O&G US 4 by GDS International

COVER NGO+G v3:dec07 09/12/2008 16:14 Page 1

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Q4 2008

MORE IN THE TANK Why PRESIDENT OBAMA needs oil as part of his energy mix – and how the right policies could unlock America’s hidden potential Page 28

BACK IN IRAQ Can the IOCs finally strike gold in the troubled Arab state? Page 132 CLIMATE OF CHANGE With ConocoPhillips’ CEO JIM MULVA

PLUGGING THE CAPABILITY GAP With BP’s head of production ANDY INGLIS

EXPLORING THE POSSIBILITIES With Devon Energy’s RICK MITCHELL

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Demand the results of a Clearer Picture MULTI-COMPONENT SERVICES BY KINETEX

At Kinetex, we specialize in gathering multi-component seismic data for the resource industry. 3-C Full Wave Technology generates significantly higher resolution images with lighter equipment in less time. This, in turn, allows E&P companies to make faster, better decisions that ultimately lead to higher returns. It all starts with the use of a single-point digital sensor. Developed by our industry partner, ION, the superior single-point receiver helps capture the entire seismic signal in any acquisition environment. Services available to clients include seismic project planning, front end preparation, data acquisition, process and interpretation.

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Calgary, Canada tel: +1 403.263.3330

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EDITORS NOTE NGO&G4:dec08 09/12/2008 16:58 Page 7

FROM THE EDITOR

MATCHING ACCESS WITH CAPABILITY The US is blessed with some of the most extensive natural resources in the world – but what use is that if we are unable to extract them?

“Environmental protection is important, but cannot come at the expense of handcuffing domestic oil and gas production” Governor Brad Henry, Interstate Oil & Gas Compact Commission (page 28)

“It doesn’t matter how much supply there is if there is no access to it. It is imperative that these resources are expanded” Under Secretary Bud Albright, US Department of Energy (page 46)

HE BIG STRATEGIC ISSUE for all oil and gas companies is matching the earth’s abundant natural resources on the one hand, with the capability – the technology, skills, know-how and willpower – required to bring those resources to market on the other. It’s a tough task. Oil and gas reserves are increasingly found in some of the most inhospitable operating environments on the planet; environmental concerns are placing additional pressures on production teams; and falling prices are making profitable returns harder to come by. But as it has done countless times before, the industry is rising to the challenge. In this issue, we hear from some of the leading figures in the oil and gas industry on how they are addressing the issues of capability and access in very different ways – through people, processes, policies and technology. For example, Andy Inglis is CEO for Exploration and Production at BP, the fourth-largest company in the world by revenue. Yet even an organization as successful as BP faces challenges in attracting and retaining the best talent. For Inglis, plugging the capability gap requires leadership and innovation, as well as technology. “Our industry needs the smartest engineers and geoscientists,” he says. “Increased computing power and better technology will also make a huge contribution, but they are not a magic bullet. With capability, it is people who make the difference.” In addition to identifying and nurturing the right people and technologies, implementing a common-sense approach towards energy policy will also be essential in ensuring America makes the most of the resources at its disposal; both oil and gas have a vital role to play in US energy security, and in the rush to (quite correctly) embrace greener technologies and a more energy efficient approach to 21st century living, should not be abandoned completely. We hear from ConocoPhillips CEO Jim Mulva on why his company is taking a leadership role in energy policy development, and look at what an Obama presidency is likely to mean for the oil and gas industry as a whole. Is the ‘change we need’ going to be a change for the better? And as the Bush administration finally prepares to pack its bags and take its leave of office after eight years at the helm, we also have an exclusive interview with outgoing Under Secretary for Energy, Bud Albright, who provides some fascinating thoughts on what the main oil and gas challenges will be for his successor. He doesn’t pull many punches. Increased access and enhanced capabilities: put like that it sounds so simple, but we all know the challenges ahead. Clarity of thought, ingenuity and the will to make the correct decisions for both the short and long-term will be essential as we move forward.

“The financial crisis has triggered a significant reduction in the price of oil and gas. We need to drive expenses down to continue our activities” Bruce Vincent, Independent Petroleum Association of America (page 60)

Ben Thompson Senior Editor

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CONTENTS

FEATURES Q4 2008 www.ngoilgas.com

28 A new dawn for oil? Given his promise to free America from what he calls “the tyranny of oil”, exactly what does the president have in the pipeline in terms of energy policy?

46 Access denied Supply and demand challenges are reflected in fluctuating oil prices. In an exclusive interview, Bud Albright, Under Secretary for Energy, explains how and why the US needs to develop its own resources

82 The changing of the guard The retirement of the babyboomer generation is only part of a far bigger challenge facing the indus-

try: that of plugging the capability gap. Andy Inglis, CEO of BP Exploration & Production, outlines how to manage the talent crunch

Back in Iraq

36 Achieving energy and climate security In an industry not famed for its eco-credentials, ConocoPhillips CEO Jim Mulva is something of a paradox: an oil industry executive who’s a champion of carbon controls and the climate change challenge

The largest unexploited oil reserves in the world could be back on the agenda for international oil companies. O&G looks at why, after a 36-year period of expulsion, IOCs are finally set to return to troubled Iraq

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CONTENTS

EXPLORATION & PIPELINES

ASK THE EXPERT

95 Johnathan Johnson, Fircroft Group 120 Magnus Wallmark, SWE-DISH Satellite Systems 130 Paul Gregory, OleumTech Corporation 138 Frank Lloyd, SMU Cox School of Business

52 Drilling deep Rick Mitchell explains why his role at Devon Energy has the Indiana Jones factor

60 Offshore opens up Access could change exploration and production

62 Exploring new ideas What will the next generation of oil and gas exploration techniques look like?

66 Investing in infrastructure Robert Jones explains how the Keystone Pipeline project is progressing

70 Finding the value in research for the pipeline industry

With George Tenley, President of the Pipeline Research Council International

74 Fighting back Bob Herbert examines the huge cost of corrosion

78 Pipe dreams Bud Fackrell reveals plans for the largest private construction project in the US

90 Attracting top talent Mahesh Puducheri on building a long-term talent pipeline

96 Rebalancing the workforce Where are all the 30-year-old CEOs?

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CONTENTS

PEOPLE, SAFETY & TECHNOLOGY “The goal is to deliver the same level of services everywhere, to improve collaboration inside the organization.” Patrick Héreng, CIO, Total

110

100 The importance of safety Hugh Williams, Chief Executive of the IMCA, debates the issues

104 The price of oil Who is to blame for record oil prices?

109 A new era in offshore crew supply By Philip Strong

110 An industry going high-tech O&G catches up with Stephen Brand at ConocoPhillips

114 Mission critical

Patrick Héreng CIO of Total explains how the oil giant plan to upgrade their entire IT infrastructure

122 Stretching your dollar Why mesh networking supports the growing momentum of wireless broadband

124 Producing smarter fields Why it pays to know what your wells are producing, with Shell’s Ron Cramer

EXECUTIVE INSIGHT

100

58 Neil Dyer, ARKeX 64 Cliff Berry, Centek 76 Bjørn Jalving, Kongsberg 80 John Muncaster, Polyguard Products 98 Christopher Wood, AC Engineering

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CREDITS NGOG:dec08 09/12/2008 17:00 Page 14

9-11 June 2009 North Carolina, United States

Chairman/Publisher SPENCER GREEN CEO/Publisher JAMES CRAVEN Director of Projects ADAM BURNS Editorial Director HARLAN DAVIS

Editor BEN THOMPSON Associate Editor REBECCA GOOZEE Deputy Editors NATALIE BRANDWEINER, MATTHEW BUTTELL, FRANCES DAVIES, DIANA MILNE, JULIAN ROGERS, MARIE SHIELDS, HUW THOMAS

Creative Director ANDREW HOBSON

The Next Generation Oil and Gas Summit is a three-day critical information gathering of C-level technology executives from the oil and gas industry. A Controlled, Professional & Focused Environment NG O&G ’09 is an opportunity to debate, benchmark and learn from other leaders. NG O&G ’09 is a C-level event reserved for 75 participants that includes expert workshops, facilitated roundtables, peer-to-peer networking, and coordinated technology meetings.

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A Proven Format This inspired and professional format has been used by over 100 R&D executives as a rewarding platform for discussion and learning. “Excellent location, good technical information from vendors and the ability to source new ideas off of solution providers can only enhance the industry.” Timothy Roughan, National Grid “I got more than I expected.” Werner Schweiger, Nstar

Production Coordinators HANNAH DRIVER, HANNAH DUFFIE, JULIA FENTON Director of Business Development RICHARD OWEN Operations Director JASON GREEN Operations Manager CHRISTIAN MORATO

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UPFRONT

P18 Top 10: America’s Largest Oilfields P20 The Five-Minute Executive P22 The Burning Issue P27 Around the World in 80 Days

PRICES FALL & STOCKS TUMBLE

www.ngoilgas.com

nergy stocks have taken yet another beating as oil and natural gas prices tumbled and analysts drastically cut expectation for 2009, after a warning from the world’s largest oil services company. Analysts reported that any oil and gas companies hoping to rely on international demand to see them through the US slump should cut back as demand weakens globally. As world economies begin to grind slowly into recession, demand worries have shot

sky high as stocks and shares plummet – natural gas fell six percent to a 14-month spot low and oil prices neared four-year lows. The American Stock Exchange index of natural gas companies has fallen more than eight percent, dealing a terrifying blow to the industry. Among the oil producers, companies with refining arms did better than those without because refining margins rise as crude prices drop. Exxon Mobil and Chevron were both down by just under two percent whereas Devon Energy fell by seven percent.

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NUMBER CRUNCHING In July 2008, oil prices reached a record high of

$147 per barrel Since then prices have dropped by over

60% to around $43 per barrel

Average gasoline prices have fallen to

$1.75 the lowest since March 2004

In Colorado and Montana exploration could drop as much as

40% “It’s become now more the question of the onslaught of negative news here, pointing to a deeper and deeper recession,” said BMO Capital Markets analyst, Jim Byrne. “At $40/$45 oil you’re going to see a significant pullback in activity, which in our view will ultimately lead to recovery, but it appears that we’re going to go through a little bit longer downturn than anticipated.” Worrying times indeed as we start 2009, but it is vital to stand strong and brace for the worst.

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NEW CONCEPT FOR PROCEDURE MANUALS

ou know the situation – the government inspector asks a question, and you know that the information is covered and documented somewhere in the company – but where? PRO-cedures is a method of writing procedures that captures and preserves your company’s body of knowledge, organizes it and provides a way to find specific topics quickly, even if the user is inexperienced. PRO-cedures is state-of-the-art. It helps to ensure compliance with regulations and incorporates the best ideas from many different sources. It can be used in a hard copy format, but its features really stand out when used electronically. It includes techniques that minimize risk and liability. As companies are scrutinized ever more closely by outside parties, good procedures are becoming more important than ever before. The actions of employees and contractors must conform with the

written procedures. It is imperative that procedures are well-written. Procedures need to be clear to the user. They need to be as brief as practicable, yet detailed enough so that the user understands what is intended. They need to be well-organized. There should not be any conflicts or contradictions. The ability to mis-read a procedure should be minimized. There needs to be a sensible way to include large items, such as tables, drawings and pictures. Electronic procedures provide huge advantages over hard copy, paper manuals. Use of color, which is extremely expensive in hard copy, is free. Hyperlinks can give instant access to related information and regulatory requirements. With electronics, access to all procedures can be greatly enhanced. Making revisions is much easier with electronic manuals, and it is easy to archive complete manuals that were in effect on any given date. All these features, and more, are incorporated into PRO-cedures.

THE NEXT WAVE OF WELDING The first and only inverter designed for AC/DC submerged arc welding. incolnElectric’sPowerWaveAC/DC1000 forunprecedentedweldingperformanceinmultiinverter power source is designed as arc applications typical of high quality welding in partofamodularweldingsystemforsin- pipe mills, pressure vessel applications or strucgle or multiple arc applications targeted tural steel fabrication. The Power Wave AC/DC 1000 takes adat submerged arc customers with these objecvantage of Lincoln Electric’s tives: increased productivity, lower operating costs, improved quality The AC waveform can Nextweld Waveform Control operate at any Technology, which uses elecand greater production flexibility. frequency between tronic regulation circuitry to conThe machine is rated at 1000 trol and shape the output amps for AC or DC. Each welding waveform. Using Waveform arc may be driven by a single maControl Technology, welding chine or by a number of machines waveform parameters can be in parallel. For example, two matailored to the application. chines can be used to produce up The AC waveform can operto 2000 amps at 100 percent duty ate at any frequency between 0 and 200 hertz cycle.Atthesametime,eachmachineachievesa withasingleknob.Dialinginthefrequencyaidsin 95 percent power factor with 86 percent efficienstabilizing the arc. Also, the amplitude and duracy for lower operating costs. The Power Wave AC/DC 1000 produces a tion of the positive and negative cycles are indevariable AC output, as well as straight DC+ or DC- pendentlyadjustable,deliveringgreatercontrolof output. No hardware configuration changes are bead shape, higher deposition rates and lower required.Thesesoftware-drivencapabilitiesallow heat inputs.

0-200 hertz

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TOP 10

18 1

Largest oil fields in the US As demand for oil goes up, so must production.

Prudhoe Bay, Alaska 13 billion barrels (BB)

2 3 4 5 6 7 8 9 10

East Texas, Texas 5.1-6.0 BB

ACCREDITATION LAB

n the early seventies, no existing facility fulfilled SPSE flowmeters calibration needs, so it was decided to invest in an adapted flowmeter calibration laboratory. This choice of a centralized calibration guaranteed a better metrology performance. This facility, being the only one in the world in such a range of flowrates (up to 4000 m3/h) and viscosities (0.5 to 500 cSt) soon attracted flowmeter users and manufacturers. To obtain the recognition of its skills and competences by the international authorities, and offer its clients the best services, SPSE decided to turn to accreditation.

Accreditation

Wilmington, California 2.8-3.0 BB

Being in relation with the manufacturers requires the strict adherence to confidentiality of the personnel performance tests, acceptance inspections, technical expertise and endurance tests in perfectly objective conditions. The laboratory connects the flowmeters to national standards and carries out primary and periodic calibrations. It also carries out tests or expert studies for all types flowmeters with meter manufacturers.

Midway-Sunset, California 2.8-3.5 BB Kuparuk River, Alaska 2.6 BB Kern River, California 2.0-2.5 BB

SPSE Laboratory guarantees:

Traceability of results

Thunder Horse, Gulf of Mexico 1.5-2.0 BB

Independence Yates, Texas 2.0 BB

Confidentiality

Belridge South, California 1.9 BB

International recognition

Wasson, Texas 1.8 BB

n 2007, US crude oil production actually increased for the first time year-onyear since 1991. According to the US Energy Agency, US production totalled 1.872 billion barrels, which was increase of just 182,000 barrels over 2006. Despite the fact that this increase is very small, it is only

the 10th time that annual oil production has grown since the production peak that occurred in 1970, almost 40 years ago. Also, 2007 saw imports decline from the all-time peak of 3.396 billion barrels that occurred in 2005. O&G identifies the current top 10 oil fields in the US. SPSE proving station carries out calibrations up to 4000m3/h within a range of viscosities from 0.5 to 150cSt on standard (accredited up to 500cSt)

www.ngoilgas.com

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PICKENS MAY STALL WIND FARM PLANS

illionaire oilman T. Boone Pickens, who launchedahigh-profilecampaigntoreduce oil imports to the US, is being forced to delay a huge planned wind-farm project, according to published reports. Boone has recently spoken out and said that the wind project is having trouble getting financing becauseofthecreditcrunch.Hewasalsoquotedsaying that falling prices of natural gas, used in power plants, are making his wind project less economical. In July, Boone launched a public campaign, said to be funded

with $57 million of Boone’s own money, to wean the US off oil imports through a massive investment in windenergyandconversiontonaturalgasforvehicles. Earlier this year, he also founded Mesa Power to oversee what would be the world’s largest wind farm in Texas, able to make 4000 megawatts of electricity, or enough to power 1.3 million homes. Mesa Power has already placed orders for the first phase of the Pampa Wind Project, 667 wind turbines from General Electric capable of generating 1000 megawatts of electricity – enough to power more than 300,000 average US households. “The capital markets are problematic foreveryoneandmayleadustoscaleback abit,”JayRosser,aspokesmanforMesa, toldCNNinastatement.“Butwearestill going forward with our wind business.” The first phase of the project, projected to cost $2 billion, was supposed to come online in early 2011. Source: news.cnet.com

Pickens launched a public campaign, said to be funded with

$57 million of his own money 667 wind turbines are capable of generating

1000MW of electricity The first phase of the project has been projected to cost

$2 million

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THE FIVE-MINUTE EXECUTIVE

A global perspective Saad Al-Shuwaib, CEO of Kuwait Petroleum Corporation, reveals the challenges he faces in the Middle East market.

