Personnel must not be sacrificed in soft cycle

Critical D&C issues with Ed Jacob, Grey Wolf Drilling

By Linda Hsieh, assistant managing editor

Ed Jacob is senior vice president – operations for Grey Wolf Drilling. The company’s acquisition by Precision Drilling was completed in late December.

DC: Drilling contractors have been saying for several years that recruiting and training personnel is their biggest goal. How is the industry doing on that front?

Jacob: As an industry, it has not taken the opportunity that was available to them. I don’t think we have done as well as we should have. Some people have been more creative and have tapped different resources or tried things to separate themselves from others. For example, interviewing and hiring military personnel or junior military officers. We’re also seeing a lot more people doing behavior-based training for personnel management and management styles.

Still, as an industry, there’s still too many companies that, in my opinion, are just hiring people off the street, putting them out there as a warm body, and hope they learn through on-the-job training. The business today does not allow you to do that and be successful.

I think we need to do more training, regardless of the business state. Right now we’re in a market correction, and we don’t know how deep it will be or how long it will last. But it would be extremely short-sighted on our part to sacrifice training and recruiting – because we know the business is going to come back. It always does, and it will come back up just as violently as it did coming down.

DC: What kind of recruitment and training plans does Grey Wolf have during this market correction period?

Jacob: We will actually be intensifying our recruiting plans. We see this as an opportunity to upgrade our personnel and bring in more talent. The implementation of new technologies is also requiring more sophisticated employees.

For drilling contractors, I think the worst thing we can do now is sacrifice any recruiting and training programs or investments we’ve made in the future of our labor market. We can’t go back to the way we always have – relying on people who have been with us for years to carry us forward. We have to look at the next generation and the generation after that, not only of people who will man our equipment but also manage our companies. There’s a huge gap and between this generation and the next one.

More than anything else, that’s the one thing that I hope contractors have learned. We cannot sacrifice the investments we’ve made in people and training. In soft cycles, we ought to be investing in people instead of equipment.

DC: The military recruits you mentioned – has that been a good personnel resource for you?

Jacob: Absolutely. We’ve found that their leadership skills, even at the entry level, are far more advanced than even the average college graduate, or someone with five years of experience. We can teach them our business, but we can’t teach attitude or leadership.

DC: So it sounds like you don’t think this industry has learned much from its previous downturns?

Jacob: Historically, this industry has had a difficult time retaining lessons learned from previous cycles. This business is tied so tightly to supply and demand, yet we continue to overbuild. Overbuilding puts pressures on rates, returns on capital and every financial metric out there.

With that being said, you can make the argument that we’ve been retooling the industry with the building process over the last five years. Still, the business is a function of supply and demand. In the coming months, it will be interesting to see whether new-technology rigs will maintain its utilization above older-technology ones.

And this is what I mean: If you’re traveling 600 miles, you’d rather drive a luxury car like a Mercedes or BMW than a Toyota Corolla. But if all you need is to go down the street 10 miles every day, you don’t need that Mercedes or BMW – you can get by with a Corolla. So, the interesting thing will be: Can you put that high-technology rig on a well that requires just a Corolla and be competitive? I think that’s the key as we go through this market correction – will these plain vanilla wells support the economics required for the high technology?

DC: I thought the industry wasn’t seeing as many of the plain vanilla wells?

Jacob: That’s not necessarily true. They’re still out there. A lot of our wells are directionally drilled, but I think they’re all going to take a hit. Everything, even the shales, are beginning to feel the impact of the correction.

DC: Do the higher-technology rigs have a competitive edge over the older rigs?

Jacob: Absolutely, they do. They may not command the higher rate in a correcting market, but they will be the rig of choice.

DC: Have the advances of rig automation helped the industry to reduce the number of personnel we need on rigs?

Jacob: No, it has not reduced the number of people. Some rigs you can run with fewer people, but, because of the technology, you need people who are more technically trained.

DC: Then where does the value of rig automation lie for you?

