Benchmarking the industry

By Julian Rogers, Deputy Editor

In the ultra-competitive world of oil and gas, the business of exploration and production (EP) is where the lion’s share of the majors’ gargantuan profits are unearthed. O&G puts upstream operations under the microscope in an exclusive interview with Marvin Odum, Executive Vice President for Shell EP, Americas (EPW).

From his office in Houston, Texas, Marvin Odum is the man charged with overall responsibility for the whole of Royal Dutch Shell’s EP business in the Western hemisphere. The lucrative EPW arm is a vital cog in the Anglo-Dutch giant’s international operations, handling 3400 staff and churning out 23 percent of Shell’s global oil and gas production. In terms of hard cash, Odum’s unit generated a whopping net income of $4.7 billion ¬in 2006 – 31 percent of Shell EP’s total. If you’re thinking that a hefty weight of expectation must rest on Odum’s shoulders, you’re probably thinking along the right lines.

Today, with total worldwide oil production barely meeting global daily consumption, the battle is on to venture further and deeper for those all-important hydrocarbons. Indeed, worldwide production levels constantly run the perilous risk of dipping below global usage, while the booming economies of China and India put increased strain on soaring demand. Odum concedes the situation looks bleak. “World oil demand currently hovers around 84 million barrels a day and production is 85 million. We’re delivering all the oil and gas we can, and yet it’s predicted that we’ll need another 35 percent into the market by 2020. Supply is barely ahead of demand and that narrow spread is why commodity prices have risen over the past few years.”

He also believes population increases will add additional pressure. “Over the next 25 years, the world’s population will grow by at least 1.3 billion. Combined with increasing prosperity, that will lead to growth in energy consumption of nearly 50 percent – all within one generation.” Scary stuff indeed, but when you look at the fact that oil and natural gas provides around 80 percent to today’s global energy mix, it is clear to see why the race to find alternative sources is paramount and not just a marketing ploy in a bid to be ‘seen to be green’.

“Hydrocarbons are the most affordable and accessible energy source on the planet, fueling economic growth and powering our lives,” says Odum. “They will continue to provide the foundation of world energy supply for at least the rest of this century, and to address the increasing demand we need to continue to explore and produce new reserves in ever more challenging environments.”

Experience counts

For Shell’s North American operations, that means drilling in contrasting and harsh conditions, from the deepwater of the Gulf Mexico to the frozen landscapes of Alaska. Odum, who has occupied his current position since 2005, argues that his company’s long-established experience in exploration proves an invaluable asset, especially in the more inhospitable regions. “Shell has amassed a wealth of knowledge and experience in Arctic ice and sea operations and in cold weather materials behavior and construction. That experience can only be acquired by doing and it positions us at the head of the pack in the search for new energy resources near the top of the world.”

When it comes to difficulties with hard to reach oil and gas reserves, Odum concedes that this is just part and parcel of the industry. “From the frozen Arctic to burning deserts, inhospitable environments have long been part of the oil exploration and production industry. Shell depends on its capabilities and advantage in technology, integration and scale to succeed in remote and inhospitable developments.”

One key component of the firm’s operations that falls within Odum’s US remit is Shell Exploration and Production Company (SEPCo), the largest of the firm’s global EP operating units. Covering projects in the US, SEPCo’s focus is on South Texas, Wyoming, Alabama, Colorado, Alaska and its most lucrative location – the Gulf of Mexico, which provides almost three-quarters of the unit’s oil and gas production and where it holds world depth records for exploration and production platforms. Shell, which has operated in the Gulf of Mexico for five decades, holds more than 720 federal offshore leases, most of which are in the deepwater.

One of SEPCo’s flagship operations in the region is the groundbreaking Na Kika project, which achieved a host of firsts when it was unveiled in 2003. With its cutting edge technology, this $1.5 billion exploration and production project, jointly owned with BP and stationed 140 miles southeast of New Orleans, pushed the boundaries in terms of technology when it first went online. With a capacity of 500 million cubic feet of gas and 200,000 barrels of oil a day, Na Kika is a jewel in Shell’s crown.

Odum waxes lyrical about the project: “Na Kika is considered one of the largest and most complex deepwater projects of this decade. It is a significant achievement for Shell and, yes, it has delivered what we expected. Na Kika also extends the boundaries of deepwater development. The Na Kika semi-submersible production facility is moored in water 6300 feet deep, and the individual wells are in water depths that range from 5800-7000 feet.”

Of course, Shell sustained a hefty battering in the region in 2005 when Hurricane Katrina ripped through the Gulf Coast, toppling offshore rigs and destroying pipelines. Production was drastically reduced for months as the clear-up operation dealt with the aftermath of the hurricane’s destruction. Shell’s Mars tension leg platform was one rig to suffer substantial damage. However, it was back up and running last year, well ahead of schedule. This was a proud achievement for Odum and his team. “The platform, heavily damaged in a direct force five hit, was brought back last year ahead of schedule and producing more than before the storm. I’m proudest of the fact that we did it without a single lost time injury in more than a million man-hours.”