Expanding economic activities in the world, and especially in China and India, are the main drivers for continuous rising demand for energy. We adopt the view that there is sufficient petroleum resources, conventional and non-conventional liquid fuels, to meet growing demand for decades to come. Key players in the market need to make timely investments to expand oil and gas supplies. We in Kuwait will pursue with our long-term plans to sustain enough supplies to the market according to strategies set for KPC until 2020. The desired benefits from foreign participation includes extracting maximum value from the reservoir assets, adding reserves, optimization of capital expenditure, cost savings, application of new technology, acquisition of improved management systems and creation of job opportunities for Kuwaitis. Production is moving to increasingly difficult locations as easy oil is diminishing and the high oil price makes previous exploration and complex asset maximization economically viable. A very important challenge in this area is to improve technologies to respond to these complexities and at the same time improving technology application capabilities.

Having a skilled and motivated workforce is becoming increasingly scarce, so the HR, learning and development departments are therefore becoming increasingly important. The need for such talent is increasing as projects become more complex and management becomes more difficult.

â&#x20AC;&#x153;This is a competency that needs to be nurtured and developed to ensure the strategic objectives are met on the medium and short-termsâ&#x20AC;?

Capital project management is becoming a big obstacle for the oil industry and KPC in particular, as projects become more complex, and at the same time exceeding their costs and not meeting

their deadline. This is a competency that needs to be nurtured and developed to ensure the strategic objectives are met on the medium and short-terms.

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ON THE BRIGHT SIDE

he US Department of Energy (DOE) has announcedupto$17.6million,subjecttoannual appropriations, for six early stage photovoltaic (PV) module incubator projects that focus on the initial manufacturing of advanced solarPVtechnologies.Includingthecostsharefromindustry, which will be at least 20 percent, the total research investment is expected to reach up to $35.4 million. These projects support outgoing President Bush’s Solar America Initiative, which aims to make solarenergycost-competitivewithconventionalforms ofelectricityby2015.Increasingtheuseofalternative and

cleanenergytechnologiessuchassolarenergyiscritical to diversifying the nation’s energy sources to reducegreenhousegasemissionsanddependenceon foreign oil. As the lead agency for the Advanced EnergyInitiative,DOEiscommittedtothediversification of US energy resources by spurring widespread commercializationanddeploymentofcleansolarenergy technologies. The development of innovative technologieswillhelptoprovidelong-termeconomic, environmental and security benefits to the US. “These projects will help promote the development of a diverse set of photovoltaic technologies and ensure that theUS is a worldleader in next-generation, cost-effective solar technologies,” Acting Assistant Secretary for Energy Efficiency and Renewable Energy John Mizroch said. “Thesesolarphotovoltaicincubator awards will help accelerate the time it takes for innovative start-up companies to get their technologies to market.”

The DOE has announced up to

$17.6 million for six early stage photovoltaic module incubator project

Including the cost share from industry, which will be at least

20% the total research investment is expected to reach up to

$35.4 million

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THE BURNING ISSUE

Investing in the future This fall’s economic meltdown has had a massive cross-industry impact as companies look to batten down the hatches and weather the storm – but taking a longerterm view will be critical to future success.

Abdalla Salem El-Badri Secretary General, OPEC Technology has transformed our industry and empowered it to be more effective and efficient. There has been the information technology revolution, moves to explore and develop deeper offshore, better sub-surface imaging and directional drilling. This has helped expand production, improved recovery rates and at the same time facilitated a continuing increase in the estimates of global ultimately recoverable reserves. Estimates of ultimately recoverable reserves

have practically doubled since the early 1980s and continue to rise. It is interesting to note that cumulative production during this period has been less than one-third of the increase. On top of this, there is also a vast resource base of nonconventional oil to explore and develop. The issue is not whether the resources are there. We know they are. The world has enough oil resources to meet demand and satisfy consumers for decades to come. The question is one of deliverability.

Red Cavaney Former President, American Petroleum Institute Our lifestyles, our economic strength and our national security all depend on ready availability of adequate supplies of energy. If we don’t take steps to control our energy destiny, we put at risk a better future for ourselves and for the generations that follow. Large domestic supplies of oil and natural gas are critical to our energy future. Alternatives are important but cannot yet substitute for the vast amounts of oil and natural gas we now use and are projected

to continue to demand. A sound national energy policy will encourage energy diversity and conservation. It will push the development of alternatives, encourage greater energy efficiency, but ensure we have the traditional fuels we will continue to require. The oil and natural gas industry has the technology and know-how to safely bring the resources out of the earth and to consumers. But we can’t do that without Congress’s help.

David O’Reilly CEO, Chevron Corporation Conventional energy sources will remain indispensable to meeting demand for decades to come, even as we pursue greater contributions from renewable energy. But we can’t simply drill our way out of the problem. There aren’t enough domestic reserves, and what there are will take time to develop. The reality is that there are no silver bullets, no quick and easy answers. Massive scale, long lead times, tight spare capacity, growing de-

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mand – these are the realities we face. There are solutions. And those solutions are not ‘either/or’. It’s not a choice between more drilling or more efficiency. It’s not a choice between coal or wind. It’s not a choice between nuclear or solar. We need it all. We need greater efficiency and more renewables. We need nuclear and clean coal. We need wind and oil and natural gas. Our path to energy security cannot rely on just one option.

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FUELING THE DEMAND

ob losses throughout the US have seen the cost of crude oil fall to its lowest price in nearly four years, new reports show. On December 5, oil fell as low as $43.25 a barrel, the lowest since January 6 2005. “All the weak economic data is really disturbing the oil market,” said Sintje Diek, an analyst with HSH Nordbank in Hamburg. Oil prices have now seen a fall of 70 percent since reaching a record $147.27 a barrel back in July. In fact, during the four-week period ending November 28, US fuel demand was down 6.2 percent from a year before. What’s more, the National Bureau of Economic Research, a private, non-profit panel of economists that dates American business cycles, has said that the US actually entered a recession as far back as December 2007 and US equity markets declined earlier this month as oil stocks dropped on forecasts of $25-a-barrel crude. “The picture is still very bearish,” said Gerrit Zambo, an oil trader at BayernLB in Munich.” Source: Bloomberg.com

ISSUE IN NUM8ERS ConocoPhillips’ capital expenditure in 2008 was

$15 million (p36)

The Denali pipeline

UP FOR LEASE

his month saw several conservation groups filing formal protests against what they call a “fire sale” of oil-and-gas drilling leases in Utah. The Sierra Club, The Wilderness Society and the Southern Utah Wilderness Alliance filed their objections to drilling in 100,000 acres (40,469 hectares) of wild land in eastern Utah. The US Bureau of Land Management (BLM) has already pulled nearly 100,000 acres from the upcoming auction, leaving more than 276,000 acres up for bid. The BLM has already been under intense pressure from the National Park Service to cull a list of auction parcels in Utah’s final oil-and-gas lease sale of President George W. Bush’s administration. Last week, the BLM pulled drilling leases that were located on and around the borders of Arches National Park, Dinosaur National Monument and Canyonlands National Park, all in Utah. Stephen Bloch, an attorney for the Southern Utah Wilderness Alliance described the auction as “the Christmas sale, the Bush administration's last great gift to the oil and gas industry.” Source: International Herald Tribune

will be 2000 miles long (p78)

90% of the Iraqi government’s budget comes from oil (p136)

Barack Obama plans to reduce carbon emissions by

80% by 2050 (p28)

Devon Energy produced

224 million barrels in 2007 (p52)

www.executivehm.com

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FROM THE VAULT Back in issue two of Next Generation Oil & Gas magazine, we spoke to Shell’s Marvin Odum about his major North American projects and the continuing pressure on world supplies. He reveals his thoughts on access to resources, human resources, escalating project costs and regulatory predictability. To read more, go to the Past Issue section at www.ngoilgas.com and click on “Benchmarking the industry” within issue two.

NEW JOINT PROJECT EXPLORES PLAN TO PIPE OIL, GAS TO INDIA

ndia,Turkey and Israel are exploring a plan to use a new route to pipe and ship oil and gas to India. The proposed pipeline will give energy-hungryIndia easier access to the vast oil and gas supplies of Central Asia. Petroleum officials from India, Turkey and Israel will meet next month todiscuss aproject totransport oilandgas to India using a combination of pipelines and supertankers running between the three countries. The oil and gas will be carried via a pipeline from the Caspian region to the Turkish port of Ceyhan. The supplies will then be taken via supertankers to Israel, fed into pipelines running to Israel’s Eilat port, and finally make their way to India via the Red Sea. An analyst at the Indian Defense

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and Strategic Institute in New Delhi, Shebonti Ray Dadwal, says the proposed route carries many economic and political benefits for India. “It is going to be cheaper if the oil comes via the Red Sea, as the pipeline will allow it to,” he explained. “I believe it is going to be four dollars a barrel cheaper to transport it through the pipeline. Also politically it will allow us to avoid the Suez Canal and Strait of Hormuz. In the event of a war that is going to be blocked. This is an alternative route.” India is heavily dependant on oil imports, and worries that any instability in the Middle East region could disrupt supplies of oil to the country. Those concerns have prompted India to look for both alternative sources and alternative routes to ensure the smooth flow of its massive energy requirements.

WATER SUSTAINABILITY

onocoPhillips is developing improved methods of water purification and recycling. In mid2007, the company announced plans to establish a global Water Sustainability Center that will examine ways of treating and using by-product water from oil production and refining operations, as well as other projects relating to industrial and municipal water sustainability. The center will be located in Qatar Science and Technology Park at Education City, Doha, Qatar. ConocoPhillips plans to invest $25 million in the center over its first five to seven years. The center will conduct research on and develop and test technologies relating to water production and management, disseminating findings to the company’s global operations as well as to local government and industry partners.

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SMART WATER BOOSTS PRODUCTION

IMPROVEMENTS IN WATER TREATMENT

world’s oil reserves are trapped in oil esearchers in Norway Low-yeild oil reservoirs. By injecting seawater have reported that injectwells may help into these chalk-based oil wells, oil ing a special type of seaboost oil water called ‘smart extractions by as extraction is boosted dramatically. much as However, scientists still have yet to water’ into certain low-yield oil discover whether the method wells may help boost oil extraction works for oil wells composed of by as much as 60 percent. limestone, a material known for its In the new study, Tor Austad et low oil-recovery rates. al note that more than 50 percent of the

60%

DRESSER-RAND COMPLETES TWO KEY ACQUISITIONS

resser-Rand, a global supplier of rotating equipment to the oil, gas, petrochemical and process industries, recently completed two acquisitions. Both are consistent with the company’s commitment to a ‘bolt-on’ acquisition strategy to expand services to its clients and acquire products, services and technologies that enhance market positions.

Peter Brotherhood Ltd: Dresser-Rand’s UK subsidiary, Dresser-Rand Ltd, has completed the acquisition of certain assets of Peter Brotherhood Ltd, a company that specializes in the design and manufacture of steam turbines, reciprocating gas compressors, gas packaged combined heat and power systems (CHP) and gearboxes. The Peter Brotherhood business had sales of approximately $94 million in fiscal year 2007. Stephen Fitzpatrick, Managing Director of Peter Brotherhood, commented: “DresserRand recognized the success we have forged

by a clear set of values focusing on customer care and satisfaction and the delivery of great products by a highly motivated and successful workforce.”

Enginuity LLC: Dresser-Rand also acquired the assets of Enginuity LLC a private, USbased provider of combustion and catalytic emissions technology solutions, controls and automation, and aftermarket services for reciprocating gas engines used in the gas transmission market. In 2007, Enginuity reported sales of approximately $16 million. In connection with this acquisition, DresserRand will establish its Gas Engine Technology Center in Fort Collins, Colorado, headquarters to Enginuity since 1999. Chad Fletcher, founder and CEO of Enginuity, observed: “The well-established Dresser-Rand brand provides the platform whereby Enginuity can realize its vision of ‘bringing energy and the environment into harmony.’”

roducedwaterisawidespreadconcern in oil and gas production. Depending on various factors, including environmental restrictions, reservoir disposal limitations and end-use options, treatment to remove oil, solid and chemical contaminants is almost always necessary. With ever increasing water volumes, the management of produced waters is a necessary evil of production. Typically,producershavehadlimitedreliable process and equipment solutions suppliers. Producers are frustrated by high levels of activity that have resulted in higher prices, longer deliveries and poor client attention. To address client needs in the midst of growing challenges, process solutions provider ProSep Technologies, Inc. has launched a complete portfolio of produced water equipment. This new line of products is based on proven process principles and industry accepted concepts and designs. The offering features a solution-oriented approach; client-focused attention and responsiveness; flexible commercial terms; experiencedprojectmanagement,fabricationand assembly expertise; and a dedicated service team.ProSep’sfabricationandassemblyfacilities will facilitate quality assurance and control while providingin-housecontroloftheprojectschedule to ensure on-time delivery. The comprehensive range of produced water treatment solutions covers inlet contamination concentrations of several percent to tens of ppm and capacities from 2000-100,000 BPD, and is designed to address the full spectrum of water treatment issues.

ProSep’s portfolio offering includes:

Primary separation (CPI and hydrocyclones)

Secondary separation (vertical and horizontal, single and multiple flotation cells)

Tertiary separation (media and nutshell filters)

Dresser-Rand is among the largest suppliers of rotating equipment solutions. The company operates manufacturing facilities in the US, France, UK, Germany, Norway, India and China, and maintains a network of 30 service and support centers covering more than 140 countries.

Zero harmful discharge technologies

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COMPANY INDEX Q4 2008

26 AC Engineering 98, 99 Amalto 19 AOA Geophysics 62, 63 Archer Daniels Midland Company 110 ARKeX 8, 58, 59 Baker Hughes 38 Baylor College of Medicine 82 BP 52, 78, 82, 104, 132 Burlington Resources 28 Carbon Disclosure Project 28 Centek 64, 65 CERA 82 CGG Veritas 13, 129, 143 Chevron 52, 132 Cisco 44 ComputIT 107 ConocoPhillips 28, 66, 78, 110 Crowcon Detection Systems 105 Dedico AS 69 Denali â&#x20AC;&#x201C; The Alaska Pipeline LLC 78 Department of Energy 46 Devon Energy 25, 52

Companies in this issue are indexed to the first page of the article in which each is mentioned 141 Dresser Rand 2 EMC 110 EnCana Corp 122, 123 Encom Wireless 89 Energy Holding 144 Ernst & Young 104, 132 ExxonMobil 94, 95 Fircroft Group 82 Gazprom 42 GE 51 Geosoft 117 Gilat Network 96 Global Energy Insights 90 Halliburton 82 Herriott Watt University 119 Honeywell 114 IBM 82 Imperial College London Independent Petroleum 60 Association of America (IPAA) 82 International Energy Agency International Marine Contractors 100 Association

IOWA State University 110 Iraq National Oil Company 132 Iraqi Federation of Oil Unions 132 JOA Oil & Gas 55 Kambi Enterprises 10 Keystone Pipeline 66 Kinetex Inc 6 Kongsberg Maritime 76, 77 Lincoln Electric 17, 72 LUKOIL 132 Lukoil 28 Maysan Oil Company 132 Microsoft 114 Minerals Management Service (MMS) 60 NACE International 74 OAO LUKOIL 110 OECD 82 Oil Careers 97 Oleksa Associates 17, 26 OleumTech Corporation IFC, 34, 130 OPEC 104 Oppenheimer 104 Petrobras 82

Pipeline Research Council International 70 Polyguard Products 80, 81 Proforma Safety 103 Prosep 15, 18 Pure Technologies 85 Reflex Marine 108, 109 Reservoir Exploration 57 Rice University 82 SAP 114 Saudi Aramco 82 Shell 124, 132 SMU Cox School of Business 92, 138, 139 Southern Oil Company 132 SPSE 18, 21 Stork 4 SWE-DISH Satellite Systems AB 120, 121 TGS NOPEC 49 Total 114, 132 TransCanada Corp 66 Tyson Foods Inc 110 University of Manchester 82 US Climate Action Partnership 28

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AROUND THE WORLD IN 80 DAYS Our guide to the last quarter’s global events – and their impact on your business.

