Even above technology, industry must push training

Critical D&C issues with Pete Miller, National Oilwell Varco

Pete Miller is chairman, president and CEO of National Oilwell Varco.

DC: What do you see as the most critical issue facing the drilling and completion industry today?

Miller: We’re in two worlds right now. On one hand we have the oil world. Oil price levels are significant, and that means there’s a tremendous demand internationally for oil drilling, whether it’s in the Middle East, South America, North Africa. On the other hand is the natural gas world, where prices are problematic. Going into the winter, the US is almost at record storage, and, by all appearances, it’s going to be a warm winter. For land drillers, the market is softening because natural gas is $7 and could be headed lower.

So we have a tale of two cities right now — the vibrant oil business and the very nervous gas business. That’s the dichotomy we’re trying to deal with in the industry today.

DC: Are you seeing a growing reluctance among the land drillers to re-invest?

Miller: Absolutely. Most land drilling companies have already stopped investing anywhere near the levels they’ve invested the last couple of years. Conversely, the deepwater players continue to invest very heavily. National Oilwell Varco (NOV) took deepwater orders almost continuously throughout 2007, and I don’t see that stopping anytime soon. With projects like the Tupi field in Brazil and other areas off West Africa, the demand for deepwater rigs will remain significant up through 2015. Clearly, the people looking for oil in deepwater expect that to be a very vibrant business well into the future.

DC: So how do you go about encouraging the land market to think ahead to the next up-cycle and continue to invest?

Miller: Well, you can’t. At the end of the day, if they want to build, they will build. We’re pricing elastic. NOV can offer its rigs for free and they don’t want them — because they don’t want too many rigs out there. It’s not a pricing mechanism.

From NOV’s standpoint, we make sure that we have a worldwide presence, because companies are still buying rigs in Russia, in North Africa and in the Middle East. The global market is, for the most part, an oil play. Therefore, with oil at about $90 a barrel today, clearly the worldwide business is vibrant. If you have a global footprint like NOV does, you can get business wherever you want. If you’re a local player and trying to sell into the US land market, it’s pretty tough right now.

DC: Does this separation of the oil and gas market pose any challenges to NOV?

Miller: No, actually it’s nice to have one of the markets going. There’s just a little bit of a disconnect between the price of oil and gas, and ultimately, they will come back together. That’s one reason the natural gas market hasn’t fallen apart completely — people are still looking for that to happen.

DC: The price of oil has obviously revitalized the industry and kept drilling activities at a very healthy pace. But with oil up near the $100 mark, do you think the price of oil is too high for our own good?

Miller: Yes, without question. I think everybody would rather see $60 or $70 oil. At $60, you can still drill just about anything in the world, and you won’t have the same demand destruction.

You also have to understand that the rest of the world hasn’t been impacted by high oil prices the way Americans have been, and that’s because the dollar is so weak. Europeans are effectively paying about the same price for oil as a year ago because of the currency exchange rate. Because oil is priced in dollars, we’re suffering greatly in the US. In other parts of the world, because their currencies have gotten so strong against the dollar, they’re effectively paying less for oil. It’s the same in China, Norway, all over the world.

NOV is in 49 countries and does international business in 28 currencies. The weakness of the dollar has impacted us significantly. Currency is so important to our business today. I think people need to be concerned about it.

DC: What progress do you expect to be made toward achieving further drilling automation over the next couple of years?

Miller: I think we’re on the cusp of seeing a lot of big changes. They will be subtle to a person looking in from the outside, but they will be very significant to the people operating the rigs. The biggest one is AC technology. More and more rigs are moving towards AC technology. Certainly the offshore drillers have been there for some time, and now there is significant movement on land as well.
AC power brings a lot of changes to drilling operations. It’s much more power-efficient, so you burn less fuel to get the same power. In turn, when you use less fuel, you cut back on the amount of hydraulics. Because AC is direct drive, you also reduce the number of gears you need; gears mean you don’t have to use oil. AC technology will enable the industry to make smaller motors and smaller rigs.
Almost all deepwater rigs being built today are AC, and we’re starting to see that on land as well. I think it’s a trend that will continue to push through the industry.

