High activities bring complex challenges

Critical D&C issues with Rodney Eads, Pride International

RODNEY EADS IS executive vice president and chief operating officer of Pride International. Mr Eads serves as chairman of the 2008 IADC/SPE Drilling Conference, 4-6 March in Orlando, Fla.

DC: From your perspective at Pride International, what do you see as the most critical issue facing the drilling & completion industry today? What can we do about it?

EADS: Providing competent engineering and operating personnel is the most critical issue. Attracting and retaining the thousands of new personnel needed for the increased activity is a huge challenge, but just having the people is not the main concern.

We must ensure that no priority is higher than the safety of our workforce and the protection of the environment. One could state that these have always been priorities, especially in the last 25 years. However, the industry is now facing significant challenges and associated risks that it has not seen since the late ’70s and early ’80s, when a huge ramp-up of drilling activity took place. I can see the “perfect storm” potential, with the increasing number of new rigs being constructed — last count was approximately 175 offshore and approximately 300 land rigs — and few being retired; more high-tech operations that command more highly trained personnel; more challenging environments such as deepwater, high current offshore operations, HPHT wells and arctic drilling; and a high-cost environment that adds the risk of “cutting corners” if strong discipline is not in place.

The industry must address the risks associated with this amazing level of activity and complexity. And I think the only way we will mitigate and control risks is by ensuring strict implementation of safety management systems with competency assurance, working together by sharing best practices and sharing lessons learned so we don’t repeat the same mistakes.

A key point on competency is that training does not equal competency. Training is a vital element of achieving competency, but demonstration of skills is the other key component, and this adds time, extra effort and extra cost.

In regard to staffing needs, not only are we competing with our peers for the experienced employee, we’re also competing with the service companies and our customers — as well as other industries — for the best and brightest of the younger generation. It is certainly a challenge, particularly with the unconventional lifestyle that many jobs in our industry demand.

Within Pride International, we have a number of initiatives to attract quality personnel to the company, including targeting personnel exiting the military.   We have in the last two years doubled our expenditures for training/competency and added two distinct programs to “accelerate the learning curve” for high-potential rig hands and rig managers.

There will be an excellent discussion on this issue at the 2008 IADC/SPE Drilling Conference, which has a plenary session devoted to this subject to underscore the critical nature of the people needs. ( “Roadmap to the Future – People and Processes.”)

DC: How is Pride working to reduce total drilling costs for operators, either through rig/rig equipment or other technologies?

EADS: We constantly review our operating metrics both internally and with our clients to reduce downtime and other nonproductive time costs. We have an internal team focused on rig-operating performance. This team monitors and reports monthly how the rigs are doing in regard to tripping times, casing running times, riser running and retrieving times, and BOP test times, i.e., the operations in which we have major control. The idea here is to constantly look for best practices that we can share across our fleet.

Our three new drillships under construction have incorporated numerous design features to increase efficiencies with riser and pipe handling, storage and use of multiple drilling fluid types, and simultaneous well operations. We work closely with other drilling and completion service companies to develop new equipment and techniques to improve efficiency. With dayrates and other cost factors for all of us at all-time highs, our clients expect us to be fully engaged in improving their results with full attention to safety and environmental goals.

DC: What have been some challenges specific to Pride as it shifts its focus to offshore drilling with emphasis on deepwater floaters?

EADS: The last two to three years have been specifically devoted to the improved maintenance and upgrading of our fleet, with special attention to existing jackups and floaters. Shipyard downtime has been substantially decreased by changing our planning and procurement process. The divestiture of our Latin America land business last year has enabled us to focus more on the expansion of our offshore fleet, initially with the order of three new ultra-deepwater drillships, now under construction. The key positions of our newbuild project team have already been staffed with highly experienced floater personnel, and we’ve increased our engineering and technical staff with personnel highly experienced in the offshore, and particularly the floater, side of the business.

In addition to our three newbuild projects, we have several ongoing shipyard upgrade and maintenance projects, a fleet of 28 jackups, five managed deepwater rigs that are on production units, and 14 floaters to operate. It is an exciting time to be in this business, and Pride International is poised for growth.

DC: Do you think that the high oil prices we’re seeing now is a challenge itself for the industry?

EADS: The higher oil prices we’ve seen since 2004 have been a blessing to the industry, as it has allowed the industry to “re-tool” and allowed technology and R&D to become robust efforts again. Also, this is the first time that I have seen that all companies involved with the “energy supply chain” from the manufacturers to the service companies to the operators are making acceptable profits that will encourage and sustain growth.

However, there’s a range of commodity prices for oil and gas that’s healthy for the world economy, our clients and our industry. That range continues to be a moving target, and it is a very complex issue. In my opinion, the concern to this industry with “too high commodity prices” is threefold: If these prices induce a recession and stifle growth in developing countries, which have been driving the demand side, then demand will notably drop. These high prices also trigger the switch to alternative fuels and could usher in an era of increased governmental intervention. With oil now hovering around $100 per barrel, my personal opinion is that this price is a concern.

