DRILLING MARKET FOCUS: Plenary panel addresses effect of high prices on performance

March 26, 2007
At the International Association of Drilling Contractors conference in Amsterdam, Feb. 20-22, 2007, leaders from two of the world’s largest operating companies, the largest offshore drilling contractor, and the largest oil field service company discussed reasons for the high price scenario, their outlooks for the future, and the effects of prices (oil, commodities, rates) on performance.

At the International Association of Drilling Contractors conference in Amsterdam, Feb. 20-22, 2007, leaders from two of the world’s largest operating companies, the largest offshore drilling contractor, and the largest oil field service company discussed reasons for the high price scenario, their outlooks for the future, and the effects of prices (oil, commodities, rates) on performance.

The four panelists anchored a plenary session, moderated by Stuart Ferguson, senior vice president and chief technology officer at Weatherford International. Panelists included:

  • Dave Blackwood, North Sea strategic performance unit leader, BP Exploration Operating Co.
  • Jean P. Cahuzac, president, Transocean Inc.
  • José Formigli, executive manager of E&P production engineering, Petroleo Brasileiro SA.
  • Chakib Sbiti, executive vice-president, Schlumberger Oilfield Services.

Although the title of the session was “High Prices Prevent High Performance,” not all the panelists agreed with that premise.

Cahuzac took an opposing view in his presentation. He said, “present market prices do not prevent high performance. On the contrary, they are required to allow industry to commit to the long-term investments needed to solve technical and cost efficiency challenges.”

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In addition to the speaker’s individual presentations and panel discussion, the audience was also polled on a variety of questions, with touchpad voting results shown immediately in the auditorium (Table 1).

Performance measures

As the demand (and prices) for commodities and services increases, industrial pundits discourse on the ability of suppliers to deliver. The panelists discussed several measures of performance:

  • Safety (total recordable incidents; lost-time incidents).
  • Nonproductive time.
  • Risk aversion.
  • Innovation, ability to increase supply.

The industry is expanding at an ever-increasing rate, seen in the activity, projects planned, and amount of capital expenditure money committed in the last several years.

Pricing, rates

Sbiti discussed the cost inflation for key materials. Although some had decreased in cost (HMX, RDX nitroamine explosive powders; ferro-chrome 60-65% carbon steel; et al.) many have increased in cost (Inconel 718, 625 nickel-based alloys; copper, lead, and tungsten powders; et al.).

Sbiti said that almost all complaints fielded in 2005-06 concerned unavailability of services, not the pricing. It is important to have the right equipment and people in the right place. “Fiascos on the rig floor are extremely visible, expensive,” he said.

Blackwood thinks the market is “moving toward a softening.” Although BP recruited personnel heavily last year, he said that recruiting would be down in 2007.

Transocean was more bullish than BP. Cahuzac sees a strong market for drilling services as China, India, and other countries increase investment to guarantee their own supply. Also, traditional deepwater areas continue to see strong activity. New contracts are running 3-5 years, and Transocean is investing in rigs. He envisions strong demand for deepwater rigs in 2010-11, even with the newbuilds scheduled to enter the market.

Cahuzac noted that the offshore drilling industry will need to recruit more than 5,000 rig supervisors in the next 1-5 years, representing a 30% increase in the present rig supervisor population, and Transocean is gearing up for it now. He said new approaches are needed to support recruiting and training, such as new drilling simulators.

The audience was polled on their expectations for West Texas Intermediate crude prices to fall and stay below $50/bbl for more than 3 months (Table 1). The largest group, 38%, expected this to occur in 2008-09.

Blackwood thinks the industry is in a shoulder period and it should be mindful of price flattening. Asian demand for oil is not as high as anticipated, he said.

Transocean and many other drilling contractors continue to invest in rigs, mostly newbuilds, while watching for opportunities to purchase speculative newbuild units.

Formigli said that Petrobras’ focus is to reach self-sufficiency goals set by the government. Its strategic plan is based on average price of $35-40/bbl, but the new development price threshold is $30/bbl.

Petrobras has started renewing rig contracts. The company has $300,000-400,000/day contracts in place for 2009-10 with a new contractor, a great savings from current market price of $400,000-500,000/day.


Asked how they believe safety performance in the industry has changed over the last two years, the audience predominantly answered that it has stayed the same (44%), with 31% saying it is noticeably better and 26% saying it is noticeably worse (Table 1).

Workplace safety measures are usually tracked by the total recordable incident rate (TRIR) and the IADC’s lost time incident rate (LTIR). TRIR is the total number of recordable incidents x 200,000, divided by the number of work hours. LTIR is the number of lost-time incidents/100 full-time workers for a given reporting period.

From 2001-07 (year to date), both measures have fallen at Transocean (Table 2). TRIR has dropped to 0.62 from 2.11, and LTIR has dropped to 0.09 from 0.95.

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But Cahuzac noted that safety performance in the UK has decreased, from a previously great safety record 5 years ago. The company wants incident-free operations. He said there is a focus on taking personal responsibility for individual behavior and preventing major events.

Formigli said that Petrobras does not want another P-36 or Piper Alpha incident, and has learned from the experiences. The company has intensive training courses for new hires. The new generation, he notes, is more aware and has a stricter view of safety.

Schlumberger also emphasizes training. The company hired about 6,000 people in 2006 and offered about 400,000 training days during the year. A new training center in Abu Dhabi will open in March 2007 with the ability to provide an additional 77,000 training days/year.

