Dayrates, shortage of skilled labor challenge international market

Dalma Energy to field-test new process control system on Oman rig to address training barriers, promote safety

By Katie Mazerov, contributing editor

Dr T. Fredric Young is chief executive officer of Dalma Energy Co, an international land drilling contractor headquartered in the Sultanate of Oman.

From your perspective at the helm of Dalma Energy, what do you see as the two or three biggest issues facing the industry today?

Low dayrates in the international land drilling market continue to be challenging. The international land drilling contractor business, including the Middle East, Africa and Russia, is totally independent from the US, European and Australian markets. The international side of the business operates at a dayrate level that does not allow recovery of depreciation due to unfair competition from countries with centrally controlled economies or countries with shadow money markets, where capital does not have the value it has in Western economies.

For us, technical costs make up the biggest portion of dayrates, but in India and China, for example, those costs often are not included in the dayrates. This means that contractors in those regions can perform the same job at half the cost we do. That phenomenon is driving down rates.

The other issue that remains problematic is the non-availability of skilled labor and supervisors. People are not available, and there is a lack of training facilities in the international market. During the recent downturn, many workers left the oil industry, and they are not returning because they don’t want to become victim to the cycle of companies laying people off when the market turns downward and prices drop. This shortage of skilled personnel will dictate speed of growth.

But with the complexity of today’s wells and the need for higher skills to handle new rigs and technologies, what do operators and drilling contractors need to do to hire and train qualified personnel?

The exploration and production companies, both international operating companies (IOCs) and national oil companies, need to step up to their responsibility to make the funds available to build and operate training schools to train rig personnel on a large-scale basis. Funds to build significant schools are simply not available with drilling contractors. There currently are no schools or training facilities in the international environment where we can send an assistant driller and train him to be a driller.

What do you feel are the key technical advances that have moved the industry forward in recent years to meet increased global demand for hydrocarbons?

We are most excited to be the launching customer for the new RigRider process control system, a joint venture of the Japanese company Yokogawa and Well Engineering Partners in The Netherlands. In February, Dalma Energy will deploy the system in a field test on a rig working for Oman Oil Company. This is a full process control system that promotes efficiency and safety on the rig through the use of touchscreens, tablets and smartphones. It replaces paper manuals and makes it easier for the rig crew to keep up with changing regulations, equipment processes and procedures and other essential information on the rig floor, when they need it most. We are also hoping it can become a valuable training tool.

In Oman, when we outfit a new rig, 80% of the workers come from small villages in the desert. These people know nothing about drilling, but they all have smartphones, and the villages have Internet access. With RigRider, these workers will be able to log into the system on their time off to learn tasks and procedures. Supervisors will be able monitor the workers’ progress and verify they have completed critical steps in their education and training. The system is also fully mobile and can move from rig to rig.

Rotary steerable systems (RSS) also have provided some major breakthroughs. And, a technology that has enhanced rotary drilling in the Middle East is the telescopic forklift, a forklift with a telescoping arm that operates like a combination of a forklift and a crane for surface drilling with conventional, 2,000-hp rigs. This is likely not something that is commonly used in the US or markets where rigs are more automated, but in this region, they have proved to be a very useful tool.

In Oman, for example, we are drilling tight-gas wells for a major IOC. This involves conventional drilling on the surface, then downhole we use advanced RSS and directional drilling technologies to drill down to 6,000 meters and 1,500-meter laterals.

There is a major effort under way to automate the drilling industry. What is your view of that, and what does that mean for Dalma Energy in terms of your rig fleet?

In the international land drilling industry, I don’t think it has been proven that rig automation is producing cheaper wells. As such, automation has not been introduced. Automation requires skilled maintenance crews, which are not available in the Middle East/North Africa (MENA) region. Also, in order to obtain a license to operate in this part of the world, it is a major pre-requisite to employ as many local people as possible to create in-country value. In the Middle East, Russia and Africa, reduced labor costs are not a driver for automation as it is in other areas.

In Oman, we employ 98 people on a rotary rig. The government wants operators to continue that trend of employing a lot of workers because 60% of the country’s population is younger than 20. So, it makes no sense for a drilling contractor to approach an operator with a fully automated rig. Automated drilling rigs for desert and jungle operations also are not being manufactured and are considered slower because they involve the use of hydraulics, which carry out tasks in a defined, controlled manner.

Automation is best suited for “factory-drilling” situations, such as coalbed methane and unconventional shale applications, where several thousand identical wells are being drilled.

Are you seeing more emphasis on exploration and production in new fields, or extending production in brown fields?

In the regions where Dalma operates – the Arabian Gulf, North Africa and India – we see no change in the distribution. However, in Iraq, all the drilling will be development drilling because we know where the fields are. Going forward, we believe the number of production wells will increase percentage-wise simply because of all the work in Iraq.

On the other hand, in Saudi Arabia we expect to see more exploration because of all the shale gas exploration going on in the northern sector of the country.

How have recent geopolitical events, such as the Arab Spring, impacted the Middle East?

Overall operating costs have increased by 30% to 50% due to the Arab Spring. The increases are being felt in two major areas – security to protect our personnel and wages.

or companies operating in Iraq, the cost for security is tremendous. Dalma did not feel the huge impact that companies operating in Libya, for example, experienced when drilling came to a standstill during the 2011 uprisings. But, we have experienced slow-rising costs in our markets, especially related to wages, in the wake of the Arab Spring.

In Oman, wages have increased 100% due to a government mandate to pay workers more money because people couldn’t make a living on their previous salaries. All these costs have been rolled over to our customers.

Recently the International Energy Agency projected that by 2020, the US will overtake Saudi Arabia as the world’s largest oil producer, thanks to the shale-oil boom. Do you feel this will have an impact on Middle East, especially Saudi Arabia, oil production going forward?

Not for the next 10 years. It remains to be seen if the unconventional oil boom in North America will transform into a trend. Also, there are many environmental challenges that still need to be overcome. The oil produced in the MENA region will feed the growth in the Asian markets and Europe and, as such, is independent of what happens in the Americas.

What do you feel are the key technology gaps the industry needs to overcome to move forward?

Technology gaps are identified by the drive of the oil industry to further cut costs. As the cost of finding and producing oil and gas has increased, there is increasing pressure in all sectors to reduce costs. From a drilling perspective, in my opinion, independent land drilling contractors in the international market will all but disappear in the next 10 years because either the national oil companies or the major service companies will absorb them.

In terms of specific advances going forward, we are very optimistic about the potential of the RigRider technology. Also for rotary drilling rigs, any technology that advances health, safety and environmental performance and reduces costs is critical. We also believe that services, such as directional drilling, mud engineering and logging, oilfield logistics, casing handling and running, need to be integrated into the delivery scope of drilling contractors.

Automated spare parts ordering systems and improved spare parts logistics also are needed, along with better oilfield logistics to reduce rig move times for 2,000-hp rigs. Technology that manufactures equipment in a more cost-effective way is also on the horizon. By 2020, 80% of the land drilling equipment will be manufactured in Asian countries.