DC: Quite a few offshore drilling rigs are scheduled to be delivered in the next two years. How can drilling contractors ensure these rigs will get to work as smoothly as possible? What will be the sticking points in the process?

EADS: This is one of the key challenges for the drilling industry and the operators as significant delays could occur on major development projects around the globe if these rigs do not come out of the shipyards on time — and working properly! Many of the new offshore rigs have been ordered by groups that are not experienced drillers and have minimal, if any, operating organizations. The attention to detail in completing these complex rigs, and achieving valid commissioning, is an immense undertaking.

Also, when you consider that all the shipyards, equipment manufacturers and associated service companies are “to the max,” you can see the acute potential for problems as these rigs are delivered.

Some concern has been voiced that there will be rigs coming out of the shipyards unstaffed, simply due to the shortage of personnel in the industry.  My concern is not that they will be unstaffed, but as previously mentioned, that they will not have competent staff, which will be an industry concern as well as an individual company concern.

To alleviate these concerns, drilling contractors must start as early as possible with competent and experienced shipyard project teams, plan on manning the rigs with all key supervisors several months prior to the rig delivery, and have very detailed commissioning procedures, which includes having “systems integration testing.” These SIT programs are more than just testing a single component to see if it works properly; it means making sure all the equipment works together for each major process, i.e., dynamic positioning, drilling, fluid transfer, etc.

DC: Everyone is looking for and competing for contracts that are steady, long-term for their new rigs. Are you concerned by the number of newbuilds coming into the global fleet? There seems to be no real industry consensus on whether we’re overbuilding or not.

EADS: Am I concerned about the number of newbuilds? Yes and no.

Yes, primarily because of the reasons I mentioned earlier — the risk of poorly commissioned rigs and inadequate crew competencies, and the consequences to the entire industry. Yes, because many of the newbuilds are being built by speculator organizations that are not committed to this industry for the long term and don’t understand the complexities of building and operating offshore drilling rigs.

No, because I am extremely encouraged by the worldwide fundamental demand for oil and gas, the recognition that many of the existing major fields are on decline, the increase of drilling activity by the NOCs, and the industry geological success in many new offshore areas around the world, particularly deepwater. The giant Tupi field just announced by Petrobras is a prime example.

Because new projects continue to become more complex, many with deepwater requirements, operators have been and will continue to be very specific about the experience and performance records of the contractors they select. Overbuilding may occur, but we’re working to be fully utilized with our fleet because of the quality and value we deliver to our clients.

And, as with many situations, challenges for one company may present opportunities for others. We believe that some attractive asset acquisition opportunities may develop, and we are positioning ourselves to be able to quickly evaluate such opportunities.

DC: Service companies say it’s a major challenge for them to get the industry to invest in technologies that cost more now and may take years to provide a return. How are drilling contractors balancing the need to keep costs down while investing in new technologies/equipment for the future?

EADS: We heavily scrutinize every capital expenditure we make: Even if it sounds like a good idea, if the project can’t meet our economic hurdle rate, we don’t do it.

I’ll use our new drillships as an example. They’ve been designed with the latest
technology, which has been field-proven, with depth rating to 12,000 ft of water, and quarters for 200 people. The invest-
ment cost is high, in the range of $650-
720 million, and the vessels have 35-year lives. But with expected dayrates, we can meet our economic hurdle rate, and we are proceeding to deliver this higher technology to the industry. The other key cost/technology consideration in deciding on the drillships was the versatility. These are not niche assets; they have global appeal and application.

Another way we work the “technology cost and payback” issue is to partner with our clients. We have numerous situations in which our clients have seen the significant advantage to them to have us install and operate some new technology. Sometimes we’ll share the costs, and sometimes the client will support all the costs.

There will be an excellent discussion on technology issues at the 2008 IADC/SPE Drilling Conference, with the second plenary session devoted to “Technology, the Key to Finding and Producing Difficult Hydrocarbons.”

DC: Operators say that cost increases are affecting the number of drilling programs they greenlight. Is that a concern for Pride? What are some possible solutions?

EADS: No doubt we are in a high-cost environment and, in such situations, the smaller reservoirs, particularly if they are not near infrastructure, will not make the cut. So, yes, I’m sure some drilling programs are being deferred due to cost. The good news is that, on a global basis, there is still full demand for drilling services. The market is what drives the cost situation. Our job in reducing cost is to continually look for ways to be more efficient, with a key focus on reducing the “flat time” on the drilling curves.

One proven solution to reduce costs in areas of marginal economics is for operators to partner and share services and enable more long-term commitment to the drilling and services companies, i.e., have a “rig club arrangement.” I have seen this happen in several areas around the world, and it has been very effective in lowering drilling costs. The mob and demob costs of each operator starting and stopping operations in these areas can be significantly reduced and operating efficiencies significantly increased.
A great opportunity to hear industry experts discuss this issue will be at the Drilling Conference’s first plenary session (“Operating Costs: Validation, Consequences and Solutions”).

