Executive Q&A: Offshore Drilling Outlook

OGJ Online Senior Oil & Gas Writer Sam Fletcher interviewed C.R. "Bob" Palmer, chairman and CEO of Rowan Cos. Inc., on July 11 at the company's Houston headquarters.

Rowan Cos. Inc., a premier offshore drilling contractor based in Houston, was founded in 1923 on the premise that "men are more important than machinery and tools." It adhered to that philosophy through an industrywide depression, keeping drilling crews on the payroll even when rigs were idle. Its aviation division, Era Aviation Inc., started in 1948 as the first commercial helicopter service in Alaska and claims the title of the oldest continuous operating helicopter firm. LeTourneau Inc., the manufacturing arm, built more than a third of all mobile offshore jack up rigs now in service, including Rowan's unique Gorilla rigs designed for deeper waters and harsh environments.

OGJ Online Senior Oil & Gas Writer Sam Fletcher interviewed C.R. "Bob" Palmer, chairman and CEO of Rowan Cos. Inc., on July 11 at the company's Houston headquarters.

OGJ Online: The service industry seems poised for a rebound, with operators expected to increase exploration and production spending through 2001.

Palmer: I think we are truly entering the golden age of opportunity for E&P.

I'm a firm believer in the National Petroleum Council report that we're going to have to increase gas [supplies] in the United States by 50% in the next 10 years. That gas has got to come from North America, and it's going to take a lot of rigs to drill it.

OGJ Online: Industry analysts rank Rowan at the top of those companies best positioned to capitalize on this rebound, primarily because you kept your crews employed and your rigs working through the depression.

Palmer: Some people say we've never had a layoff, but that's not accurate. When we left Indonesia, we had to leave behind about 350 very good, qualified Indonesian employees. Some had been with us 15 or more years, but we couldn't take them anyplace�we couldn't get work permits and visas.

More recently, we pulled six rigs out of the North Sea�the last ones, 2� months ago. We no longer have an operation in the North Sea. When we pulled out, we had about 275 UK employees. Some of them had been with us 18-20 years.

What we were able to do�and I give plaudits to the US Coast Guard and the Immigration and Naturalization Service�we got permits for about 175 of our UK employees to come over here and work in the United States on temporary visas.

Now it costs us a fair amount of money, because we're working those guys 21 days on, 21 days off, and we fly them back home on their days off. But it's our belief that the North Sea will be a place that we'll go back to again. We have spent an untold amount of time and money getting these employees trained and onboard as good, loyal employees. So we're doing everything we can to protect that investment in people.

OGJ Online: Certainly a great amount of experience has been lost from this industry through the huge layoffs during the last few years.

Palmer: I've said time and time again, if we had to start over with Rowan brand new and could keep either our existing equipment or existing personnel, it's the personnel we'd keep. We can build new equipment, but it is much, much more difficult to build an organization.

The vast majority of our rig managers are under 50 years old. In 1982 when the first downturn started, had we started laying off people based on seniority, the guys running our business today would have been the ones we were laying off.

But we said, "No, at some point 5 years, 10 years, 15 years from now, we're going to need those people." And we hung onto them.

I feel very pleased to go out on our rigs and see toolpushers who are in their 30s and yet have 12-15 years service with Rowan. I think that's where our real distinction comes.

OGJ Online: Many in the service industry are already having problems hiring new workers for the upturn (OGJ Online, April 30, 2000).

Palmer: We as an industry have a tremendous credibility problem. We have time and time again gone to schools and universities and told students that there's a great career in this industry. We hire people out of school, and 2 years after they go to work, we fire them because of another downturn.

It's almost an IQ test for a guy getting ready to go to school�if he decides to be a petroleum engineer based on that history, what's wrong with him?

I think Rowan is doing a good job of attracting young, reasonably well-educated, sharp guys and hanging onto some of them. But as an industry, that's not happening.

What this industry needs to do, is to provide (a) better wages and (b) better job security. We as an industry are desperately behind the rest of the nation in terms of wages. So we're not getting people who are college-educated who are willing to come and start from scratch on a drilling rig. And that's got implications 10-15 years down the road.

Rowan is trying to cut through that by hiring a lot of college kids for summer jobs. We're working 50-70 undergraduates on the rigs as roustabouts and roughnecks every summer.

The only way you're going to get college-educated people to get rig experience is to get them while they're still undergraduates, because we as an industry can't compete out there on the job market. And that's a big change in the last 30 years.

Rowan has actually grown employment. We have many more employees today than we had in 1982. We've got more employees than we had in 1997, which was our last little miniboom.

