Front-end engineering is key to better projects

Critical D&C issues with Don Jacobsen, Hess Corp

By Jerry Greenberg, contributing editor

Don Jacobsen is vice president, global drilling and completions, for Hess Corp.

DC: What opportunities does the industry offer?

Jacobsen: There are a lot of great opportunities in our industry. E&P is a highly technical business, and the drilling and completion of wells are essential parts of that business. To meet global energy demands, we are pursuing more technically challenging resources like ultra-deepwater, tight gas, arctic and other unconventional plays.

Obviously, these plays are more robust with higher commodity prices, but we, as an industry, have to continue exploring and figuring out ways to economically develop these more challenging resources in an economical way. Although there is some slowdown in E&P activity in reaction to current market conditions, the longer-term view is still strong and that global energy demand will increase. In my 28 years in the industry, I have experienced a few of the ups and downs in this cyclical business, and no matter where we are in the cycle, it is has always been a challenging and fun ride.

DC: How might Hess’ lower 2009 capital and E&P budget affect its operations?

Jacobsen: Our activity levels have been ramping up since 2006 with a pretty dramatic increase in spend. For 2009, we have adjusted our capital plans to reflect current market conditions. Although there will be some impact to our drilling and completion activities, I do not consider it to be significant.

In global exploration, we have deepwater acreage in Libya, Egypt, Ghana, Indonesia, Brazil, Australia, and the Gulf of Mexico, which will all require drilling in 2009 and beyond.

Hess also has development and production drilling activity planned in 2009 and 2010 in the Gulf of Mexico, Denmark, Equatorial Guinea, Indonesia and North Dakota. We have scaled back the timing for some of these activities, but I view this in a positive light. Industrywide we have been in a high-price environment, and costs were increasing significantly. Now we have the opportunity to look more closely at what are we doing and how are we doing it. We plan to increase the interaction with our contractors and service providers to better design and execute our drilling and completions activities.

DC: What are some of the critical issues facing the drilling and completions industry, and how would those issues and challenges be met?

Jacobsen: Looking back on 2008 and thinking about 2009, I see critical issues in at least four areas of the drilling and completion industry. The first is improvement in safety performance. As an industry, we have made great strides in the last decade or so in drilling and completions operations to fundamentally improve our safety performance, but with the rapid increase in activity, new staff in the industry and new rigs with more complexity, our safety performance has suffered. We need focus in this critical area to deliver the kind of performance we want – incident-free operations.

The second issue is around integrity management and quality assurance/quality control of equipment. Again, with the rapid growth in activity in the last few years, a large number of tool failures, equipment failures and basic quality-control issues have occurred. This has led to a significant amount of nonproductive time and associated cost. Most companies, whether drilling contractors or service companies, have good quality control and integrity management processes in place. Therefore it is the execution of these processes that need improvement.

A challenge that is a little bit tougher to address is breaking the paradigm in the drilling and completion industry of “we can get it done.” One of the things I love about this business is the innovation and optimism of the men and women who drill and complete wells for a living. However, we are sometimes our own worst enemy by trying to deliver very technical and/or challenging wells with inadequate subsurface data and a compressed planning schedule. This collectively results in insufficient front-end engineering.

I like to contrast drilling and completions operations with construction of facilities where a basis of design is normally locked in, and front-end engineering design is completed before execution is done. We have that same principle in the drilling and completion business, but we often squeeze the front end and don’t provide adequate planning time to fully engineer, design and plan our operations.

This situation is not unique to Hess. I have seen this happen throughout the industry. If we spend more time on front-end engineering, lock in the design basis, identify and understand all the uncertainties, and develop contingency plans for those uncertainties, performance will definitely improve.

The last challenge I see is application of new technology. Across the industry we are dealing with more complex and challenging projects, where new technology is not just an option but often a necessity. For example, in the Bakken play in North Dakota, we are drilling 10,000-ft lateral sections and completing with pinpoint fracs. This past year we drilled what we called a “fishbone well,” with one main spine and six lateral sidetracks such that it looks like the skeleton of a fish. Total drilled footage for this well was over 31,000 ft, a tremendous accomplishment for an onshore well drilled with a relatively small and low-technology rig.

In Southeast Asia, we are drilling directionally complex wells into carbonate reef structures with vugs and fractures that lead to massive lost-circulation problems. These wells push the limits of directional tools and require careful fluid management practices. In West Africa, we are drilling extended-reach wells where we walk a fine line between pore pressure and fracture gradients, which result in significant hole-cleaning and wellbore stability challenges. In the Gulf of Mexico, we are drilling below 30,000 ft in deep subsalt wells with significant pressure reversals and interesting technical challenges like bitumen flows.

DC: How do we deal with the need to meet these technological challenges while we are rapidly growing?

Jacobsen: Today’s technological hurdles are perhaps the most exciting part of our business right now. How do we bring forward and apply the technologies that already exist or need to be developed? I see bundling some of the critical technologies such as managed pressure drilling, expandable casing and potentially intelligent drill pipe as a key enabler for us to walk this fine line between lost circulation and maintaining hole stability.

