An operator’s perspective: How can drilling contractors prepare for the next downturn?

It is difficult to predict how long the boom the entire oil and gas industry is enjoying right now will last. Some may argue that industry fundamentals have changed enough to keep commodity prices high for a long time. Others will undoubtedly maintain a contrary view. Who’s right or wrong? Only time will tell. With that said, the real question is, what are you going to do to ensure profitability in an uncertain world?

The drilling contractor community is a key part of the oil and gas industry that probably suffers more during slow business periods than any other segment — so what will you do today to plan for a potential downturn tomorrow?

The answer is to differentiate yourself from your competitors. At Chevron, we’re working to differentiate our drilling and completions community. We’re building tools and processes that will survive in high and low commodity price environments.

So what can you do to make us keep your rigs when we have a lot more options than we do today? What can you do to encourage us to pay a higher dayrate for your rigs?

Understand your customers’ business. You must understand my business almost as well as I do because it’s critically important to making sure that you have the equipment we need. You need to understand our business well enough to know that we may need your help to improve the economics on some of our projects. The more you help us, the more we want to put your rigs to work.

Examples:

• Offline pipe handling. Not many jackups have been retrofitted for this capability, creating an opportunity.

• Fast moves onshore. It’s important for us to keep the rigs making hole and running pipe. We are spending money on other things while your rig is moving.

• Skidding capability onshore. As the industry faces more environmental pressures, operators will move heavily towards pad drilling, and skidding capability will become critical.

• Safety is paramount, and a safety culture that aligns with the operator’s is vital.

These are just examples, and the list will differ for different regions and market segments. However, the message is the same: Understand your customer base, what they need and how you can help them improve their business.

Invest. When the downturn comes, many of the old rigs will go away and hopefully stay away. Many rigs working today shouldn’t be working — they are inefficient, have lower environmental thresholds, and put people at risk. The drilling contractors who have invested in the right new iron are the ones who will be working in the next downturn. So use your profitability now to reinvest in your company’s future.

Operators can’t and won’t pay for all the new equipment and upgrades on old rigs, but partnerships can be a solution. Chevron intends to create longer-term partnerships with our drilling contractors, and the only way we can do that is to understand how each of us does our business. Drilling contractors need to understand not only their own business better but also the operators’ business. And frankly, we could be better at understanding the contractors’ business. Then we can discuss where we want to be — not at the end of this contract, not at the end of the next contract, but 10 or 20 years from now.

Be creative. A rig built in 1965 and one built in 2005 have a lot of similarities. This means there are plenty of opportunities for us to challenge the way we drill wells. If operators and drilling contractors can create partnerships, we can make a step change for the better.

David Payne is vice president of global drilling & completions for Chevron. He has been involved in numerous breakthroughs in horizontal and extended-reach drilling, multilateral technology and deepwater surface stack development. He began his career with Getty Oil Company in Santa Maria, Calif., in 1981 and joined Unocal in 1990. He holds a bachelor of science degree in petroleum and natural gas engineering from Penn State.