DC: Amid the bustling drilling activity worldwide, the US Gulf of Mexico has been sticking out like a sore thumb. What does the near-term future look like in the GOM? Can the shallow-water market there be revitalized?

EADS: When you discuss the US GOM, the two main sectors, shallow water or shelf, and deepwater, need to be addressed separately.
The commodity market price of gas is the primary driver of drilling activity on the shelf and the associated jackup utilization rate. Also, the majority of wells drilled on the shelf are by independent operators, and these companies tend to be more short-term focused due to their capital structure. Add to this the merger and acquisition activity of the independents, and there is inherent volatility in the shallow water GOM. The good news is that, as we speak, commodity prices are over $8/MCF, which is a price our shelf customers tell us meets their hurdle rate for most projects, and jackup utilization is rising from last year and is over 80%. Additionally, Pemex has just announced their 2008 plans for overall increased offshore drilling, which should sustain and possibly increase overall shallow water rig demand in the GOM.

There is no activity concern with the deepwater GOM. More discoveries are being made… Julia was recently announced by ExxonMobil and StatoilHydro. This is a very robust deepwater market, with operators telling us they have drilling activities they would conduct in 2008-2009 but simply cannot get the rig to do it. And Pemex is just getting started on their deepwater prospects, which have significant potential.

DC: What progress or breakthroughs would you like to see in drilling automation over the next couple of years? What are the obstacles in the way of total (or near total) automation? Has automation brought any positive impact on Pride’s operations?

EADS: There is a technical clarification that needs to be made when discussing automation on drilling rigs. Automation, if we define it as someone pushing a button and the drilling process commences and runs itself, is far away, and in my opinion may never make sense. Why? Because the drilling process is very “un-steady state.” The industry over the years has had several projects to automate a drilling rig, and none have been viable in their entirety.

What we will be able to do, and have done, is to increase the “mechanization” of the rigs, primarily aimed at taking the human exposure out of the more hazardous operations, and whether technically correct or not, this is what is now being described as automation. There have been a number of improvements in recent years, including automatic pipe handling, iron roughnecks, drillstring pickup/lay down machines, casing running equipment precluding the need for the infamous stabber board, land rig designs including all the above and with quick rig-up and rig-down mechanizations. We have added many of these improvements to our existing rigs, and our new drillships include all of the latest automation technology with the clear expectation of increased safety and efficiency.

The primary obstacles to increased automation in drilling operations are the costs to develop, manufacture and maintain, and highly trained people to operate and maintain the equipment … and this is a key concern. When automated pipe handling first came out, there were visions of reducing manpower on the rigs. Not only did this not happen in most cases, but we learned we needed to have more highly trained and expensive personnel. For example, you might displace a floorhand but now need an electronic technician.

The key improvement I would like to see is increased reliability of the automated systems we now have, before we take the “next step” in automation.

DC: What challenges/opportunities are drilling contractors seeing as national oil companies emerge as major customers? How are NOCs different in the way they prioritize drilling projects or the value that different drilling contractors can bring to them?

EADS: We work for several national oil companies in the major offshore basins of the world with jackup and floater services. While the tendering and contracting processes tend to be very structured, the work programs are usually longer term – say, three to five years – which provides the time to become well-established and develop local staff into leadership positions operationally and administratively. A key benefit of working with the NOCs is the probability of long-term work, both in good and depressed markets, because their field development horizons may be 20 or 30 years and they have strategic, as well as economic, criteria for their activity.

DC: What are some of biggest challenges you’re seeing in deepwater? In HPHT? ERD?

EADS: As our customers continue to move into deeper water, 8,000 ft to 10,000 ft and more, we approach the present limits of riser technology, subsurface wellhead design and control, and a variety of other equipment and technology issues. Add to the deepwater, ultra-deep drilling as another key challenge, and we’re seeing more of this, particularly in the US GOM. The rigs drilling these wells are being used to their maximum design, with casing loads approaching 2 million lbs, and 1-million-lb rotating hookloads not uncommon!
The challenge is to efficiently operate and maintain this highly loaded equipment in a “flat out” operating environment.

DC: Is there anything you would like to add?

EADS: I would like to make a closing invitation to all of your readers to attend the IADC/SPE Drilling Conference & Exhibition in Orlando, Fla., scheduled March 4-6. I’m privileged to serve as conference chairman this year and, as previously mentioned, the technology, people, and cost issues I’ve discussed here will be discussed by industry experts, with audience participation! You won’t want to miss it.
Rodney W. EADS’ career in the energy industry includes engineering, operations management and executive positions, including 20 years of service with Exxon Corp, 9 years as senior vice president of worldwide operations at Diamond Offshore Drilling Company, and his present appointment at Pride International in 2006. He holds a Bachelor of Science degree in Chemical Engineering from West Virginia Institute of Technology and a Master of Business Administration degree from Rice University. He is a career long member of the IADC and SPE.

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