The hurdle we have to cross is that AC is very different from the old DC power, so employees will need a different skill set.

DC: That brings us to the big challenge of training.

Miller: The industry must push hard on training. As the new deepwater rigs come out, the demand for service people and experience will only increase. NOV made a very significant commitment to training in 2007. We opened a technical college in three locations — Kristiansand, Norway; Houston; and Singapore. We are hiring new people from all over the world, from South Africa, Romania, Russia, the US, etc, and sending them to the technical college for one entire year on full payroll.They can go to the field with an experienced person to get on-the-job experience, but we won’t send them off on jobs before they graduate. That’s the commitment we’ve made to the industry. In 2008 we will spend over $30 million on training these people, and it’s money well spent.

We know that some of these people will get hired away from NOV once they’re trained, but we will continue to put our people through this training because we know the industry needs it.

NOV has also started its mobile training facility, which is a classroom within an 18-wheeler. It can train 20 people at a time using simulators and NOV equipment, and it’s been all over the country doing training.

I think that training is something we must commit to over the next 2-3 years, even more than technology or automation. It’s got to be about training. We need people who know what they’re doing on the drilling rig and what they’re doing with the equipment. If they don’t, it will be very costly to the industry.

DC: What skills does the technical college focus on?
Miller: Primarily electronics. We make sure the students are fully adept at AC/DC software. If you look at the issues offshore drillers are facing today, they’re almost all IT issues. NOV has 3-4 remote facilities around the world, where we can remotely go on to a rig and troubleshoot the problem. If a rig’s drawworks isn’t working right, we can connect to it via the Internet, troubleshoot the control system, then make tweaks. We don’t have to send people out to the rig.

The technical college focuses on this type of training — on top of mechanical training like how to tear down a top drive and put it back together, how to quickly change parts in the field, how to do maintenance and repair on the rig rather than shipping the equipment in. It’s very much a service-oriented training.

NOV is also recruiting very heavily from the military, as well cities like Detroit and Cleveland, where the automobile industry has softened. We’re finding people who have already had some technical training, and we’re putting them in NOV’s technical college. We’ll probably put 1,500 people through it this year. I’m excited about it.

DC: Some operators are growing increasingly concerned about cost increases. What is your view on that?

Miller: The world is supply and demand. If operators think it’s too expensive, then don’t drill. It’s a simple deal. If you think what we sell is too expensive, then don’t buy it. That’s the way a free economy works. At some point, if the costs get out of control, they’ll stop drilling. If they stop drilling, cost pressures will abate. This is the epitome of the free market.

Moreover, an operator at $90 oil and $7 gas is doing just fine, and they’re certainly continuing to drill.

DC: Do you think the pace of cost escalation is at least slowing down?

Miller: To a certain extent. There was some pricing leverage before, but today it’s more a recoup of cost. I think people are moving their pricing today simply their own costs have increased. But, yes, it is abating. At the end of the day, prices will abate if necessary. If the price of oil goes to $40 a barrel, costs will drop in accordance. If the price of oil sits around $90 or $100, costs won’t drop because there will continue to be significant demand.

Today we really do have a demand-pull situation: People are demanding things, and as demand goes up, so will costs. It’s very much a free market, and it’s all about supply and demand.

DC: Operators say they’re looking at more than dayrates when choosing drilling contractors or service companies — they’re looking for value and reliability. How is NOV offering value for operators?

Miller: It’s the reliability of equipment, the automation, the support of the equipment once it goes to the field. NOV has invested heavily in infrastructure so that no matter where a rig goes, we will have supply houses and operations to support the rig. To us, it’s all about life cycle. It’s not just about selling something. When we sell a rig, we’ll support it for the next 25 years. That life cycle is what creates value.

DC: Drilling contractors have seen a shift in their major customer base from majors to national oil companies. Has that been the case with NOV as well?

Miller: Absolutely. National oil companies are some of our biggest customers today. They’re becoming much greater players in what we do. We have about $8 billion in backlog now, and 85% of that is international. We’re very much impacted by NOCs, and very positively so, because the national oil companies really do want to know about life cycle and value. And NOV is in a good position to take care of their needs.

Pete Miller is chairman, president and CEO of National Oilwell Varco.