Drilling challenges in 2008 and beyond

Oil and gas drilling – mention this subject and the average American imagines a hazardous, dirty business that creates lasting environmental damage, onshore and offshore. It’s not exactly the image of a “hot sexy career with a future”. Until recently, most students and the public at large considered oil and gas, especially drilling, to be a career of the past not the future. The reality, of course, is quite different than prevailing perceptions. In safety, the E&P business is actually one of the safer industries with an overall TRIR of 2.0 (OSHA 2006). For rig operations the TRIR is 5.1 onshore, 1.4 offshore and averages 2.1 worldwide (IADC, 2007 YTD). This compares to 5.1 for construction and 6.0 for manufacturing. To really put safety in perspective, you are safer on the rig floor than driving around with a real estate agent. The average 2.1 TRIR for rig operations is lower than the 3.3 TRIR for real estate!

In terms of environmental performance, drilling is perceived as being a major risk to the environment from spills and blowouts. Once again, reality tells a different story with only two percent of the oil entering the world’s oceans each year due to E&P operations; the remainder is due to natural seepage, municipal runoff and shipping operations. In my travels I routinely discuss (perhaps defend is a better description) the environmental performance of offshore E&P operations. Most people do not distinguish between offshore drilling and transport operations and few are aware of the cutting edge technology and practices we employ to safely drill for oil and gas offshore.
From a standpoint of careers for the future, oil and gas has not topped anyone’s list for some time, however that seems to be changing.

Since 1983, when petroleum engineering enrollment in the US topped out at more than 6900 students, enrollments dropped to a low of 981 in 1990. Since then enrollments have slowly climbed and in the last two years the growth has picked up considerably with several universities restoring or adding petroleum engineering programs. For the last five years petroleum engineers have had near 100 percent placement rates at the highest undergraduate degree starting salaries. With oil near $100/bbl it is a busy time in the “oil patch”. In fact you might say oil and gas careers have become “sexy” once again.

If the jobs and careers in oil and gas are plentiful at a very competitive wage then times must be good, and to a large extent they are, but there are issues the industry faces that need to be addressed to sustain a competitive business environment. Those issues include access to resources, cost structures, and the “big crew change”. In each of these areas the American Association of Drilling Engineers (AADE) has a role to play.

AADE is a non-profit, volunteer organization founded in New Orleans in 1978 it is made up of an affiliation of independent chapters licensed and governed by a national board. Formation of the AADE was based on the fact that no existing drilling industry organization was consistently providing technical exchange specifically for drilling technology and operations. The early success and acceptance of this effort led to the expansion of AADE. Nine chapters are now active in New Orleans, Lafayette, Houston, Dallas-Fort Worth, Midland (Permian Basin), Oklahoma City-Tulsa (Mid-continent), Denver, Bakersfield (West Coast), and Anchorage. National membership is nearing 5000 active members, and has remained steady despite the fluctuations experienced by the industry. AADE offers a forum for the exchange of information, among its members and guests, specifically on drilling-related topics. AADE chapters generally meet once a month where knowledgeable industry leaders in an informal luncheon or dinner environment present issues and solutions to drilling challenges. In addition, AADE chapters also offer all-day forums as well as annual multi day technical conferences to provide the opportunity for industry experts to present in depth coverage on current topics and latest technology.

So how does AADE help address the biggest challenges we face in the drilling industry? In terms of access to resources, especially offshore, it is the view of AADE that increased reserves can be accessed safely with minimal environmental impact. However, in the United States public perception of the environmental risk, associated with drilling operations onshore and offshore are not consistent with the track record and reality. It is this perception by the public and government that is at the root cause of our restricted access to oil and gas reserves. The United States consumes close to 20 million barrels of oil a day, two-thirds of which comes from outside America, and two thirds of which comes from parts of the world where there is uncertainty in terms of the continuous supply of that product. As part of a comprehensive energy strategy the US has the means to achieve energy security for the future. This strategy involves a combination of technologies and programs, among them conservation and conventional oil and gas. Conventional oil and gas still plays a major role in our economy and for the foreseeable future will continue to play a major role in our national energy strategy, The United Sates is still the third largest producer of oil and gas in the world behind Russia and Saudi Arabia. However, our domestic production peaked in the early 1970s and we now import the majority of the oil consumed in the US.