TRANSPORTABLE GAS Chemists at the University of Liverpool have been developed a new way to convert methane gas into a power form to make it more transportable. The scientists have developed a material to soak up large quantities of methane molecules. It looks and acts like a fine white powder, which could be easily transported.

GROWTH POSSIBLE

CLIMATE CHANGE

TREATY RATIFIED

OIL REFORMS

AUSTRALIA has insisted that climate change is a priority, despite the financial crisis, and predicts a boom in the renewable energy sector. Whatever happens, expect climate change to continue to be a key driver in the years ahead. O&G impact rating: ***

RUSSIA’s lower house of parliament has formally approved treaties with the Georgian breakaway regions of South Ossetia and Abkhazia.The war in Georgia badly strained Moscow’s relation with the West, which waits on what will happen next. Our prediction? Further friction in 2009. O&G impact rating: ***

MEXICO has passed new rules that give the state oil monopoly more leeway in parceling out and financing projects. The move represents big progress for US oil services companies, putting them on a more solid legal footing. Good news. O&G impact rating: ****

TAX RELIEF

SOMALI PIRATES

IRAQ MONOPOLY

NORTH SEA oil and gas companies have welcomed a tax break for 2009 as a chance to stimulate investment, hit by falling oil prices, high costs and a shortage of finance. Whether it will have any real effect remains to be seen. O&G impact rating: ***

SOMALI pirates who captured a 1000-foot oil supertanker in November could change the way oil and gas is transported around the Cape of Good Hope according to recent reports. However, it is a little early to predict how just yet. Watch this space. O&G impact rating: ***

IRAQ’s parliamentary oil and gas committee have accused the Oil Ministry of handing a monopoly on Iraq’s southern gas fields to Royal Dutch Shell. The ministry are standing firm, while the committee vows to fight. Tricky times in 2009. O&G impact rating: ****

CARBON CAPTURE SHOWS POTENTIAL

awyersbelievethatCanadaisleadingthe race to develop carbon capture and storage technology,which it is hopedwillone day strip carbon dioxide from coal before injecting it in deep underground caverns for storage in perpetuity.The new technology has the potential to lower emissions and driveupoilproduction. “If you had to point to a silver bullet, carbon capture and

storage is it,” said John Goetz, a partner at law firm Burnet, Duckworth & Palmer, to the Financial Post. Western Canada is the perfect testing lab for the technology as it has an abundance of fossil fuels and deep geological formations. It has been reported that Canada’s Western provinces are hoping the technology will help meet targets established by the Kyoto Protocol, which requires an average reduction in carbon emissions of six percentbelow1990levelsbetween 2008-2012.

Despite falling energy consumption, Booz and Co’s energy consultants advise oil companies to remember that strategic growth is still possible. The energy consultants suggest that it could be a good time to contemplate strategic growth and invest in core businesses.

NO TAX BRINGS RELIEF Barack Obama is no longer planning to implement a windfall profit tax on oil companies because prices have dropped below $80 a barrel. The switch has drawn applause from the industry who opposed the tax saying it would stifle exploration and innovation, as well as cost the country billions as suppliers would look overseas rather than at domestically-produced oil.

TIME/COST SAVINGS Developers claim a prototype drilling tool could give exploration a ‘game changing’ technology. The Norwegian inventors of the Badger Explorer claim that it removes the need for fixed rig drilling, bringing with it the promise of huge time and money savings and that it has a low impact on the environment. Originally conceived in 1999, the Badger Explorer was formed in 2003 to take the innovative technology to full commercialization, with partners including Shell, ExxonMobil and StatoilHydro.

Source: Financial Post

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MARKET ANALYSIS

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A NEW DAWN FOR OIL

The Obama administration promises to mark a new chapter in America’s leadership on climate change, strengthen energy security and create millions of new jobs in the process. But given his vow to free the world from what he calls “the tyranny of oil”, exactly what does the new president have in the pipeline? By Ben Thompson

t’s March 2008, and the Democratic Party’s brightest hope for the White House is standing in a gas station speaking directly to camera. Intercut with archive footage of cars lining up for gas at an Exxon station back in the 1970s, he explains how energy independence is a policy issue that has been consistently fudged through four decades of mismanagement on the part of both political parties. Nothing’s changed, he points out, other than that oil companies have gotten richer and customers are paying more at the pump. Calm and self-assured, his message is clear and concise. “I’m Barack Obama,” he intones. “I don’t take money from oil companies or Washington lobbyists. And I won’t let them block change anymore.” For many in the oil sector, that 30-second TV spot – launched during this year’s primary campaign – told them all they needed to know about what an Obama administration might look like for their industry. Riding into Washington in the wake of $4-a-gallon gas prices, the Obama campaign focused on the area of most concern for potential voters: their pocketbooks. America was in thrall to oil, he implied, an industry guilty of decades of self-interest rather than one focused on finding common solutions to the nation’s energy problems. Obama’s vision was one of a greener and more efficient America. It would create jobs, and cut US reliance on rogue, oil-producing states in

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OBAMA’S ENERGY PROPOSALS

Help create five million new jobs by investing $150 billion over the next 10 years to boost private efforts to increase clean-energy production Within 10 years, save more oil than the United States currently imports from the Middle East and Venezuela combined Put one million plug-in hybrid cars that can get up to 150mpg on the road by 2015 Ensure 10 percent of the country's electricity comes from renewable sources by 2012, and 25 percent by 2025 Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions by 80 percent by 2050

able sources by 2025. Biofuels are in, crude is out. Obama has also vowed to increase government support for both public and private sector research and development to meet US (and global) energy demand through new technologies. By channeling funds and committing government departments (including the military) to greening and incorporating the use of these new technologies, the new administration hopes to create a sort of ‘moon-shot’ economy in the US, with a commonality of purpose in tackling oil dependence. But while there is no doubt that a concentrated effort to drive the US economy in this direction will eventually start to bear fruit (even if it is subsidized in the near term), the realities of the current economic situation mean that potential is not enough. The recession has propelled a stimulus package to the top of his agenda, after the government announced that the US economy lost 533,000 jobs in November and the unemployment rate had climbed to 6.7 percent, its highest level for 15 years; as Obama knows, energy and the economy are inextricably intertwined. America needs energy now if it is to stimulate a recovery. “Energy is everything and without energy – particularly low-cost energy, which we’ve become accustomed to in this country – all the great things we’re able to accomplish that have made us the envy of the world would not be possible,” points out Jack Gerard, CEO of the American Petroleum Institute. “Oil and gas is the backbone of the American economy. It has been for many years; it will continue to be for many more years. We could quadruple what we’re talking about in the area of alternatives and renewables, and what would that give us? About three percent of our energy production.” As such, oil and natural gas must remain an important part of the energy mix, he insists, and indeed the president-elect is already facing pressure from both sides to clarify his plans for offshore drilling. Oil and gas companies appeared to score an all-out victory over the summer when President Bush lifted an executive ban on offshore drilling and congres-

the Middle East and elsewhere. And the implication was that he would get there with or without the co-operation of the international oil majors. As a statement of intent, it certainly set industry pulses racing. Obama’s administration is widely expected to pursue policies that could hurt oil companies’ profits, with most headline objectives aimed at weaning the US off its dependence on the black stuff. He promised windfall taxes on oil profits over $80 per barrel; was guarded in his support of further domestic drilling; and, both during the campaign and since his election victory, made it clear that his presiENERGY AND THE CREDIT SQUEEZE dency finally intends to change the way America powers and propels itself. “We go from shock to trance,” he explained in an interview with 60 Minutes on November 16. “Oil prices go up. Gas prices at the pump go he credit squeeze has up. Everybody goes into a flurry of activity. for building 20 deepwater drilling rigs Then the prices go back down and suddenly already put some smaller to Brazilian firms with little we act like it’s not important and we start fillplayers in the oil and natural experience in such projects. Many of ing up our SUVs again. As a consequence, we gas industry out of business. these firms were not able to borrow never make any progress. It’s part of the adMany are still operating but are the money they needed to finish the diction that has to be broken. Now is the time experiencing a cash crunch – either promised rigs; now Petrobas has the to break it.” because others don’t want to do choice of advancing these

Obama’s energy goals will be closely aligned with re-invigorating the economy. Here’s why.

The challenge facing Obama It won’t be an easy task. In order to support its vision, the new administration favors a carbon cap-and-trade scheme, supports greenhouse gas reduction in line with Kyoto Protocol targets and has called for 25 percent of US electricity to come from renew-

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business with them, or because the credit that is available is very expensive. Some are offering discounted rates for their services in the hope that they will be able to maintain cash flow. Petrobas recently ran into problems when it awarded contracts

contractors the additional funds they need, or finding other contractors at a much higher price. Others are trying to use the lower prices available from contractors to their advantage. Saudi Aramco is renegotiating contracts on its $15 billion Manifa project, originally

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sional Democrats let a moratorium expire soon after. It’s good news for a domestic industry that has long called for increased access to America’s huge untapped reserves, but even so it’s only a first step. Obama has not yet stated whether he will challenge the Bush administration’s move, and even if the moratorium is not re-instated those who think nothing stands between oilrigs and the outer continental shelf are misguided. “A lot of people think that once the moratoria are lifted, oil companies can go out and do whatever they want,” says Lisa Flavin, Senior Policy Adviser at the American Petroleum Institute. “That’s just not the case. There are tons of permits and regulations. It’s a very lengthy process.”

An important part of the mix Even so, many in the industry are heartened by the recent noises coming from the Obama camp. The decision not to pursue the profits windfall tax in the wake of a steep fall in oil prices has been welcomed, and given some insiders hope that the new president might be open to further negotiation on other key energy discussion points – most notably, the important role oil and natural gas can play in helping the US meet its energy needs. “The goal of true energy independence is far too complex to believe that renewable sources alone will be enough,” says Oklahoma Governor Brad Henry, incoming Chairman of the Interstate Oil and Gas Compact Commission. “Regulations aimed at environmental protection are important and appropriate, but they cannot come at the expense of handcuffing an industry that must enhance domestic oil and gas production. The US will need every arrow in its quiver to face the challenges of energy production in this century.” Carl Michael Smith, Executive Director of the IOGCC, agrees. “Too often we have resorted to an either-or mentality in the US on energy policy,” he says. “We have viewed energy policy as a zero sum game – in other words, we can encourage either development of renewable sources of energy, or development of oil and natural gas, but not both. My message is that we can and must do both.”

scheduled to add 900,000 barrels per day in oil production in mid-2011. The intention is to reduce costs, but will likely increase the risk of subcontractor bankruptcy and delay the start of new production. Many oil and gas companies are finding it necessary to limit their investments to what they can finance with cash flow. In the Canadian oil sands, both Suncor and PetroCanada have pushed back purchasing plans, at least partly because of cash flow considerations. US natural gas producer Chesapeake Energy recently cut its spending plans three times within a single month. Other companies have found different ways to work around the

capital freeze. Russian oil company Rosneft reached an agreement with Chinese energy company CNPC Sinopec to lend it funds for a pipeline in return for a guarantee of oil.

“The net impact is that oil production has already started to decline” Meanwhile Lukoil, another Russian oil company, has asked the Russian Development Bank for a $1.8 billion loan to refinance its foreign debt.

Without outside sources of credit, companies are under pressure to keep capital expenditures within the funds that are generated by cash flow. And since the credit squeeze keeps prices low, there is no point in extracting oil and gas if the market price is too low to provide a reasonable return on investment. The net impact is that oil production has already started to decline. Plans for future investment have been cut back, so it is likely that oil production will stay low for quite some time. Even if prices should rebound, lack of credit will limit the ability of the oil supply chain to increase production. For these reasons, world oil production is likely past its peak.

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More drilling would certainly help in this regard, and Obama’s agenda calls for “responsible domestic oil production” as part of a comprehensive energy plan – good news for domestic producers. “The role of oil and natural gas in America’s energy supply, now and in the future, is critical,” suggests Barry Russell, President and CEO of the Independent Petroleum Association of America. Russell’s organization represents independent petroleum and natural gas producers nationwide, most of which are small businesses with fewer than 20 employees. He refutes the idea that the US oil industry is all about record profits and huge companies manipulating policies to their own advantage, arguing that the industry is actually home to a vibrant SMB community that provides a crucial economic engine. “Our members drill 90 percent of American oil and natural gas wells, producing approximately 82 percent of American natural gas and 68 percent of American oil,” he points out. “In addition, small business members of IPAA operate the overwhelming majority of US marginal wells that are responsible for 20 percent of America’s oil production and 12 percent of the country’s natural gas production. Currently, oil and natural gas account for about 65 percent of America’s energy supply, and over the next 25 years the Energy Information Administration projects that energy demand will increase 30 percent. A strong and vibrant independent exploration and production industry is critical if the United States is to meet its energy needs.”

Is gas the big winner? Indeed, while oil producers wait with fingers crossed to see how their industry will be impacted by Obama’s vision of a greener, less-carbonintensive future, companies involved in natural gas could be about to witness a period of sustained growth as America looks for alternatives to petroleum. Natural gas now accounts for about 20 percent of the energy used to create electricity in the US, and groups like the Independent Petroleum Association of America predict that it will become even more important in the upcoming climate-change debate; in fact, over the past decade more than 90 percent of the new electric capacity built in the US has been natural-gas-fired generation. About 84 percent of America’s total natural gas consumption is produced domestically, while the rest comes primarily from Canada. Only two percent of natural gas used domestically comes from other countries. “If the Obama administration and Congress follow through on their campaign promises to rely on more renewables to make electricity, natural gas will prove extremely useful in enhancing the reliability of those fuels,” says R. Skip Horvath, President and CEO of the Natural Gas Supply Association. “We are blessed as a country to have so much domestic natural gas in the ground.” At least 250 trillion cubic feet of recoverable natural gas is estimated to lie under the outer continental shelf alone, meaning that the gas industry, too, could benefit from the recent lapse in the drilling moratorium. “With calls to power cars and trucks with natural gas, opening up the far-offshore areas for natural gas exploration and development makes a lot of sense,” Horvath continues. “Even in the face of hurricanes, modern recovery technologies have demonstrated our industry’s ability to protect our shorelines.”