I also envision a time when most of a well is drilled without pumping cement by using expandable casing and swellable elastomers. Today, we are using both these technologies throughout the world with increasing frequency and with high reliability. We’ve proven that casing can be expanded into soft formations and, with swellable elastomers, have already set drilling liners without cement.

These are the types of challenges that make working in this business fun and exciting. When we achieve something not done before, we advance our entire industry.

DC: Would the current slowdown affect the service companies and development of new technologies?

Jacobsen: I hope there is not an overreaction. With reductions in drilling and completion activities, revenues will likely come down for the service companies, and R&D spend could be impacted. But R&D spend has been pretty robust for the last few years, and I hope that the companies will maintain a reasonable level of R&D spend that reflects the long-term view that new technology is required to economically find and develop the more technically challenging reserves.

DC: Is the shortfall in planning time a recent phenomenon because of higher activity in the past few years?

Jacobsen: My quick answer is no. I think it has always been a challenge; however, the recent high activity levels have stretched the technical capability of the industry.

DC: How should we address the planning gaps?

Jacobsen: As an industry, we have to build in more project planning time than what we typically do and ensure that adequate technical resources are available. We are delivering complex engineering projects that cost millions to hundreds of millions of dollars, and we often try to do that with a relatively small team in a compressed time frame. In comparison, other industries and technical projects typically see longer planning windows and more technical resources applied.

If we are going to significantly change the performance of the industry in these challenging wells, we have to do some things differently, and one obvious thing for me is to ensure that more upfront engineering is done. The other key improvement area is better integration of the rig contractors and service companies into our planning process.

DC: Is the increasing incident rate due primarily to higher activity?

Jacobsen: The entire industry has had an influx of new employees, which has definitely provided a real challenge. However, drilling contractors, service companies and operators like Hess all have good safety orientation programs, robust HSE management systems, and require adequate safety training. So, what’s not working? We have experienced high turnover on rigs throughout the world, and it is hard to get a well-performing team when people are coming and going so often.

We’ve also struggled with hazard identification and embedment of a “stop work” culture. With current conditions and the slowdown in activity, we can focus more on the development and training of new staff and can hopefully improve staff stability on the rigs.

DC: How do we address excessive equipment failures? What are the solutions?

Jacobsen: We have increasingly complex equipment, tools and systems that really demand robust quality control processes and integrity management systems. Given the recent high demand for tools and stretch in our industry, I believe that many of the equipment failures experienced this past year were due to insufficient “shop time” for maintenance and inspection, stretching the operating life of equipment and/or inadequately trained staff. We now have the opportunity to improve these short-comings in our business.

As part of our 2009 performance improvement plan within Hess, we intend to work closely with our suppliers and contractors to ensure better quality control on the equipment we purchase or hire and adequate integrity management on the rigs we use. While working through these improvement efforts, we will enlist third-party help to perform audits, and check and verify equipment.

DC: Let’s move to completions. What are some of the critical issues affecting the completion side of the business?

Jacobsen: I see the same issues on the completion side of the business. QA and QC of equipment is critical, especially given the complexity of most of our completions and the life-of-well requirements. My comments above about planning equally apply to completion design and execution.

Regarding technology, we are pushing the limits almost everywhere. Intelligent well completions are becoming more commonplace around the world, but have a particular application to deepwater. With the cost of offshore drilling being so high, we can significantly improve the overall project economics by optimizing and increasing the productivity of each.

Many of the deepwater Gulf of Mexico development wells now cost upwards of $200 million. If we have a development with multiple zones that require completions in each zone, total development costs can be significantly lowered by using intelligent well technology to increase the number of completions in each wellbore.

For example, we are currently doing engineering work for a GOM deepwater, subsalt development with dual intelligent well completions at 31,000 ft with two frac-packs per completion, and deep-set gas lift valves. The added complexity is significant and would result in some industry firsts.

DC: With oil prices falling to the $40s, does that put a constraint on installing intelligent well completions?

Jacobsen: No, actually I think it’s the opposite. We can utilize the technology to reduce the overall development cost in a lower commodity price environment. If we reduce the number of wells by using intelligent well systems and completions, the overall project economics will be helped. Although our goal is always to apply the right technology to drive down the total development cost, a lower commodity price environment raises the urgency to do so.

DC: In light of a slowdown in activity, will you be hiring fewer people and putting more emphasis on training current personnel?

Jacobsen: We will continue to hire here at Hess for skilled drilling and completions staff. We have a technically challenging, global portfolio that requires highly skilled engineers and professional operations supervisors. Having the right number of staff with the right skills in place is a priority for me. We will be actively recruiting in the marketplace to further build our technical capability. In addition, we will continue to train and develop our existing staff, many of whom have been with Hess for five years or less.

DC: Are you having difficulties finding the right people?

Jacobsen: This past year has been challenging due to the high activity levels in the industry. Luckily, we have hired some sharp, motivated young engineers directly out of universities over the past few years, and have brought on some more senior talent from around the industry. We also have a number of very experienced staff nearing retirement. Like many companies, we have a gap in the middle, this 10- to 15-year gap of experienced engineering professionals or offshore supervisory staff. It is still a competitive marketplace, but, with Hess’ exciting global portfolio and the technical opportunities we are going to have in 2009 and beyond, I think we are a great company to join, so I am bullish on our ability to find staff.