Have we run out of oil in the US? No we have not. What we have run out of is ”easy oil” that can be accessed at a low cost. We have chosen a strategy to import more oil and not further open up federal lands onshore or the Outer Continental Shelf to oil and gas exploration. The result of this policy is 110 billion barrels of known conventional oil and gas that oil companies are not allowed to access. That’s our choice. We could further open up the Gulf of Mexico, we could open up the Outer Continental Shelf, but it would take an act of Congress to do so, an action to date the US is unwilling to take. Even if Congress approves the five-year MMS OCS Plan (which opens the coast of Virginia, Alaska and the remaining Gulf of Mexico) that still leaves 85 percent of the Outer Continental Shelf of the United States off limits to gas and oil production.

Will development of these resources both onshore and offshore make the US energy independent? No, but access to these resources provides an opportunity to increase our energy stability and security while we work on a broader more sustainable energy policy for the future. The bottom line is if the US is to achieve energy independence a broad strategy must be developed and will include serious conservation, additional development of conventional and unconventional oil & gas, clean coal technology, nuclear, hydrogen and renewable energy. Conventional oil and gas is still the dominant provider of energy to the US and will remain so as we develop a more diverse energy strategy.

To help counter the perception that further conventional oil and gas development is not needed or is just too risky AADE has partnered with the Offshore Energy Center (OEC) to support public education of drilling and energy issues. The two programs we sponsor through the OEC are the “Knowledge Box “ and “Project E3 – Expanding Energy Education” programs.

The Knowledge Box is a free traveling classroom exhibit for students in grades six to 12 showcasing the oil and gas industry through interactive technology, hands-on activities, posters and multimedia presentations. Project E3 – Expanding Energy Education is an interdisciplinary curriculum guide for grades K to12 featuring 24 hands-on discovery activities related to hydrocarbon-based energy themes. This engaging resource features energy related activities in the areas of science, social studies, math, physics, language arts, and the environment. AADE supplied the funding for the development and printing of Project E3. Curriculum in both programs is correlated to state and national teaching Standards. After completing a training workshop, teachers are provide a copy of the Project E3 manual and are eligible to use the Knowledge Box for a period up to 30 days for their classrooms.

Local AADE chapters provide the funding for the OEC program materials and workshop facilitation; in addition AADE members volunteer their time to assist with the teacher training workshops. “Magic” happens when AADE members team up with teachers and spend a day reviewing the materials and discussing the relevance of the concepts in drilling and the career opportunities for students. The overall goal of the AADE public education programs is to increase public//student awareness of the role oil and gas plays in their lives, develop a more fact based understanding of our business to fully understand the benefits and the risks, and build interest for a career in the E&P business.

The second biggest challenge the industry faces is cost. In a time of record oil company profits how can cost be an issue? Doesn’t $100/bbl justify just about all projects? The answer is no. The hard fact is that industry profits are at a record because industry companies are at a record size. Profits are at a record size, but profit margins are at eight to 10 percent of revenue that is in line (if not lower) than companies of similar size in different industries.

Outside of the US and the UK private oil companies have to compete with the large national oil companies for access to resources. Most governments favor the local national oil company (NOC) and grant them access to the most promising low cost areas for oil and gas development, leaving the high cost, technically challenging oil and gas prospects for private companies to develop. Most people are surprised to learn that private industry controls only 15 to 20 percent of global production; the remainder is controlled by the NOCs. All these factors add up to a cost structure that is rising almost as fast as the price of oil. Total operating rates for deepwater offshore drill-ships and semi-submersible rigs is at $1 million per day and major deepwater project costs involving massive structures and sub-sea tiebacks from satellite fields are in the billions of dollars. Under the mask of increasing oil prices these projects are still going forward, but should oil prices drop to a level that is commensurate with the energy value of natural gas many projects would struggle to be profitable. Thus, it is critical that engineering and operations across the industry work to keep costs as low as possible to maintain project viability.