What next for US energy? It all comes back to the thorny issue of increased drilling. Specifically, Obama’s campaign agenda called for oil companies to explore and produce

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USE IT OR LOSE IT

Independent American oil and gas businesses – not big oil – develop 90 percent of the nation’s oil and gas wells There are 5000 independent oil and natural gas companies in the US with, on average, 12 employees These independent businesses also hold the majority of the nation’s federal oil and gas leases onshore and offshore American oil and gas companies are developing more oil and gas wells than at any other time since 1985 Developing leases requires both technical and procedural steps. Technically, areas must be analyzed and exploratory wells drilled. Procedurally, the federal permitting process must be navigated Most of the drilling on federal leases has been for natural gas, and natural gas production was way up last year, along with demand

on the 68 million acres of federal land and the 40 million offshore acres that oil companies already have under lease but are not drilling on – a ‘use it or lose it’ approach. The carrot for oil companies is a streamlining of the federal permitting process to encourage development in three areas: the Bakken Shale deposits in Montana and North Dakota; unconventional nat-

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ural gas plays in the Barnett Shale formation in Texas and the Fayetteville Shale play in Arkansas; and the National Petroleum Reserve in Alaska. His campaign also called for enhanced recovery methods to access the 85 billion barrels that are technically recoverable from existing fields. But although more exploration and production is good news for the industry, recent economic factors are causing the sector some serious headaches. Not only does Big Oil look likely to lose its tax breaks, Obama is also calling for oil companies to go after harder-to-get and more-expensive-to-produce oil and gas deposits – which may be technically feasible, but would be much less profitable. The collapse of oil prices is making E&P a much more difficult investment proposition for oil and gas companies; add in the prospect of tighter environmental regulations, and Obama’s plan is going to be a tough sell to an industry used to making record profits. Indeed, while Obama’s energy advisors have charted an ambitious policy, it remains to be seen how practical such a plan really is. While his mandate for change is considerable, it is important to remember that presidents

alone do not set US energy policy and that Obama’s victory has not been comprehensive enough to give him an easy ride through the Senate, the key hurdle for enacting legislation in the US. It may be prudent for the new president to reach out not only to members of the Republican Party in setting energy policy, but also to include key executives from the international oil companies, too. Offering them a prominent role in developing future energy policy – in other words, allowing them to be part of the solution, rather than viewing them as part of the problem – could be one way of ensuring a reasonable market-based (and job-creating) energy policy that at the same time delivers some of the administration’s key objectives. Obama’s lead energy advisor recently said that when the Obama administration leaves office, it expects the US to be using less oil and creating less CO2 than it does now. Obama has the ear of the country, and of the world, and this is a message that many have been longing to hear out of Washington for many years now. We wait with interest to see whether ‘change we need’ is actually a change for the better.

“Although more exploration and production is good news for the industry, recent economic factors are causing the sector some serious headaches”

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EXECUTIVE PERSPECTIVE

ENERGY

AND

ACHIEVING

CLIMATE SECURITY In an industry not famed for its eco-credentials, ConocoPhillips CEO Jim Mulva is something of a paradox: an oil industry executive who’s a champion of carbon controls and the climate change challenge. But can climate change be reconciled with energy security?

n an industry given to bold pronouncements, Jim Mulva prefers a differ-

ent approach: he lets his business acumen and considerable deal-making ability do the talking. In 2006 he orchestrated the $35.6 billion acquisition of US independent Burlington Resources that, virtually overnight, made ConocoPhillips one of the nation’s top producers of natural gas. More recently, the alliance he brokered with Lukoil has seen ConocoPhillips build up a 20 percent equity stake in the oil major and secure access to the lucrative Russian market. Now, though, he’s turning his attention to an altogether trickier union: how to address the challenge of climate change within the context of energy security. It’s a contentious issue. Public pressure to act over the threat of global warming has never been greater, and with a new administration set to redefine America’s approach to carbon emissions and its use of cleaner energy, many see the next six months as a critical period. Inaction or procrastination now could hamper the environmental movement for years to come. However, with the US increasingly dependent on foreign oil, the need to ensure energy security is an equally pressing concern. Many in the oil industry believe that without a co-ordinated US policy, the industry is unlikely to be allowed to invest in much-needed expansion projects because of concerns over emissions. Clearly, Big Oil needs to be an active participant in the current discussion – and Mulva is determined to be at the forefront of negotiations.

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ConocoPhillips is one of the more progressive of oil firms when it comes to tackling environmental issues, but even so, he concedes that the impact of global warming has been a relatively recent concern. When Mulva’s company first participated in the Carbon Disclosure Project (CDP) in 2004, for instance, it was with a certain degree of reservation. An independent not-for-profit organization that provides primary climate change data from the world’s largest corporations to the global marketplace, CDP plays a key role in encouraging private and public sector organizations to measure, manage and reduce emissions and climate change impacts. ConocoPhillips’ initial submission to the CDP-2 survey was only four pages long, and was not approved for public release. “The climate change issue was relatively new for us, and we did not have as much data on our recently merged company as we do now,” says Mulva. Today, however, there is a world of difference. The Intergovernmental Panel on Climate Change has concluded that global warming is unequivocal. The European Union’s Emissions Trading System is beginning Phase II. And the new US administration has pledged to address climate change. This year, when ConocoPhillips filed its questionnaire, it was 19 pages long. “We had far more data available, much of which had already been released to the public,” says Mulva. “Attitudes have evolved.”

“Last year we became the only US integrated energy company to call for a mandatory national framework to address greenhouse gas emissions” Energy and climate security Mulva wants ConocoPhillips to serve as a positive example to the rest of the industry. “Our company has taken a well-defined position,” he explains. “We are very concerned about the potential impact of climate change, and last year we became the only US integrated energy company to call for a mandatory national framework to address greenhouse gas emissions.” In keeping with these beliefs, the oil giant is taking steps to better manage its own emissions. Earlier this year, the company developed a comprehensive climate change plan that included four key action items: to build organizational capability in the form of processes, people, tools and technologies; to pursue new opportunities in low or zero-carbon businesses; to leverage carbon trading and technology; and to better engage externally with a range of bodies from the environmental, scientific and public policy communities. Mulva believes this approach is already bearing fruit. “We now regularly measure and forecast our emissions,” he says. “We are improving the energy efficiency of our refining, conducting R&D on carbon

TAKING A LEADERSHIP APPROACH No one entity can address these issues on its own, but ConocoPhillips has made a decent start in providing leadership on finding pragmatic and sustainable solutions to the climate change challenge, seeking to encourage policy measures that: ■ Slow, stop and ultimately reverse the rate of growth in global GHG emissions ■ Establish a value for carbon emissions, which is transparent and relatively stable and sufficient to drive the changed behaviors necessary to achieve targeted emissions reductions ■ Provide long-term certainty for investment decisions ■ Encourage the development and deployment of innovative technology to help avoid or mitigate GHG emissions at all stages of the product lifecycle ■ Realistically match the pace and stringency of policy to the rate at which new technology or infrastructure changes can be developed and deployed ■ Encourage energy efficiency at all stages of the product lifecycle ■ Inform and influence consumer preference toward less GHG-intensive consumption ■ Encourage the deployment of carbon capture and storage as a practical near-term solution ■ Avoid placing a disproportionate burden on any one business sector or consumer segment ■ Support equitable international competition ■ Ensure that early actions are not disadvantaged ■ Avoid undue harm to the economy

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“We urge the incoming presidential administration to work with congress to pass effective legislation. And further, to exercise world leadership in negotiating an international climate agreement”

capture and storage, and producing renewable fuels. We were already a leading producer of natural gas, which is clean-burning and low in carbon.” In a further sign of changing attitudes within the industry, the company also now belongs to the US Climate Action Partnership (USCAP), an organization that includes leading businesses and environmental groups concerned about climate change. It calls for strong national legislation that would slow, stop and then reverse the growth of US greenhouse gas emissions. “Current US climate policy is a key business uncertainty,” explains Mulva. “This uncertainty must be resolved in order for the country and the world to move forward. For this reason, we urge the incoming presidential administration to work with congress to pass effective legislation. And further, to exercise world leadership in negotiating an international climate agreement.” For some, ConocoPhillips’ advocacy is evidence of a shifting attitude towards green issues on the part of Big Oil; others see it as an obvious byproduct of a changed operating environment in which business-as-usual is no longer an option. Either way, the reality is that climate change is only one of a wide range of energy issues currently faced by the US and other countries around the world. And it is in balancing an increased focus on mitigating the impacts of climate change with competing – and in some instances contradictory – industry imperatives that the real challenge lies. “We cannot focus on climate change alone,” explains Mulva. “We must also meet the challenge of improving our energy security. The tight oil mar-

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ket of early 2008 clearly demonstrated this need. As a result, the public agrees that the US needs more domestic production. This is why a majority now supports environmentally responsible offshore drilling.” He believes the public would almost certainly reject any effort to address climate change if, as a consequence, it raised energy prices too far or too fast. Yet at the same time, the public clearly wants action to address climate change, so any effort to increase energy supplies would be similarly rejected unless carbon emissions were also addressed. “For instance, any serious effort to reduce emissions would require the greater use of natural gas to generate electricity,” he suggests. “But to do this, we would need expanded domestic access for exploration and drilling. We could not do the first without the second. So climate change and energy security issues must be resolved together through co-ordinated policies. The new administration and congress must set aside partisan politics and get down to business.”

A sound climate change policy When he takes office in January, energy and climate change will undoubtedly be one of the first things on President Obama’s agenda – and it is an issue that needs addressing urgently, not least because of its international dimension. “Of the nearly 40 countries in which ConocoPhillips operates, some now have greenhouse gas regulations in place; in others, regulations are imminent. We have important operations in the Arctic, which

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development to proceed in a sustainable manner. Make no mistake: we are talking about fundamental changes to the energy system that drives the world economy and our standard of living, so we must do this right.” Of course, US climate policy must be efficient in order to minimize costs to both business and consumers, and as such Mulva supports the development of a federal program. “We recognize the important role that state initiatives play, particularly in the areas of building codes, urban planning and education. But we oppose a patchwork state-by-state approach. We also believe that an overlay of competing and conflicting regulations, such as separate standards for renewable and low-carbon fuels, would be too costly or even unworkable.” The policy must establish a transparent and relatively stable value for carbon, which must be sufficient to change behavior enough to achieve the emissions targets. It must promote new technological solutions without picking winners. And it should contain look-back provisions so adjustments can be made in response to changing conditions. Finally, it must be transparent and equitable. “It should not unduly burden any group of consumers, region of the country or industrial sector,” says Mulva. “It should also protect industries exposed to competition from unregulated countries. This is necessary to avoid disadvantaging domestic industry and to prevent emissions ‘leakage’ from industries moving offshore. Ultimately, equity requires global participation, and a linked international system of climate programs.”

A sound energy policy

is experiencing the impact of warming temperatures. And as we go about providing the energy that powers modern life, we consume energy ourselves. So we are not strangers to either the risks or the opportunities associated with climate change,” says Mulva. “And we obviously have a vested interest in helping achieve global energy security. We believe that our industry must be involved in the effort to find solutions to both challenges.” He proposes a number of steps the energy industry must take in order to address these issues, including developing new conventional and unconventional energy resources, utilizing the industry’s expertise to develop carbon capture and storage technology, and leveraging international business and trading experience in the emerging global greenhouse emissions industry. He also maintains that the US has a significant role to play in the international arena – but that first it needs well-founded policies. “US climate change policy should be aligned with the ‘four Es’ – environmental integrity, efficiency, effectiveness and equity,” he explains. “It should meet the long-term objective established in Article 2 of the UN Framework Convention on Climate Change, which calls for stabilizing greenhouse gas concentrations at a level that would accomplish two goals: preventing dangerous interference with the climate system; and enabling economic

And just as a comprehensive climate program should be linked globally, so it should also be linked to the development of the US domestic energy policy. Mulva maintains that the US needs a sound, comprehensive approach that should incorporate four principles: energy supply diversity, greater energy efficiency, technological innovation and sound environmental stewardship. Due to rising population and economic prosperity, the world will clearly need more energy in the future, in all forms. This includes alternative and renewable sources, like solar, wind and geothermal power, biofuels and others. But there is, to borrow a phrase, an inconvenient truth. The world will also need more fossil fuels, as well as more nuclear power – particularly given that experts predict that alternatives such as renewables could take decades to come online to replace these sources. “US energy policy should of course stimulate development of alternative and renewable sources, including some that have not been invented yet,” Mulva concedes. “But it must recognize the essential role of oil and natural gas, and open new onshore and offshore areas to development. And it should facilitate permitting and construction of energy infrastructure.” In Mulva’s view, the policy should encourage the environmentally responsible development of unconventional fossil fuels, such as oil sands, oil shale and natural gas hydrates. “These are abundant, and are located within our borders or nearby. They represent hundreds of years of energy potential.” He cites the example of the Canadian oil sands, which he says could provide 20 percent of US oil supply by 2020. While some oppose development due to their current carbon intensity, Mulva believes that the

$15

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ConocoPhillips’ capital expenditure in 2008

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best course is to proceed, while continuing intensive R&D to reduce that carbon footprint. The policy’s second tenet must be improving energy efficiency. Since the 1970s, the US has doubled its economic output per unit of energy consumed, but Mulva insists we can do more. “Currently, gasoline demand is down three percent – the first meaningful decline in years. Total distance driven fell by 12.5 billion miles in June from a year ago. Sales of hybrid cars are booming, and business is raising its efficiency. Government can drive continuous improvement through public education, and by enacting rising efficiency standards throughout the economy. This offers the dual benefit of improving energy security and reducing carbon emissions.” Third, the energy policy should promote innovation by encouraging research and development. “Enormous corporate investments are already under way,” he continues. “But we also need public investments in technologies that cannot be logically funded by industry, such as nuclear fusion or fuel cells. Government can encourage investment by granting incentives, and by not taxing away the financial returns of energy companies. Government can also enhance national research capabilities through greater educational support.” Finally, Mulva’s aim is to achieve these priorities while serving as a good environmental steward – protecting air and water quality, and preserving the land – while at the same time, investing in cleaner forms of energy. “At ConocoPhillips, we have dramatically increased our capital spending to more than $15 billion this year,” he explains. “We primarily concentrate on our core businesses. But we also have a very active R&D program in renewable and alternative energy. We are a large blender of ethanol and we produce renewable diesel fuel. We are researching next-generation biofuels and developing new materials for batteries for electric cars. We are also considering investments in other energy sources. So we are committed to doing our part.”

THE CHALLENGE FOR THE US Access to resources is severely restricted in the United States and abroad, and the American oil industry must compete with national oil companies that are often much larger and have the support of their governments. US companies can only compete directly for seven percent of the world’s available reserves, while about 75 percent is completely controlled by national oil companies, and is not accessible. However, ConocoPhillips is actively working to bring more energy to the market, explains John Lowe, Executive Vice President for Exploration and Production at the US giant. “Over the past six years we have reinvested – on average – 106 percent of our income. In 2007, we earned $12 billion but reinvested $13 billion – and we have over $15 billion in investments planned this year. This investment includes finding added supplies of oil and gas, expanding refining capacity and continuing to research and bring renewable and alternative fuels to the market.” In North America, ConocoPhillips is drilling exploratory wells, developing the Canadian oil sands and building infrastructure.

Meeting the challenge head-on The world clearly faces serious challenges on both climate change and energy security. As economies around the world continue to develop, the growing global demand for energy must be met in concert with responsible actions on climate change. Balancing supply and demand will require more efficient use of energy and the full utilization of both conventional and innovative sources of energy into the foreseeable future. “There are potential solutions available – that is, if we can rally public support and political will, and build a consensus for action,” concludes Mulva. “If we fail, our country will be stuck in a worsening situation. We will become ever more dependent on foreign sources of supply. We will remain subject to wild gyrations in energy prices. And we will only be able to sit and watch as the climate changes around us.” Whatever happens, meeting the twin challenges of taking action on climate change and providing adequate and reliable supplies of energy will require technical innovation, resource commitments and responsible stewardship by energy producers and consumers alike. It will require some risk-taking, but given Mulva’s previous track record in successfully balancing risk with opportunity, don’t bet against ConocoPhillips meeting these challenges head-on. n

But Lowe insists that more must be done to explore the vast areas of the US that are off-limits due to drilling moratoriums. These areas could more than double the nation’s oil and gas reserves. “The US is in a global race for energy,” he says. “We are competing against national oil companies that are far larger, and that enjoy preferred access and governmental co-operation. We must move beyond today’s adversarial relationship and start working together to find real solutions. US oil companies should be viewed as the key to the energy solution – not as scapegoats, but as assets in this global energy race. We must be allowed to compete on level ground for the benefit of our country.”