Odum’s other key E&P development is situated north of the border in Athabasca, in Alberta, Canada. Here you will find Shell’s Athabasca Oil Sands Project, which delivers close to 10 percent of the country’s oil needs. The area holds the largest oil sand deposits on earth – containing more oil than Saudi Arabia. Odum runs through the impressive figures: “It is already producing 170 thousand barrels of heavy oil per day and going into the first of several planned expansions to add 100,000 barrels per day to that. Shell Canada has announced intentions to eventually reach production of more than 700,000 barrels of oil a day – a rate sustainable for decades.”

Keeping a lid on spending

Although the rewards for EP efforts can be colossal, particularly at Na Kika and Athbasca, the downside for the oil giants is the expenditure for these vast projects; drilling a deepwater well, for instance, can cost up to $100 million. Recently, everything from drilling rigs to labor and lodgings have shot through the roof. According to a recent report by Upstream Capital Costs Index, expenditure has rocketed by more than 50 percent in the past two years alone. “We see substantial increases in such areas as the international rig markets, EPC (Engineering, Procurement, and Construction) contracts, supply vessels, helicopters and steel related services and products such as fabrication and tubulars (drill casing, pipes and risers). In some cases we have seen spot market rates double since 2005.”

So how does Odum go about overcoming these soaring expenses? “We have managed this in a number of ways, including long-term rig commitments and leveraging our long-term relationships and global procurement scale. So, while we are seeing inflationary pressure on our operations and capital expenditures, we have still been able to procure the capacity we need at well below market rates.” So have rising costs affected SEPCo’s work? “Over recent years, as the materials and labor markets have heated up, Shell has increasingly considered the factor of rising costs in project planning and, in some cases, delayed or altered schedules on selected projects in the planning stream.”

A rapidly changing landscape

Stepping back and taking a holistic view of the sector, it is clear that the oil and gas industry is a far cry from when Odum first arrived at Shell 1982 as an engineer. Naturally, the oil and gas companies had to get smarter to feed the world’s insatiable appetite for energy but Odum says he has seen industry evolve in a variety of ways. “Since the early 1980s, some of the major changes in the oil and gas industry have included consolidation, globalization, an increased focus on sustainability, expanded roles for independents and service companies and the rise and growth of national oil companies.”

As you would expect, technology is now light years ahead compared with when Odum started out. “The importance of technology – and having the best there is – is one thing that hasn’t changed and Shell researchers have pioneered much of it. As with technology in general, its importance and the pace of development have grown exponentially, leading us into deep and ultra deep waters, driving projects and production undreamed of in 1982.”

For example, he explains how, on a production front, engineers and geoscientists can now monitor and control drilling and production remotely, in real-time, which lowers costs and increases oil and gas recovery. Developments in high-precision, long-run directional drilling and ‘underbalanced’ drilling also allow Shell to access new resources and produce more. But what about new seismic technologies? “4D seismic, used carefully, tracks the flow of hydrocarbons through a formation over time and is another major tool increasingly deployed from our arsenal as we seek to extract ever more oil and gas from existing fields and infrastructure.

“In addition, flow assurance technologies are critical to cold, deepwater operations and include pipe-in-pipe, heated pipe and chemicals to inhibit hydrate, paraffin and asphaltine formation. Without characterizing and solving the real problems of vortex induced vibration, production in strong current environments such as the deepwater Gulf of Mexico would be nearly impossible.”

Bright outlook

Casting an eye over the future for Shell EPW, and Odum appears optimistic about his region’s prospects, and he should be. After all, the Americas is a crucial division for the oil giant, contributing a significant chunk to Royal Dutch Shell’s annual net profit – it recently recorded as $25 billion or, to put it another way, $70 million a day. The Gulf of Mexico and Athabasca will continue to provide EPW with healthy growth but Shell also sees Alaska as the key to unlocking an abundance of untapped oil and gas and providing the possible answer the US’ energy challenge. “We are progressing carefully in Alaska,” Odum notes. “This summer, working in concert with the native populations across the northern arch, we hope to shoot 3D seismic and drill three exploratory wells in the Beaufort Sea and also obtain additional seismic in the Chuckchi Sea.

“Beyond that, I intend to keep Shell E&P, Americas, on the company road map –especially our stated goals of ‘More Upstream’ and meeting the energy challenge.” And what about today’s EP activities? “I’m extremely proud of our employees and proud that Shell is engaged in the kind of world-scale projects – in the Arctic, ultra-deepwater, oil sands and shale – that bring out the best of their capabilities and creativity. Their development and application of innovative technologies and project delivery strengthens the foundations of the company’s future and sets a benchmark for the entire oil and gas industry.”