Sbiti thinks the industry is unfortunately focused on statistics, and that as currently reported, they do not adequately represent actual occurrences in our industry. Contract staffers are seldom counted, for instance, in company reporting. The industry has to evolve, he said, and needs frank talk to avoid glossing over realities.

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As an example, he showed data from 2001-06 on industry-recognized fatalities, and Schlumberger-involved fatalities (counts which included contractors), listed in Table 3. This suggests that our current measures underreport incidents by 100-400%. Sbiti thinks the industry should also track all nonwork-related fatalities to capture key knowledge. In 2006, for instance, Schlumberger found that driving and health issues (primarily heart attacks) were the common causes of 36 non-work-related fatalities.

Schlumberger also tracks “service quality events,” distinguished as catastrophic, major, serious, light, and near-accident/hazardous. Although there were some increases in three of the five categories from 2005-06, Sbiti said he does not see much pro-rata change, in view of the escalated activity levels.

Nonproductive time

Asked whether nonproductive time (NPT) has changed during the last 2 years, 48% of audience respondents said it has gotten worse (Table 1).

Blackwood said that we do this to ourselves, overestimate how much we can do. Few contractors say they can’t do a job, but often equipment doesn’t work. The industry should either wait for the experience base to catch up, or admit that it is not very efficient, he said.

Calhuzac acknowledged a widespread reluctance to say no to an operator. But he said his company is making strides, and sold two rigs last year instead of trying to reactivate them and staff with experienced people. Rig performance is steady; equipment downtime has been flat for the last 2-3 years on Transocean’s fifth-generation rigs.

Formigli said NPT has stayed the same. He thinks the biggest problem has been in shipyard work and construction. Well engineering and subsea work have been fine; newer projects have been better scheduled

Sbiti looked back even further and said that the supply chain system has broken down many times during the past 4 years, although the industry is trying to improve upstream delivery.

Ferguson asked how the industry can improve NPT. Formigli thinks simple well designs for drilling and completions would help. Petrobras’ approach in well engineering is to treat reservoir engineers as the “clients.”


Companies face risk technically, politically, and financially.

Ferguson asked BP, if forced to choose a single direction, whether it would focus on either meeting production targets (today) or replacing reserves (tomorrow). Blackwood said the company could never choose; it was necessary to keep both in sync.

Asked how attitudes toward risk and reward have changed during the last 2 years, most of the audience voted that attitudes had stayed the same (24%) or that risk-taking has decreased (43%; Table 1).

Blackwood was surprised by the result. Perhaps there is a perception of an aversion to risk because new players are heavily leveraged and act conservatively, he said.

Sbiti said, “our biggest risk is investing in our R&D portfolio.” Customers are too stretched and have no time to enter into novel, collaborative business arrangements. But he sees that they are still entering some new plays, taking on risk.

Cahuzac said that high costs may encourage a more conservative approach for technology development and implementation. Showing data ftom ODS-Petrodata, he noted that the average return on invested capital for the major drilling contractors during 2001-05 was only 4.6%. Those 6 years were a “value-destroying period for shareholders,” he said, and drilling contractor’s efforts did not return the cost of capital.


One of the roles of technology is to increase efficiency. Sbiti noted that seismic has led to improvements in sub-salt exploration, and real-time remote drilling connections are becoming standard in the North Sea. Rotary steerable systems are used in increasingly harsher environments.

Research and development spending continues to increase. Schlumberger spent $595 million in 2006, up 17% from $509 million spent in 2005.

Cahuzac noted that long-term investments include not only research and development of new technologies, but also investments in people, in rig upgrades, and newbuilds. Transocean developed and patented innovative dual-activity drilling technology by 1996 and incorporated it in its three Enterprise-class, dynamically positioned drillships. The Discoverer Enterprise was the company’s first drillship to have dual-activity capability. The technology has paid off in increased efficiency, allowing parallel drilling operations on a single well.

GlobalSantaFe Corp. later adopted the technology for three of its newest semisubmersibles: Development Driller I, II, and III. In January 2007, a federal district court entered an amended final judgment against GlobalSantaFe for patent infringement.

Both companies announced the terms of a settlement on Feb. 20, 2007, 2 days before the plenary session. GlobalSantaFe will pay Transocean about $15 million and future licensing fees when operating in an area where Transocean has dual-activity patent rights. The fees include 3% of future revenues from the three Development Driller semisubs and 5% of revenues from any other rigs that GlobalSantaFe may acquire which incorporate the dual activity technology.


Asked how important the effect of professional societies such as IADC and SPE are on the industry, most of the audience said they make a valuable contribution (53%; Table 1).

Blackwood thinks we need to give people time to make professional society interactions work. “We can derive a lot of power from people coming together,” he said.

Formigli believes that societies make a valuable contribution. He noted that it was difficult in the past for SPE to gain a foothold in Brazil, when Petrobras was the sole operator and served the same role as an association, disseminating information and training. But since the monopoly was broken in 1998, he said there is more support for SPE as a mechanism for sharing knowledge.

Sbiti said there are too many industry events, and we could do with fewer, with better overall quality. He thinks that a company should have a strategy on how to participate and collaborate.


Companies are recruiting new workers. Schlumberger envisions high growth in the next 5 years, and needs to hire 5,000-6,000 engineers and technical staff. Petrobras hired 5,000 for upstream in 2006 and “will maintain this level,” stressing that the company also has to staff new refineries. So far, Formigli says Petrobras has 20 applicants for each position. Transocean continues to recruit and sees a need to focus more on evaluating competency as well as providing training.

Blackwood said, “we need to continue projecting high-growth,” but wondered, “is there a better way to manage boom-bust cyclicity?”