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THE BIG INTERVIEW

Access

denied Fluctuating oil prices are symptomatic of supply and demand struggles in the current market â&#x20AC;&#x201C; and in order to control them, the US needs to realize that supply can and should start at home. In an exclusive interview with O&G, Bud Albright, Under Secretary for Energy at the US Department of Energy, reveals why it is vital we start now. By Rebecca Goozee

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In Northern Alaska, a geophysicist stands near a snow tractor equipped to generate seismic data to show the presence of oil or gas. Many experts believe the US will need to open up areas such as Alaska’s Arctic National Wildlife Refuge (ANWR) to drilling if it is to successfully meet rising demand and ensure energy independence.

ook at any analysis for the future of the oil and gas industry and it is fraught with supply and demand difficulties. As regulatory pressures continue to impact operations, costs soar and reserves become more difficult to extract, the pressure to meet future energy demand mounts higher every day. World demand is currently expected to increase up to 57 percent by 2030, with many commentators concerned over the future availability of oil and gas reserves to meet that demand. Bud Albright, Under Secretary for Energy at the US Department of Energy believes that it is crucial we act now in order to see returns in the future, and it is even more important that the US take responsibility for creating their own resources. “Demand in the world is up,” he says. “China and India are growing exponentially, and their demand is increasing accordingly. We have limited oil and it looks like this problem will be around for a long time in the future, unless we take the intiative and get the ball rolling.” But, these problems didn’t come about overnight, and the solutions won’t either – and certainly not without increased access to supplies. Albright believes that there are several billion-barrel areas that haven’t yet begun to be explored, including the Arctic and the outer continental shelf. “But it doesn’t matter how much supply there is if there is no access to it,” he says, comparing the situation to a locked strongbox: “If there’s plenty of money in the world

OPEN ANWR ANWR reserves are estimated at 10 billon barrels of oil by the US Geological Survey. At full production, ANWR would add a million barrels per day to US production. The amounts of natural gas are also astounding, with the survey estimating that there were 150 trillion cubic feet of conventional gas and 590 trillion cubic feet of gas hydrates. In addition, there is thought to be an uncalculated amount of drillable coal-bed methane in an estimated 13.7 billion tons of indicated coal resources.

Drilling is permitted in the Beaufort Sea on Alaska’s north coast. On the west coast, it is not allowed under the general prohibition against offshore drilling New technology also allows long distance slant and horizontal drilling from a single drill site. BP is now planning such an eight-mile drill The Beaufort Sea offshore is shallow and production is done from man-made islands. A single platform allows for many slant wells Estimates of recoverable oil are based on a $40 barrel price, but would see much higher prices with oil at $100-plus per barrel – the higher price justifies more costly drilling and secondary recovery engineering The Alyeska Pipeline once pumped 2.1 million barrels of oil per day – it’s now at 700,000 and declining seven percent annually

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but it’s all locked up in a safe, it doesn’t do you much good to proclaim the wealth of the vault.” He believes that we need to ensure that existing resources are developed and at the same time research the way things will be done differently in the future. “One of the things that frustrates me is that so many people take an all or nothing approach, that if we expand our petroleum resources then we won’t do any alternative work, and won’t look to better and smarter energy production,” says Albright passionately. “I don’t buy it. As long as the research continues we’ll see scientific progress and developments – ok, not by next Wednesday, but these developments will change things Bud Albright dramatically as we go forward over the next five, 10, 20 years. To transition through the time until these new resources work, we are certainly going to need the petroleum resources that we currently do have, and it is imperative that these resources are expanded.”

International Airport. “That footprint is shrinking, as the latest technologies use even less acreage than that. We can develop our own resources and we can drill safely in an environmentally prudent and responsible way, we just need to get about doing it. And if we don’t we are being short-sighted and unwilling to meet our own needs, which potentially could be catastrophic for the future of oil and gas in the US.”

Opportunity Fourteen years ago, the Senate passed a bipartisan bill that would allow the development of ANWR. The president at the time, Bill Clinton, chose to veto the bill, and that veto has so far been sustained. Because ANWR is an important wildlife habitat, some people are concerned that development would hurt the land, endanger wildlife and not even recover enough oil to make the effort worthwhile.

Imports The US currently imports around two-thirds of the oil it uses. With energy security such a key issue, America’s reliance on imports has to change. Albright argues that it is imperative that the Arctic National Wildlife Refuge (ANWR) is opened up as soon as possible, along with the outer continental shelf. He also says that it is critical that resources in oil shale and sands are developed. “We need to get smarter about our usage, conserving more and wasting less. But along with decreased demand we need increased supply, particularly within the US itself,” he says. He goes on to explain that the US is already seeing some decrease in demand in specific sectors and industries. Decreases have been identified in the transportation and industrial industries, but not so much in the residential and commercial sectors. “The market will have to work in a way that will send signals in order that people change behavior, embrace new technology and therefore change usage patterns,” explains Albright. So far, he believes that the US has failed to develop resources in a way that has met predictable need – in a sense, the US can be seen as a victim of its own inaction regarding oil and gas supply. “A good example of that is the failure to develop ANWR,” says Albright. “Many of the reasons put forward tend to involve the safety of development of those resources, primarily from an environmental perspective. But with regard to the environmental argument, surely developing our own resources makes a whole lot more sense than relying on foreign imports.” The 19-million acre ANWR park lies in the northeast corner of Alaska and is about the size of the state of California. The Coastal Plain of ANWR is the part being considered for oil and gas development since it potentially holds billions of barrels of recoverable oil and trillions of cubic feet of recoverable gas. The Coastal Plain is around 2000 acres, or one-fifth the size of Washington DC’s Dulles

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ly utilizing includes producing oil and gas from difficult tar sands and shale Albright believes that had Clinton’s veto not been sustained, around a fields. This type of extraction is predicted to hold up to a trillion barrels of million barrels a day would be coming out of the site today. “One of the raeconomically recoverable oil. To put this in perspective, the whole world has tionale at the time for vetoing was that we wouldn’t see this oil for 10 years used a trillion barrels since oil was first used. It is anticipated that the entire anyway and that we needed something with immediate results. That was world’s supply could come from this oil sand and shale for the next 30 years. 14 years ago, and I think it is fair to say that we’d be getting that oil now if Albright believes that Canada is developing these resources incredibly we hadn’t been so short-sighted,” he says. “The old saying is that the best well and is seeing a great deal of product from them. While oil shale has time to plant a tree is 30 years ago. The second best time is today. And it’s gained attention as an alternative energy resource, there are some environthat kind of short-term thinking that has gotten us into the situation we’re mental issues involved in the extracin today.” tion and production of oil shale, The outer continental shelf is anincluding land use, waste disposal other area that has remained under and air pollution. Environmentalists wraps for years, denying the US access oppose the production and usage of to millions of barrels of oil. Analysts esThe Department of Energy’s overarching mission is to advance oil shale as it creates even more timate that there are somewhere in the the national, economic and energy security of the US. The greenhouse gases than conventional region of 115 billion barrels available. department’s strategic goals to achieve the mission are fossil fuels. Although there has been a lapse in the deigned to deliver results along five strategic themes: But despite the concerns around outer continental shelf ban it still re-

STRATEGIC GOALS

alternative resources, demand for oil will continue to intensify and one way to meet these demands involves new Energy security: Promoting America’s energy security through reliable, clean and affordable energy technology. Albright believes that in terms of transportation, fuel cells and plug-in hybrids have promise, as does Nuclear security: Ensuring America’s nuclear diesel, crucially because it is available security today. “It’s clean and it delivers almost 30 percent more efficiently,” he says. Scientific discovery and innovation: Strengthening “By using diesel you have already US scientific discovery, economic competitiveness found 30 percent more fuel for every and improving the quality of life through innovations vehicle on the road, and we will conin science and technology tinue to see tremendous advancement in this area.” Albright goes on to explain that Environmental responsibility: Protecting the the Department of Energy are working environment by providing a responsible resolution to the on other alternatives such as biofuels environmental legacy of nuclear weapons production and cellulosic ethanol. “Nobody knows exactly what’s going to work Management excellence: Enabling the mission and what isn’t. Some of it will probathrough sound management bly fall on its face but some of it will probably do quite well and change the way we do things. I don’t know exactTechnology ly where we’re going but I do know we’re going to be better in the future. I’m Many experts believe that rather than opening up new fields, we should extremely optimistic about our ability to meet the challenges.” concentrate on maximizing returns from existing fields. While Albright believes that maximizing returns should surely exist for every oil or gas field Future focus currently in use, he goes on to explain that the reality is that we need to drill So how does Albright see the oil and gas sector developing over the next more holes to get more oil. “Frankly, we need to stop playing games,” says few years? “The government should no longer be in the business of making Albright. “With prices the way they are and having gotten to where they are determination as to how the business is developed,” he replies. “We ought to because of our own inaction and because of political games that have been be in the business of seeing oil and gas businesses have access to resources played for years, it’s time to stop that and get serious about recognizing the so they can fashion their business plans to meet America’s, and the world’s, problem, acknowledging that supplies are down and without additional reneeds going forward, and let them determine the best way to do that. sources we aren’t going to get out of this unless we develop alternative “In my experience at least, how they look, how they form and what their sources as well.” profile is should be determined in the private sector, with the government An alternative option that the Canadian oil and gas industry is currentclearing a path to make sure that there is access to what’s needed.” mains to be seen what will happen regarding the ban and whether it will be reinstated. Albright believes that if Congress truly allows the development of these resources then the US could begin almost immediately to develop those, particularly in areas where infrastructure is already in place, such as the coast of California. However, it will still take a number of years to develop, probably around eight to 10 years. “It’s a long-term process and it won’t be something that happens overnight,” says Albright. “We’re talking about billions of dollars of investment and there will be studies and test drills on the leases that companies get. A platform requires about $3 billion of investment so these companies are going to want to be pretty sure that they get oil when they drill. It’s a long-term process with a long-term answer.”

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EXPLORATION FOCUS

The search for black gold can be a challenging experience. O&G’s Rebecca Goozee caught up with Devon Energy’s Rick Mitchell to find out why effective exploration requires more than a tattered treasure map and a sense of adventure.

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s job titles go, they don’t come much more exciting than possible. “A deepwater drilling operation currently costs about $8 or $9 ‘head of exploration’. The very word conjures up images per second, a shallow operation is around $5 per second and a US onshore of adventure and derring-do, of pushing knowledge to operation about $0.50 a second,” he explains. “Time is money, and when the known limits, of going beyond the frontiers of what you can focus on efficiency and minimize problems, that’s one of the top is possible. “We call it the Indiana Jones factor,” laughs ways in which you can control your costs.” Rick Mitchell, VP of Drilling and E&P Services at Devon To help meet this challenge, Devon’s E&P divisions spend a great deal Energy. “We like the challenge of finding ourselves in reof time sharing best practices and lessons learned so that when they have mote areas and supporting our divisions in setting up operations from a great market success rate or a good level of performance, it can be shared scratch, where no drilling has been done before.” And while his role doesacross divisions so problems are less likely to occur. “We capitalize on the n’t necessarily require him to carry a bullwhip and a revolver, finding the learnings and experiences of others, which helps us to hit the next level of buried treasure can still be a challenging experience. performance,” says Mitchell. “We spend a lot of time in supporting the diOf course, just like Hollywood’s favorite fedora-wearing hero, visions in their experimenting with new technologies in a controlled enviMitchell’s job isn’t all fieldwork. Diligent research and hours of prepararonment, and in this way we can find that next level of technology that helps tion go into making sure the search for oil and gas is a productive one; he us improve and save costs even further.” can typically be found going over drilling reports and talking with various divisions Expansion and diversity on what is working well, where there may As the largest US-based independent be a problem and assisting and supportproducer of oil and gas, Devon Energy proing the staff. “I focus quite a bit of energy vides three percent of all the gas consumed on our Devon Procurement Steering in North America and also produces about Committee,” he explains. “It’s the group 600,000 barrels of oil a day. Since Mitchell that oversees the major procurement of joined Devon Energy in 2003, the indepengoods and services within our company.” dent oil giant has expanded to incorporate In addition, Mitchell is in charge of the a diverse portfolio of exploration and proSurface Controlled and Data Acquisition duction activities, including conventional (SCADA) group, which handles the remote oil and gas exploration and production in monitoring of wells and facilities as well Canada, as well as good growth in heavy oil as Devon’s major capital projects group. production and development in Canada “My job entails many different things,” he and the deepwater Gulf of Mexico. The says. “We’re responsible for supporting company also has a strong US conventionthe seven different business units within al and non-conventional oil and gas prothe corporation, and we’re also the supduction operation on the US onshore. port group that tries to help out and sup“After various mergers took place in “We’ve got fantastic deep-water and port all our exploration and production the late 1990s and early 2000s, we had international teams at the moment and you groups, as well as our marketing and midmany different exploration blocks and areas will see Devon continue to explore and stream group. There’s a lot to do.” all around the world, and Devon has now develop its existing discoveries” And while at first glance his role consolidated those into a strong and foseems more average Joe than Indiana cused approach,” explains Mitchell. Since Jones, Mitchell is facing a growing number of challenges within the indus2003, Devon has strategically defined Devon’s international approach and the try. He believes that the top challenge is access, which is becoming incompany now works in just three main areas, China, Brazil and the former creasingly difficult. “That’s a common issue for all oil and gas operators,” Soviet Union. “We have a wide variety of activities and projects throughout he says. “At Devon, particularly over the past year, the E&P divisions have the company, and we’ve continued to grow production year over year, and done an outstanding job of securing additional lands and picking up that’s very exciting for us.” acreage from Canada through the US, and internationally to where we conMitchell joined Devon Energy as Director of Deepwater Drilling and tinue to access and gain land at reasonable prices that will help us mainFacilities, a unit that he is still involved in today. In 2007, deepwater exploration tain profitability.” Nevertheless, Mitchell is a firm believer that more needs accounted for around 10 percent of Devon’s portfolio, and the company is keen to be done to open new areas for drilling if the US is to meet its energy to keep expanding. “Right now, we have three deepwater rigs operating for needs and achieve energy independence. us and our activity level is expanding,” he explains. “Over the past five to 10 The other main challenge is controlling costs and ensuring the liabiliyears, Devon has spent a lot of time focusing on expanding its deepwater portty of operations. Costs have grown significantly since 2000, doubling across folio, and preparing some high impact and high potential prospects to drill.” the board for just about every company in the industry. One of the ways that In terms of its deepwater exploration, Devon is concentrating on three Mitchell’s team has been supporting the E&P divisions in controlling costs main geographical areas, the first being the Gulf of Mexico. So far the compais by ensuring efficiency in operations so that there is as little downtime as ny has four proven discoveries with partners in the Lower Tertiary trend, of

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Drilling rig in Barnett Shale which several are starting the drilling phase now – the Cascade project is one such example, and Devon expects to see the first production from the project in 2010. “We are also partners in Jack and St. Malo with Chevron, and the Kaskida project with BP, so we’ve got some very good projects underway, with drilling expected for both projects by the end of the year,” says Mitchell. “We are working very closely with our partners, and we’re working such that we can accelerate, get these projects moving and a return on production as soon as possible. We don’t have firm start up dates for Jack and St. Malo and Kaskida yet, but we think they’ll probably be in the 2013 timeframe.” There are two other areas that Mitchell is excited about, including deepwater China, which he considers a frontier area, citing the one significant discovery there by Husky Oil and Gas. Deepwater Brazil is another area with numerous prospects. Devon is currently one of the largest exploration and production companies with leaseholds in the area. On September 30, Devon announced the preliminary results of an exploratory pre-salt well in the Campos Basin offshore Brazil. “We’ll be continuing with a rather aggressive and exciting exploration program in Brazil for several years to come,” he says.

