Deepwater revival is under way but needs rethinking of talent, technology and capital strategies

By Jessica Whiteside, Contributor

The short-term picture for deepwater oil and gas is rosy: Energy demand is on the rise, oil prices have been relatively stable and healthy, and deepwater drilling programs have become increasingly active again after years of slowdown. Deepwater rig utilization is up, too, as are dayrates. But how sustainable will this nascent resurgence be in the face of serious headwinds – wary investors, aging equipment, evolving regulatory frameworks and steep competition for talent?

The deepwater industry must make some changes to thrive – and look beyond competition to embrace collaboration, according to members of a panel at the 2023 IADC Offshore Regional Forum in Houston on 26 September.

“We are entering a significant transformation period, and it’s going to present a once-in-a-generation opportunity,” said panelist Evelyn MacLean, Workforce Energy Task Force Director at the International Association of Oil and Gas Producers (IOGP). What makes this recovery different than prior periods, she said, is the rise of renewables.

The talent landscape

With the renewables sector competing with oil and gas for talent, opportunities for the workforce are increasing exponentially. Ms MacLean pointed to a projected doubling of the EU’s 650,000-strong wind and solar workforce by the end of the decade and to the approximately 1.5 million new US wind and solar jobs expected by 2035 under the Inflation Reduction Act. With an estimated 60,000 electricians needed annually until 2031 for power grid expansions, she said, “how does our drilling sector retain its electricians, and how do we attract those needed to fuel growth requirements?” 

And then there’s the demographics problem. Not only is oil and gas experiencing high attrition through retirement of experienced personnel, but the next generation of talent is not keen to replace them. According to EY research, 62% of Gen Z and Millennial workers view a career in oil and gas as unappealing, while a McKinsey analysis found that oil and gas has fallen from 14th to 35th in terms of employer attractiveness among engineering and IT students. Ms MacLean called it sobering that oil and gas also lags other industries in diversity, equity and inclusion (DE&I) metrics.

“We are not making the progress that we need in order to have the security of supply necessary,” she said.

To that end, the IOGP is launching a standing committee tasked with establishing a workforce/DE&I industry roadmap that will include forums to share learnings and best practices, engagement with academia, educational outreach and DE&I guidance. The committee’s mandate emerged from a baseline study IOGP published in May calling for an integrated approach to workforce and DE&I issues.

In addition to working collaboratively to address external perceptions, the industry needs to retain existing talent by addressing their day-to-day experience and giving them the opportunity to learn digital skills and work smarter, Ms MacLean said.

“People have no tolerance anymore for mundane, tedious work that could be automated or that could be done in a much more efficient way. We need to build our digital dexterity, and there’s no better sector than our sector to create deeply complex and technical opportunities to satisfy even the most curious and the most intelligent of workforce members.”

The digital future is here

Investment in new technologies, particularly digitalization, will be essential to tackling the divide between the world’s need for more energy and its ambition for net zero emissions. Richard Lynch, Senior Vice President Technology & Services at Hess, called digital collaboration a “strategic imperative” – the key to accelerating learning, making standardization the norm, radically improving safety, shortening timelines, reducing costs and increasing profits.

He described a vision for a digital future in which continuous improvement will be managed by digital twins and where the industry will operate with shortened supply chains, automated and optimized logistics, seamless electronic commerce and an improved energy footprint. 

“Autonomous operations, autonomous maintenance and the so-called automated field of the future is literally at our doorstep. It’s just around the corner from where we are today,” Mr Lynch said. An army of problem solvers with shared objectives is required to make this vision a reality. While shifting from a competitive to a collaborative mindset is a big cultural change, it could result in massive benefits and profits for everybody, he added.

“This is going to require shared data, digital data and information, data analytic algorithms, automation controls, machine learning, artificial intelligence, remote sensing, robotics, autonomous transformation, cloud storage. Ultimately, this is going to be driven on the back of quantum computing.” 

Technological advances that are already driving increased confidence in deepwater exploration include “unbelievable breakthroughs” in seismic that are leading to new discoveries and providing pictures of things in the substrate that have not been understood in the past, Mr Lynch said.

“The deepwater basins in the Gulf of Mexico and around the Atlantic margin have been lit up like we’ve never seen them before.”

Upgrading the fleet

It’s been estimated that most existing deepwater assets will be more than 20 years old by 2030, leaving the offshore industry with the question of whether to make the huge investments required to design and manufacture new rigs or to direct investment to retrofitting existing assets, another costly proposition. 

Ramesh Maini, President & CEO of engineering and software development company Zentech, said his company has been involved with a number of major conversions over the past few years, including converting some stacked rigs into mobile offshore production units or LNG units. Technological advances helping to support the work of design and engineering teams with rig conversions include extended-reality scanning, which allows 1-2 mm accuracy and an immersive 3D experience to better define the situation, Mr Maini said.

Further, equipment manufacturers and service companies are looking at ways to improve rig performance, including developing low-carbon technologies like battery storage, applying predictive analytics for more cost-effective equipment maintenance, and deploying remote technologies for training and repairs, Mr Maini said.

“Everyone’s thinking out of the box, trying to come up with better ways to do things.” 

When it comes to the question of who should pay for the rig and equipment upgrades needed to maximize value during the deepwater recovery, Ryan Tull, Managing Director, Energy Investment Banking at JPMorgan, said this: The cost of debt for offshore drillers today is between 8% and 9%, while the cost of debt for large majors is closer to approximately 4% or 5%. That contrast creates some risk-sharing opportunities.

“To the extent you can push back on things like mobilization costs, upgrade costs, etc, to your customers, you absolutely should be doing that. They have a lower cost of capital, and you have to get paid for it one way or the other,” Mr Tull said, although he acknowledged that may not be easy given the competitive dynamics of the industry. “You should lean more on your customers to make sure that they’re absolutely paying you for all of the work that you do, including potentially fronting you the money for things that you don’t have access to capital for today.”

Attracting investors

The drilling sector is an asset-heavy business that, unfortunately, runs in cycles. When the going gets good, people start to overbuild, although he doesn’t see that on the horizon at the moment. Mr Tull stressed that continued cost discipline is key: Show investors the money, and they will invest.

“The world needs all energy, not just the new transition energies – and at the end of the day, investors, I think, realize that. As long as you are helping your customers generate returns and cash flow, that money flows into the energy space broadly, and it will create the demand for you to continue to provide your services.”

The industry spent over $100 billion on new rigs between roughly 2004 and 2014 that were worth less than $10 billion at the bottom of the cycle – what Mr Tull called a “nasty, dark period.” Investors got beaten up badly, but their interest is returning. The energy space last year was the top-performing sector in the S&P 500 by a massive margin, he said.

Mr Tull said he feels good about the continued outlook for deepwater drilling. Among other indicators, there’s more balance in the supply and demand both for energy and for offshore rigs. Oil pricing looks favorable, too, with JPMorgan calling for a long-term oil price average of between $80-$120/bbl.

“Those are really good numbers when one considers that the offshore space has expected breakevens today at $50/bbl or below,” Mr Tull said. “That leaves a lot of room or margin for your clients to drill those offshore projects.”  DC