deep water, safety, and personnel retention top these concerns.


Steven Poruban
Senior Staff Writer
HOUSTON, Apr. 15 -- The offshore oil and gas industry's ability to grapple with the many issues facing it is being tested by continuing—and briefer—boom and bust cycles. Fluctuating market fundamentals, advances in offshore equipment, exploration and development moving more into deep water, safety, and personnel retention top these concerns.
These issues were addressed Thursday by a panel of offshore industry players during the International Marine-Offshore Industry Outlook Conference in Houston. The panel was part of a half-day conference sponsored by the National Ocean Industries Association, Washington, DC, and Texas A&M University's Sea Grant program, College Station, Tex.

Market fundamentals
Keeping oil supply and demand in balance is grounded in the ability to accurately capture and assess oil inventory data, said Leonard H. Paton, managing partner, Growth Capital Partners LP (GCP). Houston-based GCP serves as financial advisor to both private and public middle-market companies based in Texas and the US Southwest. "Today's challenge involves managing inventory rather than capacity," Paton said.

"Our [inventory] data are abysmally poor," Paton added, explaining that a large portion of inventory data is collected by binocular-toting monitors who make note of tanker depths as the vessels enter and leave US ports.

How industry deals with inventory surpluses is another issue, Paton said. "The good thing about [today's perceived] surplus problem is that it can be adjusted quickly," he said, adding that currently, "We are quickly sopping up the excess oil in the system."

Supply, meanwhile, is flattening out, Patton noted. Inventories are coming back into balance, and some industry watchers are even saying that there may even be oil shortages, he said. "Markets rally on 'bad' to 'normal' inventory and peak on inventory 'surplus,'" Paton said.

In dealing with the cyclical nature of the industry, said Todd Hornbeck, president and COO of Hornbeck-Leevac Marine Services Inc., solutions include diversification; building high-quality, multifunctional assets; and maintaining long-term contracts.

Another panelist, Ted Ryan, vice-president, executive sales, BJ Services Co USA, put it bluntly: "If [companies] didn't make any money in the last up cycle we had, something's wrong."

Access to capital is another challenge for both offshore operating and service companies, Hornbeck explained. By playing niche markets with a high level of contracted cash flow, companies can have the flexibility to access any of the capital markets, he said.

Paton added that GCP sees its client list of energy service companies—those with annual revenues greater than $2 million—as being very active in the capital markets for the latter part of this year and into 2003.

Offshore equipment
Advances in drilling equipment will continue to cut back drilling completion times, said William E. Chiles, president and CEO of Chiles Offshore Inc., Houston. In addition, Chiles noted that ultrapremium jack ups are the industry's newest offshore niche market. Chiles Offshore operates four of the existing nine jack ups worldwide that are classified as ultrapremium and has one such jack up currently under construction.

Ultrapremium jack ups will serve industry well, Chiles said, as operating companies head into deeper and deeper water to drill for oil and gas. Comparing ultrapremium jack ups to more traditional jack ups, Chiles explained that ultrapremium jack ups have a deeper water depth rating, a deep drilling depth rating, more useable payload and deck space, and extended cantilever reach, among other attributes. Also, ultrapremium jack ups have much more capable solids control, digital drilling controls vs. analog controls (getting workers away from the drill floor), automated pipe-handling efficiency, and advanced blowout preventer systems.

Chiles said that any additional ultrapremium jack up to come into service would likely be a newbuild, as most of the jack up market is based on technology dating back to the 1970s. "It doesn't make sense to retrofit existing rigs to make them an ultrapremium status," Chiles said.

Advances in remotely operated vehicles and remotely operated tools will play a large part in oil and gas field development, said Bruce Gilman, president and CEO of Houston-based Sonsub Inc., which specializes in remotely operated vehicles (ROVs) and other tools.

"The remotely operated vehicle is currently the only means of heavy intervention in ultradeepwater environments," Gilman said. And autonomous underwater vehicles are emerging as an alternative for certain tasks, he added.

Equipment reliability is an extremely important aspect to field development, Gilman said, particularly with day rates being as high as they are. Understandably, "Operators are simply not accepting delays," Gilman said.

Meanwhile, replacement demand for equipment is ongoing, and global certification of equipment remains a challenge, Ryan noted.

"Most of the work [in offshore construction] will be upgrades and repairs over the next 3 years," said Robert W. Fogel Jr., Pres. of Robert W. Fogel & Associates, Houston.

Deepwater, deep drilling
The deep water will continue to be an increasingly important play area, most of the panel agreed, particularly in the Gulf of Mexico.


The prospect for growth in deepwater gulf production can be determined by the high number of deepwater leases receiving bids during 1996-98 in the Western and Central Gulf of Mexico lease sales, said Bruce Gilman, Pres. and CEO, Sonsub Inc., Houston.

And there remains considerable potential at greater drilling depths offshore.Chiles noted that over 50,000 wells have been drilled in the Gulf of Mexico, and of those, only 2,300 wells, or 4.6%, have been tested at 15,000-17,000 ft.
"There's a lot of work to be done on the [Outer Continental] Shelf," he added.

Safety, personnel issues
Improvements in equipment safety and safety training will continue for offshore exploration and development projects, the panel said. "Industry can work 'incident-free,'" Chiles said.

"Safety makes money," Hornbeck said.

Attracting and retaining qualified personnel remains a continuing problem for the offshore industry, the panelists noted. "I sure miss that big team of people who used to work for me," Fogel lamented.

"There is a limited number of skilled personnel with the experience necessary to meet deepwater requirements," Gilman said.

Regarding shipyard employment, Rogel noted, "There is always demand for frontline supervision." Also, finding and retaining proposal management technicians—those who put contracts together—is a "big problem for our industry."

Hornbeck suggested that a solution to some of the personnel constraints might be found in developing in-house training programs that would help to improve the overall image of the oil and gas industry, which has been marred over the years. "The key will be to grow our own," Hornbeck said.

Industry's problem is that we are "getting to them too late," Ryan said. He went on to cite the example of environmental activists groups that distribute coloring books depicting images of birds covered in oil to young children as representative of oil industry operations. Ryan added that improving the industry's image to attract workers "is something we can all participate in."

Regarding employee retention, Hornbeck suggested that companies should have a more stringent set of hiring practices and create an optimum work environment.

Contact Steven Poruban at [email protected].