Technology Technology has been vital in improving operations at Devon, and is quickly transforming E&P operations. With an evermore prevalent focus on horizontal drilling in the US and Canada, Mitchell has seen much improvement in the capabilities of the down hole drilling equipment to help drill horizontal wells. The number of horizontal wells drilled per year was about four percent back at the beginning of the century; now the figure stands at around 12 percent. Mitchell predicts a further focus on drilling technology that incorporates horizontal drilling and completion techniques. “In 2009, we believe that Devon could be drilling as many as 700 horizontal wells, and that’s a key area for us in a way, which helps us to become more successful and help our company grow,” he predicts. He is also tremendously excited about some of the new horizontal completion technologies that are currently coming online. “These completion technologies allow us to drill and complete longer intervals so that we can stimulate more zones and maximize the production and reserves per well in a timely and cost-effective manner,” he says. Of course, one of the key changes that technology has made is that in almost every circumstance, safety techniques have been improved, from rig designs to the way in which the equipment is handled. Mitchell also believes there has been a focus on making things more efficient and Devon’s E&P divisions are doing a great job in this area. Technology has also made it easier to access the reserves that lie in the most inhospitable places in the world, and possible to work with unconventional oil deposits such as oil sands. Although Mitchell admits that there have been challenges in these areas, he goes on to explain that there are a relatively large group of employees at Devon that have spent a great deal of time working in difficult places and have the experience to make these opportunities successful. “It goes back to that Indiana Jones factor,” he jokes. “Even though it’s difficult, you have to set up everything yourself and get going. There are a lot of people in our company who like that challenge and enjoy it – we certainly don’t shy away from that side of operations.”

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THE BARNETT SHALE STORY Not long ago, the Barnett Shale formation in north Texas represented a geological puzzle that had gone unsolved for more than 40 years. Geoscientists knew vast energy reserves were sealed inside the tight, black rock formed from organic material deposited 325 million years ago. The challenge was recovering them. Through a lot of hard work and a great deal of unconventional thinking, Devon unlocked the stingy shale known for its low porosity and high complexity. Engineers use a method known as fracturing to foster permeability in the shale. Crews inject a mixture of fresh water and sand into the rock at high pressure to fracture the formation and release gas trapped inside. The technology has given Devon access to vast reserves, transforming this challenging area surrounding Fort Worth into one of the nation's most important natural gas producing fields. In all, Devon has more than 3500 wells producing in the field. The company uses innovations such as horizontal drilling and advanced seismic technology to ensure each well reaches its full production potential. Devon is optimistic about its future production growth in the Barnett Shale and will continue to expand and recover gas reserves contained under a dominant lease position of more than 715,000 net acres. Through Devon's pioneering effort, the Barnett Shale has emerged as the largest natural gas field in Texas. Within the last few years, Devon has made significant advances in developing and enhancing production from the Barnett. The north Texas area has potential to remain one of the country's most vital energy resources for many years to come. Devon's accomplishments in the Barnett are an example of technology and innovation helping meet growing energy demands by finding new ways to tap North America's remaining reserves.

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Ocean Endeavor – a fifth generation semi-submersive drilling rig currently under contract by Devon in the deepwater Gulf of Mexico.

FACT FILE Headquarters: Oklahoma City Founded: 1971 Employees: 5000+ worldwide Production: 224 million barrels in 2007 E&P Budget: $5.6-$5.9 billion in 2008

OPERATIONS Devon’s worldwide portfolio of undeveloped oil and gas properties provides an extensive inventory of exploration drilling opportunities to enhance the company’s potential for sustained growth. Devon’s production is weighted toward natural gas and most of its operations are in North America. ■ 64 percent of production is clean-burning natural gas ■ 36 percent is oil and natural gas liquids, such as propane, butane and ethane ■ More than 90 percent of both production and proved reserves are in North America, including the US onshore, Canada and the Gulf of Mexico ■ Devon produces 2.4 billion cubic feet of natural gas each day, or about three percent of all the gas consumed in North America ■ About 40 percent of Devon’s gas production is from unconventional sources, such as the Barnett Shale in north Texas, and coalbed natural gas fields in New Mexico, Wyoming and Canada

Environment Even in more remote locations, the onus is on improving productivity and reducing costs while making safety targets and environmental regulations. Mitchell says that Devon uses the same model throughout the organization regarding environmental and social issues. Devon has always put the environment and people first, which is a part of what he calls, “being a good corporate citizen”. The company has an excellent reputation, says Mitchell, and has never had any problems. “When you take the time, effort and precautions to put the people and the environment first, the challenges don’t seem to be as great, and you are accepted by more people in the community,” he explains. “People tend to want to help you and be a part of the team if they see you as a good corporate citizen.” Indeed, a major part of the exploration process is seeking input upfront about the areas Devon is working in, and Mitchell explains how employees will go in and meet with the local communities in the environment to

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make sure all goals are aligned from day one. “It makes a lot of sense to understand the area you’re working in, and who you’re working with,” he points out. “And when we collaborate with the local people, we get potential problems sorted out in advance, and typically costs and performance then fall right in line and you don’t have to deal with unforeseen events, which can be costly and cause delays.”

Future focus In terms of the future, Devon plans to maintain its strong presence in Canada, where Mitchell wants to continue the good work in the heavy oil area. He believes that Devon is currently leading the way in producing natural gas from the Barnett Shale in North Texas, the Woodford Shale in Southeast Oklahoma and other shale plays that continue to emerge, predicting growth in these areas. It is, he concedes, an exciting time. Mitchell also says that work will continue with the ultra-deepwater programs, such as exploration in the Gulf of Mexico, Brazil and China. “We’ve got fantastic deepwater and international teams at the moment, and you will see Devon continue to explore and develop its existing discoveries. We expect to do more of the same, executing the strategies and programs that we have because we believe, right now, that these are the right places to be and the right things to do, and we’ll do our best to continue growing the company.” He does, however, sound one final note of caution: for the industry to truly progress, more must be done to address the talent shortage. Much has been achieved already, but even so the industry cannot afford to take its eyes off the prize. “Everybody is just so busy right now,” he concludes. “We’ve got lots of new and relatively inexperienced people in the industry. It takes a lot of time and extra effort for us to ensure that we’re protecting our people and the environment, first and foremost, and then are able to execute and perform at a high level of expectation with all the new things going on and the significant levels of activity. It’s a challenge, but one we’re enjoying meeting.” n

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EXECUTIVE INTERVIEW

The next milestone of exploration Neil Dyer, VP of Geophysics at ARKeX, explains how advancements in field data technology are improving exploration efforts in the oil and gas industry.

tromagnetic methods. Together with technical development in integrated interpretation methodology, these new instruments will lead potential ﬁeld methods to new degrees of resolution. This enables meaningful contribution to exploration from traditional territory in basin evaluation to prospect level analysis. Tell us about how your products and services are aiding the industry? ND. ARKeX is providing potential ﬁeld surveys at high-resolution to the oil and gas exploration industry. We provide interpreted products through our BlueQube and Earth Modeling

How have advancements in subsurface data acquisition given oil and gas exploration companies better, more accurate subsurface geology data in recent years? Neil Dyer. From ARKeX’s point of view, as suppliers of potential field data and integrated interpretation, we see the principal advancement in our field to be the improvement in provision of high-resolution coverage of multiple geophysical datasets in addition to seismic data. Interpretation methodology is working towards the goal of combined interpretation to produce an Earth Model compatible with gravitational, electrical, magnetic and seismic observations. These endeavors require acquisition technology to deliver datasets with compatible resolution between the data types. Recent surveys acquired with this activity in mind have shown that integrated interpretation of potential field, seismic and surface observations can add valuable constraint, particularly where source coupling, access problems or illumination deficiency hinders a conclusive seismic interpretation. What are the challenges that the oil and gas industry has to overcome in acquiring reliable data? ND. As drilling capabilities extend to more extreme environments and smaller targets

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so must exploration technology improve in accuracy to serve the efficient deployment of these resources. ARKeX strives to produce data to support a robust, scientifically driven Earth Model earlier in the exploration cycle. We are required to do this rapidly and accurately over a wide range of terrain and climatic conditions. Our challenge in this, as across much of our industry, is to foster a rebalancing of the exploration effort towards a wider range of exploration methods and the intelligent integration of those methods to produce a knowledge product greater than the sum of its parts. What developments are on the horizon in terms of new technologies and how will this impact on your work? ND. ARKeX and others are developing a new generation of high-resolution gravity gradiometer that will enable moving platform gravity gradiometry to be performed in a much wider range of operating modes than are currently feasible. The increased resolution may be applied either to increase survey planning flexibility by enabling measurement at greater distance, or to increase the ultimate resolution of the survey and decrease acquisition time through increased resilience to sub-optimal acquisition conditions. Similar developments are in progress in magnetometry and in elec-

services that enable the full beneﬁt of the dataset to be realized. These services integrate the interpretation of seismic, borehole, surface geology and remotely sensed data with potential ﬁeld observations acquired by ARKeX or others. Depending upon the type

“Our challenge is to foster a rebalancing of the exploration effort” – Neil Dyer of geophysical information available and the survey objective, the focus may range from structural interpretation through to development of rock property models. All share the common objective of the use of potential ﬁeld data to reduce the time and expense required to progress the exploration effort to the next milestone. 

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EXPLORATION FOCUS

Offshore opens up Will access to the outer continental shelf change oil and gas exploration and production in the US? O&G investigates.

ne of the major issues that the US oil and gas industry face is access to resources. And when the extension of the ban on drilling the outer continental shelf lapsed in September, the opportunity to access a huge amount of energy resources shot sky high. Eighty-five percent of America’s continental shelf has been off limits since 1985, in other words the industry has been unable to get access to those areas that contain an abundant amount of natural resources. Bruce Vincent, VP of the Independent Petroleum Association of America (IPAA),

believes that much of the outer continental shelf has potential. “The United States Geological Service has estimated the amount of available resources throughout the US, finding substantial resources,” he says. “The interesting thing about their estimates is that they’re based on decades-old data. Now, the industry has made great strides with technology in the last 10 to 20 years, so our belief is that using modern technology, particularly with regard to the ability to process and analyze seismic data, that the resource base is probably larger than what’s currently estimated.”

Vincent believes that California has a big part to play, as it is an offshore area that is known for its tremendous amount of resources. As infrastructure is already in place here it is possible for a development to spring up fairly quickly, compared to some of the places on the East coast for example. “California is attractive because it has previously been drilled in, and there’s a lot of data about the area, particularly offshore of the south. In terms of getting resources to market more quickly, California would be one of the places that would be prioritized,” explains Vincent. It would be possible to get products to

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“For decades now, the industry has successfully explored resources in a responsible manner” market within two to four years, he believes, compared to fi ve to 10 years if you look offshore of the east coast. “It’s a matter of where the opportunities are, the existing data sets and the infrastructure that may or may not be in place.” While the ban expired in September, it will take time before the industry is able to start making things happen. Firstly, the Minerals Management Service, which oversees the Offshore Leasing Service, has to revise the 2007/2012 five-year plan, which means it will probably take about two years for any new leases to be issued. “It could be 2010 before exploration production companies can begin activity on the outer continental shelf,” confirms Vincent. But while some areas may take up to a decade to produce new resources, the sooner it is started the better. “I learned a long time ago that things take time to do, and if we don’t even start we will never get there.” He continues: “We need to give industry access to these areas. The industry is an incredibly technologically advanced, nimble industry that, given time, will tap the resources and make them available to the US and improve its energy security position.” There has been a shift in public opinion towards the offshore drilling ban, and in recent polls, the majority want Congress to lift their ban on offshore drilling. Vincent believes that there are a couple of reasons for this. Firstly, the American public realizes the need for the industry to develop additional resources, both in reducing imports into America and to create more supplies for the world. “The supply/demand balance for oil and natural gas is fairly thinly balanced, and we’ve seen how oil just this year alone shot up to almost $150 a barrel, and the best solution for that is to increase more supply, as well as try and

become more efficient and conserve to reduce demand,” says Vincent. Secondly, Vincent believes that the American public is aware that the industry has a 99 percent record of exploiting oil and gas production in an environmentally responsible way. People ﬂock to the beaches offshore in Texas and Louisiana where the industry has drilled successfully for decades. “The last real offshore oil spill of significance was back in 1969,” explains Vincent. “It was in Santa Barbara off the coast of California, and that still rings in some people’s memories, but for decades now, the industry has successfully explored resources in a responsible manner.”

Technology One reason that the industry has been able to successfully exploit offshore is technology, if it wasn’t for technology then the industry wouldn’t be where it is today. Vincent believes that without it he easily sees oil at $250 a barrel. “Tough times help drive people to be creative and innovative,” he says. “The 80s and much of the 90s were difficult times for the oil and natural gas industry, and what they did is say, ‘We can’t do anything about the price, but we need to focus on the things we can control’.” The oil and gas industry is a technologically advanced business and the leaders have created many new technologies from the geoscience/geophysical side to understanding where oil and gas might be, to completion technologies that enable you to get hydrocarbons out of the ground in places that you couldn’t before. “It’s been those technological advances that have allowed the industry to continue to grow reserves in production and exploit the vast resources that are available to us today,” says Vincent. “The best example of that is natural gas, which is

projected to grow four percent in 2008 alone. It’s remarkable quite frankly, to be able to grow production on a base that big. But it’s due to the development of technologies that have allowed the industry to tap into unconventional resources.” These are resources that the industry has known about for decades, but it is only now that they are about to extract the hydrocarbons in a commercial and economically viable way. It is through horizontal drilling, completion activities and multistage fracture simulation technologies, for example, that these unconventional resources have been able to become economic. However, challenges still exist in the industry. Drilling tens of thousands of feet underground in high-pressure, high-temperature environments is extremely challenging and the deeper the drill the better you need to be. “We have to become more efficient in order to drive costs down. The financial crisis has triggered an economic downturn and triggered a significant reduction in the price of oil and gas out there. In terms of the industry’s perspective, we’ve been through these cycles for decades and we know how to deal with it – by driving expenses down,” explains Vincent. “You need to drive costs down so that you can continue activities and continue what you are best at. Technology is one of the things we can do with that. As it improves for going deeper, we’ll be able to continue to unlock resources that are available, particularly in places like the Gulf Coast.” 

FAST FACTS: PACIFIC OCS REGION Acres under lease: 400,505 Active leases: 79 Producing leases: 43 Barrels of oil per day: 63,000 Cubic feet of gas per day: 130,000,000 Total oil and gas wells drilled: 1290 Total development wells drilled: 999 Total exploration wells drilled: 328 Oil and gas platforms: 23 Miles of pipeline: 188 Companies operating Paciﬁc OCS facilities: 7 Source: www.mms.gov

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INDUSTRY INSIGHT

Exploring new ideas What will the next generation of oil and gas exploration techniques look like?

hatever the oil price, there will always be a demand for effective geoscience support for exploration. Higher prices are inevitably linked to higher-risk exploration, and this higher risk – be it the expensive search in deeper water for reserves, the tapping of unconventional gas in oil shales or just the continued search for smaller and less readily deﬁned plays in already producing basins – all require our geoscience abilities to keep pace with these changes. When prices are lower, innovation in geosciences may be the only way of controlling costs, by increasing effective exploration – as occurred through the 1990s with the arrival of 3D seismic surveys. AOA Geophysics Inc. specializes in reducing exploration risk by exploiting underused, undervalued and innovative geoscience techniques, and adding value to conventional exploration activities by integrating and hence using, all available data. These techniques include electrical, magnetic and gravity surveys, high-resolution seabed mapping for seeps and geotechnical purposes and groundbreaking innovations in land seismics. The company was started by research scientists and still has that inquiring ethos – a characteristic that has put AOA in the forefront of the development of controlled source electromagnetic (CSEM) acquisition technology. Along with AGO – now sold to Schlumberger – AOA helped bring the concept of CSEM to mainstream exploration, and CSEM is now considered as a valuable tool for oil exploration companies to extend their knowledge of an exploration prospect before incurring drilling costs. However, given that the understanding of and integration of CSEM data with other exploration data and its full utilization still needs support, working with a trusted partner is critical. “Our knowledge and experience of

these scientiﬁc fundamentals is now offered as part of our consultancy services,” explains Adrian Digby, Director of Business Development at AOA. “While research may be our background, practical application is our strength. With both our exploration and our geohazards business streams, we continue to pursue practical solutions rather than just academic excellence, to decrease costs and reduce risks for our oil company clients.”

