Pragmatism underscores offshore conference

Industry conditions are conducive to investment in offshore exploration and production projects, especially in deep water.

And as operators and service/supply companies hustle to bring on new production and provide needed equipment, leaner management teams are maintaining a healthy respect for the consequences of falling prices, boom-and-bust cycles, and ancillary factors, including the effects of government regulation-principally offshore acre- age access in the U.S.-which can adversely affect profitability.

Those were among key messages delivered at the recent 21st annual International Marine/Offshore Industry Outlook conference in Houston, sponsored by the Texas A&M Sea Grant program.

Sea Grant, a nationwide program, is a partnership of federal, state, and private efforts, which applies resources of leading educational institutions to marine-related problems. It is directed by the National Oceanic and Atmospheric Administration of the U.S. Department of Commerce.

Looming equipment crunch?

Relatively stable oil and gas prices-and an outlook for more of the same in the short-medium term-are major contributors to the health of the companies involved in offshore work.

But a bottleneck may soon result, as the current lag time in the offshore drilling-to-production cycle shortens.

"In the past, the production industry has followed the cycle in the drilling industry," said Al Williams, president of Kvaerner FSSL Inc., Sugar Land, Tex. "Those cycles usually have a lag between 6-12 months. However, at the present time, it seems to be a little bit longer than that 12-month period.

"We're seeing something like an 18-month lag right now," Williams said.

He said factors influencing the production cycle include the closeness of lease expiration dates, rig availability and increased rig costs, operator inexperience in verifying deepwater subsea designs, and a lack of pipeline infrastructure to serve an increasing number of deepwater projects.

"I predict that the lull in the production equipment industry that we see will begin to terminate in the early 1998 period."

Williams said that could lead to a crunch as a number of operators move forward with their projects then. That, in turn, will cause companies involved in offshore production system manufacturing to scurry to cope with providing equipment for new projects that will need to advance rapidly and bring on new production, especially from subsea developments.

Williams said the trend of rig upgrading by the offshore drilling contractor segment may be nearing a conclusion.

"The increased activity across the industry, obviously, is going to continue to drive consumable equipment," Williams said, adding "there will be growth in this segment as these upgrades become available and new rigs come on stream."

Williams predicted a growing trend toward subsea production systems, with equipment being provided by system suppliers instead of by individual component suppliers as has been the case historically. This will result, in part, from a growing reliance on subsea systems, as currently installed systems prove their reliability and meet operator scrutiny.

Mobil E&P's view

A new spirit of partner-type cooperation between operators and service/ supply companies is providing a win-win for all parties involved in the exploration and production business, said keynote speaker J. Michael Yeager, president of Mobil Exploration & Producing U.S. Inc., Dallas. "We've got our right hand extended, not only in regards to what needs to be done but how it needs to be done," he said.

Yeager provided a perspective on oil and gas company management thinking and strategies aimed at a basic goal: "to make things work" and still remain profitable.

Yeager said Mobil Exploration & Producing sees three basic keys to success today: cost-control, strategic alliances, and technology development, including information technology and many other forms of technology of benefit to the oil and gas industry.

As an industry, Yeager said, "I think we'll look up in 5 years-and if you think the change over the last 10 was significant-I think it will be ten-fold.

"We're just now beginning to touch on some of the financing activities that other industries have been doing for years; we're just now understanding the commercial markets; we're just now understanding the spirit of win-win and how not duplicating creates hundreds of millions of dollars in wealth."

Citing the bottom-line benefits of advancing technology to new limits, Yeager compared differences in cost using the example of one offshore development system, floating production, storage, and offloading (FPSO) for a typical 5,000-ft installation. He said FPSO costs are some $100 million less in 1996 than they were in 1988.

Yeager said the majors, independents, and the service/supply sector are going about technology in different ways but, Yeager said, "we're sharing more, we're not duplicating as much," all benefiting the balance sheet.

He said some deepwater development lead times have shrunk from more than 10+ years to on the order of some 7 years. "That's real money, and that makes a difference in the project being economic or not."

Among negatives facing the industry, Yeager acknowledged a shortage of available experienced personnel, brought about, in part, because of oil and gas company restructuring and the de-layering of company staffs. "We're short people-we're feeding off each other."

Acreage, access concerns

Speakers cited the positive effects of the last three Minerals Management Service lease sales in the Gulf of Mexico's central and western planning areas as examples of the current health of the U.S. oil and gas industry, augmented by stronger prices on a relative basis and technological advancements.

With the majority of acreage on the U.S. Outer Continental Shelf currently leased, explored, drilled, and/or developed, the E/D progression to deeper water beyond the shelf edge in the western and central gulf must, as a consequence, continue to even greater depths.

But the Washington, D.C.-based National Ocean Industries Association (NOIA) issued a warning to conference attendees:

"The day is coming when we're going to have to look elsewhere," said NOIA Pres. Bob Stewart, noting that a "political fault line" separates the central and western gulf planning areas from the eastern gulf, which has been off limits to new leasing since the Bush administration.

The current 5-year leasing program, approved in August 1996, does include a small sale proposed for the eastern gulf planning area in 2001. But 22 blocks within 15 miles of Alabama's coastline off Baldwin County and the Gulf Shores resort area were deleted from the proposed offering prior to overall program approval after Alabama officials voiced opposition to offshore leasing and erection of "visible structures" within 15 miles of the coast.

The Department of Interior added 384 deepwater blocks to the offering, all more than 100 miles from the Florida coast.

Still, opposition to offshore leasing shows no signs of letting up. Bills were introduced earlier this year in the U.S. House of Representatives to ban OCS development off California and to impose restrictions on leasing off Florida.

In January, Rep. Porter Goss (R-Fla.) introduced H.R. 180, which seeks to impose restrictions on the eastern gulf planning area, the Straits of Florida, and part of the South Atlantic planning area south of the lateral seaward boundary between Florida and Georgia. The bill is not presently advancing, NOIA said.