In downturn, fundamentals can’t be overlooked

Critical D&C issues with Mark Burns, ENSCO Offshore

By Jerry Greenberg, contributing editor

Mark Burns is president of ENSCO Offshore International Co.

DC: What are some of the critical issues you see in the offshore industry worldwide?

Burns: Obviously the most critical issue, and the one on everyone’s mind, is how prolonged the current decline in industry activity will last. The economic issues affecting our global economy stretch across many industries and are not unique to ours. Our industry is cyclical in nature, and we need to work with our customers, suppliers and regulatory groups to manage through and ultimately smooth out the cycles.

Other critical issues include an aging workforce and the lack of qualified and trained technical personnel, particularly in the deepwater segment. As offshore drilling and marine support equipment continue to become more complex, the availability of qualified personnel to operate and maintain this sophisticated equipment becomes more critical. This is compounded by the fact that we will lose a high percentage of our workforce due to age and retirement over the next few years. As an industry, we need to be mindful of these issues and take care of the fundamentals.

DC: What do you consider to be some of the industry’s fundamentals?

Burns: Obviously we want to protect the health and safety of our people and ensure a strong focus on HSE performance. As an industry, we have become much better at sharing lessons learned between our companies, which we need to continue. ENSCO is completing its fifth year of improved safety performance, and it is something that we work hard at and are very proud of.

We need to continue recruiting, training and developing the next generation of industry personnel. If you look at what our industry spends to train and develop our personnel on an individual basis, we lead most other industries in this regard. So it is important when we do have a period of weak activity that we not lose qualified people to other industries.

And finally, the maintenance and upkeep of our assets, conducting our business in an ethical and legal manner and maintaining financial discipline are all key fundamentals of our industry.

DC: What about maintaining equipment during a downturn in drilling activity?

Burns: We must maintain our equipment to a high standard in both times of strong and weak activity levels. Having said that, there is a balance of managing maintenance costs during a period of weak activity. As with the first reaction to reduce personnel, so follows the reaction to reduce maintenance costs. There must be a balance in order to minimize equipment deterioration resulting in significant capital outlays once activity picks up.

ENSCO has been very proactive in this regard and has upgraded and added to its fleet counter-cyclically, thereby doing so at lower costs when shipyards and equipment were easily available and when rig downtime was less costly.

DC: Have you encountered any issues regarding equipment for your newbuild rigs or with equipment that required repair or maintenance?

Burns: We have had some examples of equipment delivered that have not performed as designed. This holds true for both newbuild and repaired equipment and can be attributed to various reasons, including poor manufacturing practices and improper factory acceptance tests.

At ENSCO, we work carefully with our major service and equipment providers, and we have been able to manage most challenges in this area. When the industry newbuild program began in earnest in 2004, companies were ill prepared to handle the number of orders that came through. At the same time, drilling contractors and operators were putting a lot of pressure on the equipment manufacturers to deliver, further exacerbating the problem.

Additionally, in some cases, technical support personnel have not been adequately trained, and this has caused additional commissioning and operating issues. On a positive note, one major equipment manufacturer has embarked on a strong technical training program. Although in its infancy, we are seeing some positive results from that.

DC: Do you think the industry generally is affected by the equipment issues?

Burns: Although the aggravation level is high, as is the cost of additional repairs and commissioning time, our industry has always been successful at designing, installing and operating complex equipment. As the newbuild cycle slows, companies will address these issues and move forward.

DC: How are your newbuilds affected by an industry downturn?

Burns: We are currently in the middle of the largest newbuild program in our company’s history, the ENSCO 8500 Series program. We are building seven deepwater semisubmersibles and are very pleased with the progress of the program. The first unit has been delivered to the US Gulf of Mexico and is undergoing final outfitting and commissioning prior to commencing a long-term contract. We currently have four units contracted upon their delivery and are actively marketing the remaining three units, which are not scheduled for delivery until 2011 and 2012. We believe the industry fundamentals remain very strong, particularly for the ultra-deepwater market, and anticipate no challenges in contracting the remaining units.

DC: Have you had problems attracting qualified and competent personnel?

Burns: As a company, we have been very proactive and successful in recruiting highly skilled personnel for both our jackup and semisubmersible operations. Where we haven’t been able to promote these skills from within, we have been able to recruit from the outside. We have been successful in recruiting and hiring from university programs, private industry and the military.

DC: How do you attract people to the industry during a downturn?

Burns: In recruiting people, we must keep focusing on the fundamentals of our industry. Number one, oil and gas will always be in demand. At some point, commodity prices will rise, and we will see demand curves rise. The people that enter our industry now will be well-placed for the upturn in activity.

We also need to further promote environmental awareness in our industry. We have long been viewed as an environmentally unfriendly industry. I think this perception is changing, and it is important we continue to promote this issue when recruiting young people. We need to remind potential recruits that both history and industry fundamentals are on our side.

DC: Do you see opportunities to acquire newbuild rigs from companies that can’t obtain credit to make shipyard payments?

Burns: As a company, we are monitoring the newbuild program very closely, and some opportunities have been presented to us. Many companies, as you mentioned, are under increasing pressure to meet their financial obligations, and if that presents an opportunity to invest or acquire assets at an attractive value, then we will pursue that.

DC: Would you be looking at acquiring semisubmersibles rather than jackups?

Burns: One strong point about our newbuild semi program is that they all are the same design, the ENSCO 8500 Series. We like standard equipment and consistency (across the series) so we can move people from unit to unit. We will look at potential semi newbuilds that are available; however, we like the fact that all of our units are consistent in design and operating capability.

With jackups, as with semis, should the right opportunity present itself, we would look at it very seriously. At this point, however, we feel over the next three years that we have enough to manage on the newbuild front with six ultra-deepwater semisubmersibles under construction. So we won’t say no, but we feel comfortable where we are in our newbuild program.

DC: The deepwater markets are probably going to remain strong. How do you see the jackup segment faring during the downturn?

Burns: Some jackup markets will remain stronger than others. The US Gulf of Mexico, Southeast Asia and West Africa markets will see some oversupply for a period of time due to weak commodity prices and operators cutting back on drilling plans. The North Sea and Middle East markets could potentially weaken, but not to the extent we have seen in those areas. ONGC in India and PEMEX in Mexico continue to be active, and we have not seen any significant pull back in those areas.

Mark Burns was named IADC Contractor of the Year in 2007.