We offer wages that are probably in the top 10% of the industry. I'd like to pay more, but you can't get too far out in front of the competition. We just put in on May 1 another 5% pay increase across the board for all of our crews. When your rig payroll is running $75 million/year, 5% is a pretty good chunk.

We are hiring only entry-level guys on our rigs�roustabouts and roughnecks. We do not hire drillers at all.

OGJ Online: Why won't you hire drillers?

Palmer: We'd just rather train them ourselves. And it's a major morale issue.

We sell a guy on the fact that, if he comes in at entry level and busts his buns and has the right amount of smarts and a good attitude, there's an opportunity to be promoted. When you hire somebody in from the outside, you deny a promotion opportunity to someone in your company.

OGJ Online: You also have maintained good equipment, keeping most of your rigs working even when others were stacking theirs.

Palmer: The three things we manage are manpower, machines, and money. The easiest thing to find is money. So we are willing to take short-term financial losses in order to protect the organization and maintain the equipment.

We have sacrificed a lot of cash to keep the organization together and our rigs in good shape. But we ultimately believe there is a pay-off for that.

It keeps coming back to people again. I think people are the hardest thing to put together, an organization that functions. The next hardest, of course, is designing, building, and maintaining drilling equipment.

But the easiest thing is money. I don't think there has ever been a time that Rowan couldn't go to the marketplace and raise more money than we could intelligently spend. So we've tried to be very careful about that. We've kept our balance sheet in very good shape, and we've always kept a lot of cash on hand.

We make an effort to never overcommit ourselves during the good times and not panic in the bad times. I think those two fundamental things are what set Rowan apart.

OGJ Online: Are your investments in people and equipment paying off yet?

Palmer: Without getting into some real specifics, I can tell you we're at 100% utilization everywhere right now. We've got 20 rigs working in the Gulf of Mexico�19 jack ups and 1 semisubmersible�and 3 rigs off eastern Canada.

In terms of current rates, we're probably 15% out in front of the competition. Why? Because what we argue and what we try to sell is value, not price. If we can deliver a lower well cost, with an excellent safety record and excellent environmental record, people will pay us more per day for the drilling rig.

OGJ Online: Certainly safety and environment issues are getting more emphasis among offshore producers today. That is what they're demanding from contractors, and they know who have the good records out there and who do not.

Palmer: It's clich�hat every good safety program is supposed to start at the top. Our board of directors has a health, safety, and environment committee, which I chair. It is a formal part of our board meetings now in which every division has to report what its accident rate is, what its environmental situation is, what our plans are going forward to reduce mishaps.

We now have the lowest accident frequency rate we ever had in the company�well under one reportable accident for 200,000 man-hours of work and well below the IADC average.

Also, we pay annual bonuses in the form of stock options to our toolpushers and rig managers. The main things that go into factoring those awards are regulatory compliance and accident records, and to some extent employee turnover. They understand that problems with regulatory compliance and problems with accidents have career implications for them.

OGJ Online: How much of that policy goes back to the fact that you once roughnecked, yourself?

Palmer: Everybody in Rowan's operations and the vast majority of people in the drilling division here in this [headquarters] office all started on the rigs. I don't think you'll ever see Rowan get into a position where it's managed by somebody who didn't come up from the rigs, starting out as a roughneck and working his way through the system.

I can tell you, it makes a tremendous difference in communicating with drilling crews, because they all know we've been there and done that.

OGJ Online: Are you seeing a pickup in drilling activity now that the operators are enjoying improved cash flows?

Palmer: In the Gulf of Mexico, yes, and that's all natural gas drilling for us, because we're on the shelf. We're not in ultradeep waters, which is mostly oil play.

Right now, the Gulf of Mexico has the best rate structure in the world. That's the reason we moved our six rigs out of the North Sea and will be moving one of our rigs out of eastern Canada.

We have 12 rigs on contracts in the Gulf of Mexico that are up for renewal in 60 days. So 60 days from now, we ought to be able to tell you what the gulf market will look like. If we can maintain 100% utilization and see day rates also increase, it's going to look good.

There are a lot of rigs in the gulf coming up for contract renewals.

OGJ Online: Are operators reconciled yet to the likelihood of higher day rates as the demand for rigs increases?

Palmer: Other than the price of oil and gas, which operators have no control over, the only way they can increase their margin is to decrease their costs.

As a drilling contractor, we're in a fixed-cost business. Our labor cost is about the same, whether a rig is working or not; our maintenance is about the same. So the only way we can increase our margin is to increase our revenue.

So the conflict is always going to be--we're wanting our revenue up, they're wanting their costs down.

Again, it goes back to value. If we can go out and drill a well in 45 days that they have budgeted for 60 days, we may, in fact, drill the well for less money than they had thought, and we can make more money in the process.