Jacob: One value is its huge impact on safety. The fewer people we have putting their hands on the equipment and putting themselves in harm’s way, the better off we’ll be. It’s not faster, and it’s not cheaper. What it does is put fewer people in harm’s way.

DC: There have been reports in some markets of operators seeking renegotiations on contract prices due to the changing market. What are you seeing?

Jacob: There are two types of markets out there – long-term contract and the spot market. In the spot market, we’re definitely seeing a negative pressure on rates. That’s being generated not really by our customers but by our competitors. We really are our own worst enemy. The only reason we ever reduce the price of the rig is because there’s a competitor out there willing to reduce his price.

For long-term contracts, some customers will want to give us pushback to reduce the price. That may be easier done by privately held companies. However, a publicly held company is not in a position to reduce rates on those long-term contracts because it would open itself up to significant litigation from shareholders. We’ve told customers and Wall Street how much revenue we have based on long-term contracts.

I think we’ll continue to see pressures on the spot market, at least for the first six months of 2009. We’ll continue to see pressure on utilization and, therefore, dayrates. We don’t have a clear picture yet beyond the first six months of ’09. This market has started correcting itself in such a way that is unprecedented in my career. I’ve never seen anything happen so fast.

DC: How quickly and drastically did it happen?

Jacob: It was probably in late October that we first started seeing signs, and, in 75 days, we went from having two rigs on the bubble to 20 rigs that are coming down, and that number has gone up since then. We’ve seen a number of operators that are pulling back that typically would continue to work in these cycles on their specific plays. Even the major independents are becoming more aggressive in reducing their activity. They know they can ramp up later, but it’s all about conserving cash now. Our Rig 17 won Rig of the Year from Devon and still got released – the program just lost its funding.

DC: So, due to the global economic situation, we’re seeing things we haven’t seen in previous downturns?

Jacob: For example, the independents typically borrow money to fund their drilling programs, and the credit market is not available now, so they can’t drill. We’ve never seen a down cycle that’s been paralleled by global economic collapse. It’s unprecedented. That’s why there’s so much uncertainty.

DC: What advice can you give to drilling contractors so it doesn’t all come crashing down?

Jacob: Drilling contractors’ barrier of entry is not very high. People who had exited the business had begun to get back into the business, so you had this increase in supply. I mean, 1,500 is not a bad rig count, but it’s a 500-rig reduction from where we were, just under 2,000. That’s had a huge impact on utilization and dayrates. Depending on how long this correction lasts and how deep it goes, I believe it will provide opportunities for companies with cash to invest in companies that are looking for an exit strategy. They either have a debt load they can’t service or they don’t have an infrastructure to maintain their employees without work. I think this will open opportunities for companies to invest to increase their fleets and open into other geographical areas.

DC: Is this an opportunity to expand your international operations?

Jacob: Yes, that is a goal for Grey Wolf and the new Precision, and we’re aggressively looking at that. We’ll grow US presence, and grow internationally. We’re aggressively going after Mexico, the Middle East and North Africa.

DC: Are you taking any cost-cutting measures, with the economy as it is?

Jacob: Yes. We can’t control our vendors. What we can control is our planning process, and we have deferred all major capital projects like newbuilds and upgrades until the third quarter of 2009. We’re re-evaluating our procurement processes. And we’re monitoring pricing and product deliveries from all vendors to assure we get the best price at the right time without sacrificing quality.

DC: Have cost pressures gone down?

Jacob: We haven’t seen any reduction in cost. We’ve mostly maintained our costs as flat through 2008. We saw an increase in labor costs in ’08, but we do not anticipate any further increases in 2009.

DC: For parts and materials?

Jacob: We don’t believe that the market will be conducive to any price increases in ’09.

DC: Might it even go down some?

Jacob: One would think that, because of supply and demand. But their business is like a train – when ours starts shutting down, theirs will continue because they have considerable backlog. I don’t see any reduction in cost of product or vendor costs for at least the first six months of ’09. I think it’ll be flat.

DC: Drilling contractors are quickly canceling or deferring their newbuild plans. Do you think that’s a good thing for the market at this point, considering the economy and the overbuilding you mentioned earlier?