“When prices are lower, innovation in geosciences may be the only way of controlling costs” Three current areas of continued development are potential ﬁeld data, seabed seep exploration and land seismic services. “With potential ﬁeld data – magnetic and gravity surveys – we felt there was the need to bring this important data to a wider audience and not just the limited number of industry experts using this data,” says Digby. In response, AOA has developed the Quick Study, a presentation format of geo-referenced maps to support new basin ventures. To date, over 60 of these custom-designed surveys have been produced. “We are now looking to provide a similar service but on a multi-client basis, through our publication partners AAPG,” he continues. “We anticipate having 10 completed this fall and made available through AAPG’s Data Base service.” Seabed exploration is another area of expertise. “Our contribution to reducing risk for deepwater exploration – and in particular, the real challenge of identify-

ADRIAN DIGBY ing the existence of hydrocarbon systems within frontier basins (not something traditional 2D or 3D seismics reveals) – is best illustrated by the recently completed Indonesian mega-survey,” says Digby. The survey included 400,000km2 of highresolution multi-beam seabed data for 10 unexploited offshore basins. The data was used to identify and classify seabed seeps for geochemical coring, and the phenomenal success ratios in the surveys shows how significant the application of geoscience knowledge to survey design, survey control and interpretation is in reducing costs and improving exploration success in deepwater environments. “We are now applying the same innovative thought processes to land seismic acquisition,” continues Digby. “We have developed ways of widening the frequency range of seismic sources, avoiding the orientation bias of geometric surveys, and lowering the costs and environmental impacts of seismic surveys in general by employing a series of innovations.” These improvements will be felt, for example, in shale exploration by identifying fracturing orientations and densities more effectively. The same goes for coal bed methane. The wider frequency range will also allow both shallow and deep conventional targets to be effectively imaged in a single survey. “The cost and time saving elements of our new survey designs will benefit all existing land-based seismic programs. The environmentally beneficial impact of avoiding dynamite or vibro sources will, we believe, be felt positively throughout the survey industry. “AOA will continue to ask whether there is a better way to approach all of our geoscience services,” concludes Digby. “And this thinking has repeatedly proved, over the years, that the answer is, ‘yes, there probably is’.”

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EXECUTIVE INSIGHT

Failure

costs

Cliff Berry, sales and marketing manager for Centek, outlines how single-piece centralizers have brought an end to regular failures and high downtime losses in the drilling sector.

nnual downtime during drilling, or running casing, is only marginally better than it was 20 years ago. Estimates from North Sea operators suggest drilling efficiency is still only around the 50 percent mark, considered across all rig activities from spud to completion, including running casing tubing. Downtime attributed to centralization problems is reaching sums in excess of $0.5 billion per year. Spiraling rig costs, of all types, including $1 million per day drill ships, mean downtime is becoming prohibitively expensive. Centralizers in real terms are cheap, but when they fail due to damage, breakages or simply getting stuck in hole due to fitting insufficient centralizers at the correct intervals, then they assume a consequential cost out of all proportion to their price. Centralizer failure costs a fortune. Why is it that some operators seem reluctant to spend on risk reduction up front, but are prepared to pay for downtime in millions of dollars later? Most centralizer failures are due to choosing an incorrect unit for the job. Everyday someone, somewhere, is pulling casing and leaving debris in the hole for the simple reason that the wrong type of centralizer was used. A second

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and equally disturbing fact is that the industry always seems to reward failure. If unit failures cause massive overspend, then a ‘so what?’ attitude becomes common, and the easy answer is to buy some more of the same and hope they work better next time. Since the early 1950s, centralizers have been of a multipart design and construction,

tributor to downtime and overspend. Modern wells have extremely close tolerance casings, some are under-reamed and many are horizontal, making radial and axial forces critical. Solid-body centralizers provide strength and are often used in these wells, but they are inflexible, have low stand-off and restrict annular flow impeding the formation of a good cement bond. The introduction, by Centek, of a singlepiece, non-welded, inherently reliable centralizer, has finally addressed the engineering failings of traditional centralizers. First used in the North Sea in 2002 these single-piece centralizers have brought an end to regular failures and high downtime losses. Key characteristics such as zero start force and zero running force reduce drag significantly. Reducing torque ensures that casings can be rotated without wear, in both cased and open holes, at a deeper level than before. The low profile of the single-piece centralizer improves the flow by area. Robustness of the centralizer was a paramount design and manufacturing criterion. Flexibility too was a key area as units must be able to pass well tight spots, squeeze down, and then expand back to the original outer hole size. Pack-off was vastly reduced due to the increased flow by area of these low profile centralizers. Units must have a high restoring force to allow for radial compression, weight of pipe and well geometry, yet get to the bottom

“Centralizer failure costs a fortune. Why is it that some operators seem reluctant to spend on risk reduction up front, but are prepared to pay for downtime in millions of dollars later?” being either welded or interlocked and having hinges and pins to hold them together. That design remains largely unchanged to this day. When wells were vertical this type was ideal as the string is in tension and no radial loads are being applied. However, these units were oversized to the borehole, had high start and high drag forces and were weak as far as restoring force is concerned. These centralizer types are still a regular choice in the industry but they are also the single largest con-

and give the stand-off required to achieve the best possible cement job. Downtime due to centralizer failure is not an acceptable industry norm, when available technology has greatly improved the chances of drilling successfully to depth with reliable cementation.  For an engineered solution for your well that reduces torque and drag, gets to bottom and offers good zonal isolation it is time to investigate change. Call or email sales@centekltd.co.uk and start looking at where saving money protects better than wasting it. The choice, as they say, is yours.

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PROJECT FOCUS

INVESTING IN INFRASTRUCTURE The Keystone Pipeline project that will connect Alberta in Canada to Illinois and Oklahoma has faced some stiff opposition since its inception. In an exclusive interview, Robert Jones, VP for the Keystone Pipeline, reveals how he fought off the critics.

ith the rising demand for energy in North America, it is imperative that the US expands its key oil supplies so that future supply disruptions in other parts of the world do not create such ferocious impacts on prices, as witnessed earlier this year. One option close to home is Canada. The US currently buys around 1.8 million barrels of oil per day from Canada, and forecasters predict that number will rise to almost another three million barrels a day between now and 2020. The Keystone Pipeline is one innovative solution to link surging demand with a reliable and stable supply of crude oil. The 2148-mile pipeline will transport crude oil from Hardisty, Alberta to US Midwest markets at Wood River and Pakota, Illinois as well as Cushing, Oklahoma. The Canadian portion of the project involves the conversion of approximately 537 miles of existing Canadian mainline pipeline facilities from natural gas to a crude oil transmission service, and the construction of approximately 232 miles of pipeline, pump stations and terminal facilities at Hardisty. The US portion of the project includes the construction of approximately 1379 miles of pipeline and pump stations. The pipeline will have an initial nominal capacity of 435,000 barrels per day in late 2009 and will be expanded to a nominal capacity of 590,000 barrels per day in late 2010. Keystone currently has contracts in place with shippers totaling 495,000 barrels per day, with an average term of 18 years. Before construction could begin in the second quarter of 2008, TransCanada Corp. and ConocoPhillips, who own half the pipeline each after a deal earlier this year, had to apply to both the US and Canadian governments to get the work permitted. In 2007, National Energy Board approval was given for two major regulatory applications to construct and operate the Canadian portion of the project. Keystone

finally got the go ahead after receiving a Presidential Permit from the US State Department in March 2008 to build the line across the nations’ border. In the wake of pending approval, two North Dakota residents have filed an initiated measure that asks voters to stop similar projects in the future and they have also stated that they hope their petitions will cause the Keystone project to be moved to a safer location. Their main concerns are over the perceived environmental impact of the oil pipelines on water supplies on Lake Ashtabula and the Cheyenne River. The pair believe that water supplies could be quickly poisoned, and are particularly concerned about the impact of Canadian tar sands oil because of its chemical content. So far, around four percent of landowners in the Keystone’s path have refused to sign on the project. Robert Jones, VP for the Keystone Pipeline, has said that the project remains committed to the prevention of pipeline oil spills and all other concerns that the public may have. “The safety of the public and our employees is our top priority,” he says. “We will meet or exceed industry and government standards that have been designed to ensure public safety. Our commitment is reﬂected in the design and construction of our facilities, as well as in our operating and maintenance practices.” Jones goes on to explain that the Keystone Pipeline will use nondestructive examination equipment to inspect all welds and then apply a coating to the weld to protect it from corrosion. “Additionally, prior to being placed into operation, all new pipeline sections are pressure tested with water up to at least 125 percent of the pipeline’s maximum allowable operating pressure,” says Jones. Pipeline maintenance activities will also include regular aerial patrols and internal pipeline inspection using specialized electronic inspection tools. The pipeline will also be continuously monitored using state-of-the-art supervisory control and data acquisition (SCADA) and leak detection systems.

PROJEct tiMEliNE

2008 • Complete receiving regulatory decisions and permits • Ongoing easement acquisition activities in Alberta, Manitoba, North Dakota, South Dakota, Nebraska, Kansas (mainline), Missouri and Illinois • Initiate conversion of exisiting facilities and construction of new facilities in Canada, North Dakota and South Dakota • Begin easement acquisition on Cushing section in Kansas and Oklahoma 66

2009 • Construction of new facilities in Canada, Nebraska, Kansas, Misouri and Illinois • Anticipate Keystone in-service by year end • Keystone Wood River Patoka portion to be completed • A nominal capacity of 435,000 barrels per day

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challenges

PROPOSED PiPEliNE ROUtE

As well as facing resistance, there have been several other challenges in terms of getting construction, maintenance and operation of facilities authorized. “Preparing optimal construction schedules that considered all environmental restriction timing windows was particularly tough,” explains Jones. “For example in both Canada and the US, Keystone’s construction program had to be developed to avoid various biological resources such as fisheries, protected plants and wildlife species to comply with restrictive seasonal activity time periods.” Additionally Jones says that there are restrictions that affect construction procedures regarding biophysical resources or soil conservation. “In certain regions, mitigation measures such as additional construction timing restrictions or altering some procedures were established to reduce or avoid effects to the natural environment,” explains Jones. Since construction started in the second quarter of 2008, the Keystone project has faced some additional challenges that it couldn’t have prepared for. In the 2008 construction season, the project experienced some extremely wet conditions in Manitoba, North Dakota and South Dakota as it was one of the wettest years in recorded history, and the wettest year in North Dakota history. “But, despite these conditions we are continuing to make progress on pipeline construction and are on schedule to meet the pipeline’s anticipated in-service date,” states Jones.

Design and construction While designing the pipeline and facilities alongside it, Jones allowed for several new technologies and materials – for example, high-strength steel and specialized welding techniques developed especially

2010 2012

• Anticipate Keystone expansion in-service by year end • Keystone Cushing part to be completed • Nominal capacity expanded to 590,000 barrels per day

• Keystone Steele City portion to be completed and pipeline to be up and running

2011 • Keystone Gulf Coast portion to be completed www.ngoilgas.com

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for high-pressure pipelines. Also, all-pipes will be delivered from qualified manufacturers with a corrosion resistant protective coating to protect against corrosion for as long as possible. During the construction process, the pipelines will be buried with a minimum depth of cover of four feet depending on the land use. However, in areas of consolidated rock, the pipeline will be buried with a minimum depth cover of three feet. The permanent right-of-way easements – the strips of land set aside to constrict and operate a pipeline – will measure approximately 50 feet in width, although temporary workspace will be required during construction.

Environmental and social impacts Jones has taken several steps to minimize both the environmental and social effects that the construction and operation of the Keystone Pipeline will bring. In terms of the environment, Jones says that during construction the goal is to avoid or minimize any impact on the land. Prior to construction, an extensive effort goes into collecting data along the pipeline route and Keystone’s stakeholder consultation process is to engage in dialogue with landowners and the public to ensure environmental planning efforts are made to avoid any impacts where possible. The land and environment data is collected and analyzed by third party experts to ensure impacts can either be avoided or that environmental protection measures are put in place to minimize or mitigate any effects to the greatest extent. “Keystone will also be designed so that it meets or exceeds all applicable standards for the safe design and operation of oil pipelines and pumping facilities,” says Jones. “We also plan to develop and implement an Emergency Response Plan before the pipeline is operational.” In order to minimize social impact, Keystone’s comprehensive stakeholder engagement program was developed and adapted to meet specific stakeholder needs according to the nature, location and potential effects of the project. Stakeholders include landowners and residents, community leaders, including federal, provincial and state, regulatory agencies, emergency services organizations, special interest groups and co-located right-of-way owners. Keystone’s community relations program encour-

Robert Jones

Fact file • The total length of the Keystone Pipeline is 2148 miles. • A pproximately 1379 miles of new pipeline will be constructed in the US. • The Canadian portion includes the construction of approximately 232 miles of new pipeline and the conversion of approximately 537 miles of existing TransCanada pipeline from natural gas to crude oil transmission. • The new pipeline will be 30 inches in diameter to Illinois and 36 inches from Nebraska/Kansas border to Cushing, Oklahoma. • The pipeline will be buried with a minimum depth of cover of four feet, depending on land use. • The estimates operating pressure of a new pipeline sections will be 1440 psi. The existing pipeline proposed for conversion to crude oil transportation will be operated at its current approved allowable operating pressure of 880 psig.

ages stakeholders to learn about proposed activities, be engaged in the consultation process and be involved in addressing issues and opportunities that may affect them. Various approaches to communicate and reach out were employed depending on the stakeholder or audience. This included project introduction and follow-up letters, fact sheets and brochures, news releases, personal visits, meetings and consultations. “We recognize the importance of incorporating public input into project plans,” explains Jones. “Through consultation Keystone can address questions and concerns by integrating important public input into activities, such as sharing project information, gathering input throughout the planning phase and incorporating feedback into its project design and implementing as appropriate.” As we move into 2009, the Keystone Pipeline is moving at full steam ahead in order to ensure that the timeline will be met and that the project will be operating at a nominal capacity of 435,000 barrels per day within the next 12 months. Jones is confident that this target will be met, and although there is bound to be controversy in any project of this size, he believes that the Keystone Project has done all it can to ensure that as little environmental and social impact is made on the pipeline’s surrounding countryside as possible. n

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INDUSTRY VIEW

FINDING THE VALUE IN RESEARCH FOR THE PIPELINE INDUSTRY By George Tenley, President of the Pipeline Research Council International o understand the challenges in achieving value from energy pipelines research, it may help to consider the realm of product development. Think of the cell phone, the safety razor and medical devices. A great deal of leading edge research has gone into all three and the end result in each case is a large market, dominated by a relatively small number of key players generating billions in sales worldwide. However, the value generated is not the physical product itself but the collateral â&#x20AC;&#x2DC;productâ&#x20AC;&#x2122; it enables. So, the value derives from the razor blades, the monthly cell phone services and the medicine that flows through the device. In contrast, there has been a reduction in the amount of investment in research for energy pipelines over the last 25 years. Companies have eliminated entire research departments. But, at the same time, there has been growing investment in research in the exploration and production of the hydrocarbon energy that pipelines transport. While seemingly everyone has a razor, a cell phone, and has benefited from medical devices, relatively very few people understand the essential value they derive from pipelines. Achieving widespread understanding of the role and value of energy pipelines and how (if at all) they are perceived, both within and outside the energy industry, is one of the most difficult hurdles to overcome in making the case for energy pipeline research.

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Last year I wrote about the critical need for collaboration as the means best able to match limited resources with essential research needs. In order to maximize the research investment, or more accurately, to justify the research cost, the wide diversity in the how, who, where and why of pipeline operations must, to the greatest extent practicable, be rationalized and directed. Only in this way can the industry achieve the greatest benefit to the greatest number of industry participants, the customers they serve, and the public trust that grants them their ‘license to operate’. Energy pipeline research will remain a viable and sustainable resource for the world’s vital energy lifelines to the extent that it yields clearly recognizable benefits that translate directly to the corporate bottom line. Increasingly, the bottom line for energy pipelines is a function of the interplay between several core needs and opportunities, including: • Sustaining and growing the productivity of pipeline assets operating well beyond their originally projected design life. • Building new pipelines to reconcile the rapidly growing demand for energy and the unconventional and more difficult to access sources of that energy. • Assuring the safety and environmental performance of pipelines in the presence of population encroachment and the intrusive activities it brings. For 56 years, the energy pipeline industry has collaborated on research to confront these issues and the needs they generate. The future success of this collaborative effort can only be sustained if it can provide solutions to the industry that generate value across the entire pipeline operation. That value is being assured through the research program of PRCI, covering every aspect of pipeline operations conducted by its members in North America, Europe, Central and South America and Asia, as well as the wider industry worldwide.