The only way to lower costs that works for both operators and service companies is through technology and improved operational execution. All publicly held companies, oil companies, drilling contractors, and oilfield service companies answer to shareholders and a board of directors that expect them to capture the most profit from the market, legally and as safe as possible. To complain about the price of goods and services in the market is like a rocking chair ¬– it gives you something to do but gets you nowhere! Which is where AADE comes in. Our chapters strive to provide technology forums that address well cost and operational issues in their regions to help improve the overall cost structure of the well delivery process. Every two years we have a national technical conference that focuses on a mixture of new drilling technology and operational case histories to advance the safety and cost effectiveness of drilling operations and well design. The next conference is scheduled for New Orleans in the spring of 2009; this will be the first time our National Tech Conference will be held outside of Houston. Opposite the National Tech Conference the Houston AADE Chapter hosts a bi-annual National Drilling Fluids conference, with the next one scheduled for spring 2008 in Houston.

Our next initiative to enable knowledge transfer is to start local informal discussion groups where members can review and discuss well design and or operational issues on a regular basis. Given the current staffing shortage and high drilling activity members are struggling to find the time to attend monthly meetings let alone put together presentations and papers. AADE believes it can fill a niche in the industry by providing an open informal forum for members to discuss challenges and issues they face in day to day well engineering and rig operations. In these forums members can discuss the impact and challenges of new technology such as drilling with casing, managed pressure drilling, HSE, expandable casing, etc.

The third big issue facing drilling operations is staffing. Various estimates in the literature have the average age of oil and gas professionals in the upper 40s with some disciplines in rig operations actually over 50. Over the next 10 years staff replacement of 40 percent or more will be needed to address growth in operations as well as retirements. What do we do to draw more students/young engineers/workers at all levels into the drilling and well engineering disciplines? At AADE we have a good core of student sections at eight universities across the United States. These student sections are aligned with local AADE chapters that assist the student sections by providing access to industry speakers for student functions, scholarships, and assistance to attend industry events and conventions. Vibrant and active student sections supported by the chapters is a great way to increase industry visibility to interested students and increase the supply of talent in the pipeline. Some student sections also utilize the Knowledge Box program to provide community service opportunities for students. AADE student members have been active participants in teacher training workshops, providing a college student perspective on the industry and the opportunities that await Jr. and Sr. high students interested in oil and gas careers.

The last issue facing the industry is a relatively recent issue, global warming and CO2. The CO2/greenhouse gas issue is likely to play a dominant role in drilling policy and drilling activity, especially in terms of access to oil and gas leases. What is the role of CO2 and global warming? For some the relationship is clear, the debate is over the jury is in and there must be a government policy and program to manage CO2 emissions. For others the relationship is not that clear, they take the position that other factors, solar, cosmic and long-term weather cycles play a more dominant role and we should wait to see if the CO2 dominated climate models are verified with actual data before taking action on CO2 emissions. At AADE we do not take a position on the relative impact of CO2 on Global Warming, it is an area that is outside our expertise, thus we will defer to the government to develop the proper national and global regulatory frameworks.

Regardless of what strategy the US chooses to address CO2 emissions we believe there is a role for Drilling Engineering/Operations to play in executing those potential strategies. Economically developing oil and gas reserves with the smallest environmental footprint will require continued development of cutting edge directional drilling, drilling fluids, drilling and well tubulars and formation evaluation systems. If policy and regulations require management of CO2 emissions, sequestration technology and CO2 storage will become major issues. If current model projections are accurate massive amounts of CO2 will need to be sequestered, transported and stored. The most economical use/storage of that CO2 is down hole flooding of oil reservoirs. This process provides safe storage and also enhances production form existing mature oil fields. Any subsurface storage of CO2 will require drilling expertise to design and manage the operation.

Hydrogen, with no CO2 emissions, is another fuel often cited as the energy of the future. However the most viable and cheapest hydrogen source is to convert natural gas into hydrogen by a process called reformation. Hydrogen from electrolysis requires more energy that it produces and cannot compete on a cost basis with hydrogen form natural gas. Reforming natural gas into hydrogen produces CO2 but no more than burning it. Combine natural gas reformation with CO2 sequestration technology and natural gas looms as both a good bridge technology as well as a potential base technology to a hydrogen-powered world. The most likely source of that natural gas is from conventional drilling.

In conclusion, the future is bright for the drilling and well operations discipline and for AADE. Conventional oil and gas development can be done safely with minimal environmental impact; it will remain a viable industry and career path for new technical professionals. As the world moves into alternative energy sources to meet the ever-increasing global energy demand those same skills will also be needed across a range of scenarios. The AADE stands ready to assist and enable the current and future technical professionals to meet their development goals and advance the profession.