Now, nobody would have believed we would have gas priced in excess of $4.50/Mcf last month. Most prospects in the gulf would be economic at $2.50/Mcf. I don't know anybody saying they'd have to have $3.50/Mcf to drill that well, although I think they'll take it!

OGJ Online: What's your outlook for other offshore markets?

Palmer: The North Sea is a real problem and a real enigma. It's a high-cost place to operate. It's got all kinds of regulatory barriers that cause things to slow down, which translate again into higher costs.

The North Sea is dominated by the majors and supermajors. They have a much longer budgetary process. Well approvals sometimes take 2-4 years to work their way through the system.

But we like the North Sea; we've been there since 1972. We'll be going back to the North Sea. In fact, we are building a new office and warehouse in Aberdeen right now, and don't have a single rig working in the North Sea. And probably won't have for a year.

So, yeah, I think the North Sea will come back for us, but it's going to be a while.

OGJ Online: What will be the deciding factor in bringing it back?

Palmer: Demand for rigs. Right now, there are probably six jack up rigs in the North Sea that don't have contracts, and easily two thirds of the existing jack up fleet is up for contract renewal in the next 6 months.

The current rate structure in the North Sea is less than the rate structure in the Gulf of Mexico, and you've got probably $10,000/day increase in cash operating expense to be in the North Sea.

We're not in the other markets of the world--West Africa, the Middle East, and Southeast Asia--but it looks like those are coming back a little bit.

OGJ Online: Canadians claim the Atlantic area off Nova Scotia, Newfoundland, and Labrador is shaping up as a potential new North Sea (OGJ Online, May 2, 2000). What's your outlook for drilling operations off eastern Canada?

Palmer: It looks fantastic over the next 10 years. But now there's a little lag in activity, partly brought about by the megamergers. Mobil was a very dominant factor up there. Following that merger, the Exxon people are reevaluating the various areas off Nova Scotia and Newfoundland.

OGJ Online: How is your LeTourneau subsidiary performing?

Palmer: LeTourneau is going fine. One of its major emphasis is building Gorilla rigs, and that's got the Vicksburg, Miss., plant and the Longview, Tex., plant pretty well occupied until 2003 or so.

The main thing we need at LeTourneau is some sort of a base load going through the machine shop so that we can take the ups and downs of rig construction. So we're doing that with the front-loader and log-stacker [industrial machines] business.

Unfortunately, with the price of many commodities dropping and problems with the timber industry, that market was beginning to shrink a bit, so we were looking for some way to put additional stuff in the plant. As a result, we bought Ellis Williams Co. earlier this year, so we can now be building mud pumps.

That's going extremely well. We're running our first mud pump through the Longview facility. It's going to permit us to add maybe another 10-15% in terms of man-hours to the Longview plant.

OGJ Online: Is the market for mud pumps improving?

Palmer: It is. One of the things stimulating the demand for mud pumps, other than the number of rigs going back to work, is that so many wells now are being drilled with pressures in the neighborhood of 3,000-6,000 psi. We have a number of jobs we've drilled offshore where we were continuously running 5,000 psi. Well, those old mud pumps won't take that. So there's an awful lot of replacement mud pumps going out right now.

Another thing, of course, is that people are getting involved with these super-fracturing jobs. In our smaller pump line, we have one with a 10,000 psi fluid end on it. So we're selling a lot of those to the pressure-pumping companies and waterflood projects, particularly in Canada.

There's also a new business that I'd never heard of until 8 months ago called trenchless drilling for installation of fiber-optic cables under rivers and streets. They use a lot of small mud pumps, and we're about the only company in that market that has a small, lightweight, high-pressure pump.

OGJ Online: What about your Era Aviation division?

Palmer: The last couple of years have been pretty tough because there was just no activity in Alaska. We have three aircraft now on the North Slope that are supporting drilling operations up there, and there's a little more activity in the Cook Inlet.

The big jump has been here in the Gulf of Mexico. We have expanded our bases considerably.

We're flying for one customer in the gulf that has 2,000 employees offshore at any one time. That's a lot of crew changes. And every one of those guys has a new SUV of some kind and wants a secure place to put it. So we're having to build these new parking lots with big high fences and closed circuit television for security.

C.R. "Bob" Palmer joined Rowan Cos. Inc. as a roughneck in 1953. He worked his way up through the company, becoming chairman, president, and CEO in 1972. He has long been involved in industry and government affairs as past president of the International Association of Drilling Contractors (IADC), past chairman of the National Ocean Industries Association (NOIA), a member of the National Petroleum Council, and a director of the American Petroleum Institute. He holds engineering degrees from Southern Methodist University in Dallas.

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