Jacob: Yeah, I think it’s a good thing to hold off. I can’t speak for other contractors, but at Grey Wolf, cash is king. We’re doing whatever we can do to spend as little cash as possible, so we can see how long and how deep this market correction will be. Plus, we’re going through an acquisition by Precision Drilling, so that’s another factor.

DC: Will that acquisition affect how you operate in 2009?

Jacob: It possibly could. Again, it comes down to how long and deep the market correction is. It will affect how we use our cash.

DC: Will natural gas prices be a big challenge for drilling contractors in the first half of 2009?

Jacob: Really, I’m surprised that natural gas prices have held where they are, between $5.70 and $6.50, considering where the price of oil has gone. I think natural gas prices will stay where they are for at least six months.
Natural gas is still the most efficient, environmentally sensitive hydrocarbon we can burn to power electricity. The US is driven by natural gas. The price will cycle up again – it’s just, will it be six months? A year? Two years? We don’t know. A lot will depend on the global economy.

DC: And do you think this $5.70 to $6.50 range is comfortable for your customers?

Jacob: It’s probably a little low for our customers; they’d prefer to see it around $7 to $8. That’s why we’re seeing some programs being shut down.

DC: What about the oversupply of gas in the market and how that will affect the market?

Jacob: Technically there is an oversupply, but it’s not a gas bubble like we saw in the ’80s and ’90s. The oversupply can be used up relatively quickly with any positive change in the economy.

DC: How has the Rockies market been for Grey Wolf and how might it be impacted in this market correction?

Jacob: It’s been our strongest region, along with the Mid-Continent. And those are the areas that are and will be the most affected as the market’s correcting. You’re driven by availability of infrastructure, by the abundance of natural gas and oil, by product prices and by environmental restrictions. That’s what we’ve seen.

DC: Your new PaDSRigs were built to operate in the Rockies on long-term contracts. How are they working out?

Jacob: We have one already working in there, and another is en route. The one there has already exceeded our expectations at initial start-up, as well as the expectations of the customer. Not only has it reduced the time needed to move between wells, it’s also cut down the time required to drill the well. We’ve cut it by a third from what we were doing before.

DC: On the technology side, what are some deficiencies you’re still seeing?

Jacob: I don’t think we’ve been able to get all the value we can out of automation. That has to do with both the shortage of experienced personnel and with technical limitations. Here’s an example: Even with all the automation, we’re still putting people in the derrick, and we still have cases of casing crews. Until we have no human hand touching a joint of pipe anywhere, we haven’t reached our full capabilities. And the technology to do that is not proven yet. It still has issues with reliability, efficiency and functionality. There are tools out there, but I think a lot of work can still be done.

DC: Any technologies or advances you see as necessary with regards to shales?

Jacob: The biggest positive about shales like the Haynesville and Piceance is it doesn’t produce water. It’s dry. One of the biggest challenges in plays like the Barnett and the Marcellus Shale is, what do you do with the water? How do they handle the produced water to get the gas out? That’s the biggest challenge operators have on the shales.

DC: Is there new technology coming out to deal with that?

Jacob: No. And environmentalists want the water to go back into the ground purer than when it came out. That’s creating a lot of issues with our customers. Shales are going to be a much more important play going forward. Other than the recent nonconventional shales, we’ve been producing the same formations for the last seven or eight years. The only reason we’ve been able to get more and more out of them is technology: 3D technology, frac technology and directional drilling technology.

DC: What specific technologies will be important in the coming few years to help drilling contractors drill better?

Jacob: Automation will be important. A cleaner-burning prime mover on the surface, like a cleaner-burning diesel engine, will be important in the future because we’ll have to reduce our emissions. There will be significant attention on our carbon footprint, and, as an industry, we have no idea what our carbon footprint is. Europeans are much further advanced with what they’re doing in the trading of carbons. We haven’t even started down that path, and I think we’ll have to start paying a lot more attention to that in the future.

Ed Jacob has served on the IADC Executive Committee and as VP of the Land Division.