Productivity of existing assets Although pipelines are a fixed element of the energy infrastructure, they increasingly need to be dynamic and flexible in terms of their purpose and their operation. This need represents both an opportunity and a challenge – to maximize pipeline productivity in terms of what they transport, how much they transport, and the ability to vary throughput to create and exploit opportunities. Important near-term (one to four years) research that will help to assure asset productivity includes: • Enhancing flow efficiency through the development of new materials and, for oil and petroleum product pipelines (‘liquid pipelines’) the use of drag reducing agents to enable greater throughput without increasing use of fuel. • Establishing methodologies that enable pipeline repair while the pipeline remains in service, thereby avoiding costly shut downs and loss of service to consumers. • Increasing the operational flexibility of underground storage assets to improve the deliverability of existing reservoirs and developing new down-hole damage remediation diagnostics and tools. • Reducing fuel consumption per unit energy throughput at compressor and pump stations, including expanded options for cost-effective com-

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pressor engine pollutant emission reductions that will enable pipelines to reserve capital for system expansion and other productivity gains.

Pipeline construction The current boom in pipeline construction that is under way in both developed and developing countries merely reflects the larger reality of a global voracity for energy. As this demand grows, so too does the need to find new sources of production. Increasingly, these sources are being found in harsh environments of extreme climate, geology and water depths. But regardless of the location, the energy produced will travel by pipeline. Ironically, the challenges may be more difficult in the developed world, where impediments to rapidly closing the demand-supply gap abound, from the lack of an adequately trained workforce to growing difficulties in gaining regulatory approvals and permits.

Safety and environmental performance An unintended release of potentially dangerous commodities from an energy pipeline can lead to death, injury and economic and social damage, as well as long-term environmental harm. Because of this, the pipeline infrastructure is being held to ever-higher standards of safety and environmental performance, despite a historical record that makes it the safest and most environmentally sound mode of energy transportation. As the demands for improved system performance increase, the pipeline industry must find ways to meet expectations – its own and those of the people who oversee or are affected by it – by the most cost-effective means. The engineering standards that have underpinned pipeline systems and their safe operation have been greatly enhanced over the last 50 years by a strong industry commitment to research. Today that commitment is expressed in critical research addressing some of the industry’s most challenging issues, including:

“Energy pipeline research will remain a viable and sustainable resource for the world’s vital energy lifelines to the extent that it yields clearly recognizable benefits” George Tenley The role of research in enabling more efficient, cost-effective construction is significant, and includes the following activities:

Pipeline Research Council International, Inc. (PRCI), is a non-profit, membership-based corporation comprised of 39 operating pipeline companies on four continents, and is augmented by 14 associate members representing steel and equipment manufacturers, vendors and service providers. George Tenley has served as President since 1999.

• Establishing the technical bases for use of risk-based alternative design methodologies, including strain-based design for higherstrength steels, to better match pipeline design to the operating parameters of the pipeline once it goes into service. One key goal is to enable faster, better and more costeffective pre-service welding. • Developing tougher, more damage-resistant and defect-resistant steels and the means to lay and weld the pipe (including improved weld inspection) faster and at higher performance levels. • Developing alternatives to pre-service hydrostatic testing to reduce the time, cost and environmental impact currently imposed by hydrostatic testing by establishing holistic approaches that draw from recent improvements in pipe materials, manufacturing processes, handling and construction quality assurance procedures. • Developing novel construction techniques, including for harsh environments, that are more efficient, produce a smaller environmental ‘footprint’ and reduce the time from pipeline design to pipeline operation.

• Methods to detect, measure and evaluate defects and damage to pipelines primarily from human activity on and around the pipe. • Methods to monitor, detect and prevent the effects of encroachment on pipelines using technologies in, on and adjacent to the pipe and via airborne means. • Methods to determine the remaining strength of damaged or corroded pipe, and from that determination to make sound, cost-effective and risk-based decisions on repair or replacement. • The reduction of emissions from compressor engines to meet increasingly stringent emission control and monitoring requirements at lowest practicable cost, thereby saving fuel and avoiding costly modifications or replacements.

The design, construction, operation and maintenance of energy pipelines are built on a solid foundation of research and technological innovation. Once that foundation was the recipient of substantial investment; now it must defend itself by optimizing its cost in achieving the value that the pipeline operator demands. Certainly, rationalizing research costs is not inherently a bad thing, because it assures that research, like all other expenditures, must respond to the relevant business drivers facing a company and the industry. Increasingly, these drivers are universal. While pipeline operators will continue to face the challenge of reconciling the corporate expense for research, collectively the industry’s commitment to collaborative research continues to grow and strengthen. As the leader in energy pipeline industry collaborative research, PRCI recognizes the need and value of a leveraging mechanism for research planning, execution and deployment. This mechanism has proven to be a cost-effective, technically sound approach to assuring that research results produce real value for the industry leaders who form the collaboration and the industry at large.

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CORROSION FOCUS

ccording to the 2002 study ‘Corrosion Costs and Preventive Strategies in the United States,’ pipeline corrosion costs approximately $7 billion annually in this country alone. This figure does not include indirect costs such as downtime and lost productivity. If you look at the oil and gas industry as a whole – including production, processing, refining, etc. – the figure is closer to $20 billion annually. The study found that direct corrosion costs overall for the US is $276 billion per year, or 3.1 percent of the Gross Domestic Product. We have since learned that this percentage can be extrapolated to the economies of other developed countries to determine just how pervasive and expensive the problem is worldwide. The cost of corrosion study determined that up to 30 percent of corrosion costs can be saved just by using corrosion control technologies that are currently available. The problem is convincing management that by incurring the costs of professionally planned and managed corrosion programs, such as using trained personnel, conducting regular inspections and implementing the best control and repair methods, companies

actually save significant money over the lifetime of the asset. Unfortunately in many instances it is a matter of “out of sight, out of mind,” until something goes wrong – and that can be not only expensive, but catastrophic.

Challenges Without doubt the number one concern that oil and gas companies face today in terms of tackling corrosion in pipelines is the aging infrastructure – many of our pipelines and related structures have met or are exceeding their original design lives. Replacing these assets is extremely expensive and disruptive, so the corrosion industry continues to work on more effective ways to inspect, rehabilitate, and maintain the infrastructure. Another challenge involves the expansion and encroachment of cities in areas where pipelines were once easily accessible. For example, a major pipeline buried in an open field may now be covered over with roads and buildings, challenging corrosion professionals to come up with more complicated and innovative ways to inspect and repair.

Fighting back

Bob Herbert, President of NACE International examines the huge cost of corrosion and what can be done to combat the key challenges.

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CORROSION CONTROL Unprotected pipelines, whether buried in the ground, exposed to the atmosphere or submerged in water, are susceptible to corrosion. Without proper maintenance, every pipeline system will eventually deteriorate. Corrosion can weaken the structural integrity of a pipeline and make it an unsafe vehicle for transporting potentially hazardous materials. However, technology exists to extend pipeline structural life indefinitely if applied correctly and maintained consistently. Coating and linings: are often applied in conjunction with cathodic protection systems to provide the most cost-effective protection. Cathodic protection: uses direct electrical current to counteract the normal external corrosion of a metal pipeline. Materials selection: a selection of corrosion-resistant materials, such as stainless steel, plastics and special alloys. Corrosion inhibitors: extend the life of pipelines, prevent system shutdowns and failures, avoiding contamination. Source: NACE International

Integrated risk assessment and integrity management programs have also emerged to help tackle some of the key challenges. The emphasis on pipeline integrity has increased significantly in recent years, largely in response to several high-profile, catastrophic failures that were caused by corrosion. Stricter regulations, liability and safety issues, and increased emphasis on protecting the environment are bringing corrosion control considerations to the forefront of pipeline protection programs. The continuing development of pipeline integrity technology brings regular improvement to pipeline integrity and safety. The accuracy with which the inspections can pinpoint areas of concern or of apparently good pipe continues to improve as well. This has enhanced safety as problem areas can now be accurately located and remedial action taken as required. In my opinion, one of our biggest opportunities is to optimize the use of existing tools and technologies through the use of risk and decision analysis principles.

Education Maintaining and replacing worn out parts in hostile environments is a difficult issue. There are just so many environments that are considered hostile and conducive to corrosion for various reasons, including fog and humidity, air pollution, proximity to saltwater and corrosive soils. It is critical that the corrosion professional understand the specific conditions of the area in order to select the best materials and corrosion control methods, whether in the design phase or during maintenance. With the corrosion control methods we have today, which include cathodic and anodic protection, numerous coating and lining formulations and systems, chemical treatment, and materials selection and design, we can tailor a program to best control corrosion in specific environments. It is not always easy, but it can be done. During the last decade or so, we have seen a big push in new research and development to address older systems as well as smaller-diameter pipelines. There have been improvements in coating formulations and systems for internal and external use, better inhibitors for protecting against such problems as microbiologically influenced corrosion and sulfate-reducing bacteria, and breakthroughs in materials, including plastics and other nonmetallic composites. In addition, there are a wide variety of effective inspection and monitoring techniques available, including close interval surveys, direct current voltage gradient and alternating current voltage gradient surveys, alternating current attenuation surveys, soil resistivity surveys, ultrasonic testing, and smart pigging, all of which help provide an accurate indicator of a pipelineâ&#x20AC;&#x2122;s condition.

NACE was founded by 11 pipeline corrosion experts back in 1943, and although the association has since branched out to cover all areas of the corrosion industry, pipeline corrosion remains at our core. Our most significant contribution to this industry, and the corrosion industry as a whole, is our corrosion education, training and certification programs. There has been unprecedented growth in these programs over the last several years, especially internationally, as countries and governments everywhere recognize the importance and value of a trained corrosion workforce. NACE offers numerous pipeline-related courses, including four levels of cathodic protection training, a course on using coatings with cathodic protection, the world-renowned Coating Inspector Program, assessment training, operator qualification, and many others. NACE is also the leading standards organization for corrosion control, offering more than 200 standards developed by industry experts, approximately half of which relate to the oil and gas industry. NACE holds corrosion conferences and seminars worldwide, publishes and disseminates journals, books and reports; has a strong public affairs presence; and offers many other corrosion resources from our website. NACE exceeded 20,000 members for the first time in its history this year, with most of the growth occurring outside of the US and Canada. Although the prominent types of industries, environments and regulatory requirements may differ from country to country and even city to city, one thing is clear â&#x20AC;&#x201C; we all recognize that controlling corrosion will reduce costs in any economy while protecting public safety and the world around us. ď Ž

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EXECUTIVE INTERVIEW

Improving pipeline infrastructure A modern and efficient oil and gas infrastructure will be critical in meeting rising demand for product. Bjørn Jalving, VP of Kongsberg Maritime’s AUV department, explains the important role of pipeline integrity in improving infrastructure. How are new technology and techniques providing opportunity for more efficient detection and risk-management activities to ensure the integrity of pipelines? Bjørn Jalving. Large variations in pipelines, water depths and environments make pipeline integrity management a complex area. Solutions for pipeline integrity monitoring include measurement of flow parameters with associated simulation and expert systems, inside inspection tools, sensors on the pipeline and external inspection tools. The two main methods for outside inspection of pipelines are towfish equipped with side scan sonars (acoustic inspection) and remotely operated vehicles (ROV) equipped with cameras (visual inspection). The main objectives for external pipeline inspection is to determine position, estimate changes in stress due to bends, determine change in protective covering due to water action, detect damage due to human action, for example, trawling, and detect leakage at an early stage. With the exception of inspection of buried pipelines, use of ROV and towfish are proven techniques. Rather than replacing established methods, autonomous underwater vehicles (AUV) can complement the pipeline inspection toolbox. AUVs provide a stable sensor platform with high data quality. Compared to ROV, an AUV surveys at higher speed and comes with a relatively small footprint that does not require a dedicated support vessel. In a dual AUV-ROV operation, one can foresee the AUV autonomously tracking the pipeline identifying critical areas for closer inspection with the ROV. High-quality visual camera solutions with low-power LED lighting are available for AUVs. Prospects of applying synthetic aperture sonars and bottom penetrating sonars to pipeline inspection are promising. AUVs can also be equipped with sensors for

BJ. The plans for moving oil and gas into new areas, for instance the arctic and areas important to marine life and fishery, meet resistance. For oil companies and pipeline owners looking to pursue oil and gas exploration in these vulnerable areas, it will be important to keep a clean track record. It will be difficult for the political decision makers to allow oil companies into these vulnerable areas if the general public does not trust them.

“There will be an increasing interest in automated technology for inspection of subsea installations and pipelines, as oil production moves into deeper water”

leakage detection, and pollution and environmental surveillance. In shallow and coastal waters, smaller AUVs will make a contribution due to easy handling. In deeper and more remote areas, larger AUVs with more capable sensors and longer endurance are required as a key point is to ensure cost efficient operation of the complete system. What influence have increasing regulatory, public and environmental pressures had on the way pipelines are managed? Why is this an increasing concern for operators?

What recommendations would you make to companies looking to improve their pipeline integrity management programs, and where does your company fit into the picture? BJ. AUVs can help pipeline owners perform more efficient pipeline inspections at reduced cost. Also interesting is the prospect of AUVs providing new and higher quality data products. Kongsberg Maritime will sell AUV products to inspection service providers that run contracts towards pipeline operators. How do you see this sector developing over the next five to 10 years? BJ. There will be an increasing interest in automated technology for inspection of subsea installations and pipelines, as oil production moves into deeper water. Many oil companies are investing heavily in deepwater technology. At the same time they are looking at how the inspection budgets for the deepwater fields can be reduced, while ensuring the same level of security. An interesting prospect is deployment of AUVs either on floating production units or in docking stations in subsea production fields. Benefits will be an always present and ready inspection capability, allowing for both planned inspections and rapid inspections in case of emergencies. In remote areas and under ice, mobilization time and cost will be greatly reduced.n

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PROJECT WATCH

PipE dreams Connecting the north slopes of Alaska to Alberta in Canada is going to require cutting-edge technology and a big budget. Denali – The Alaska Gas Pipeline will be the largest private construction project in North America with an estimated cost of around $30 billion. O&G catches up with the project’s president, Bud Fackrell, to find out more.

arlier this year, BP and ConocoPhillips, two of the major Alaska North Slope energy producers, launched a new pipeline project, called Denali – The Alaska Gas Pipeline LLC. This new pipeline will run approximately 2000 miles, depending on its terminus, from Alaska’s North Slope to Alberta, Canada. The gas will move to Lower-48 markets from Alberta, through existing pipe infrastructure, or if required, through a new pipeline that Denali will construct. “This is a truly, ‘basin-opening project’,” enthuses Bud Fackrell, President of Denali. “It will allow, for the first time, Alaska’s North Slope gas to reach the hungry North American marketplace. A successful project will encourage new exploration and development, and will provide a major new domestic source of clean energy for decades to come.” The project is expected to deliver approximately four billion cubic feet of natural gas, per day, to market and there is an opportunity to expand this through additional compression. If the project goes to plan and sticks to the itinerary then gas will be flowing to market in 2018. “This project has the capacity to provide decades of reliable, clean and secure energy to consumers in the Lower–48 states, Alaska and Canada,” says Fackrell.

Challenges There will be a number of technical challenges involved in the construction of the Denali pipeline, mostly due to the difficult terrain and freezing temperatures. Numerous river and stream crossings, as well as several mountain passes – including Atigun Pass in the Brooks range at 4800 feet – will add the mountains of challenges. The pipeline will be buried in permafrost and discontinuous permafrost in the northern sections, and in order to ensure that the surrounding soils remain frozen, propane chillers will be used to cool the gas to around 30 degrees Fahrenheit. As planning for the pipeline continues, Fackrell has the opportunity to make the most of the latest developments in pipeline construction thinking. He is currently evaluating the prospects of using high-strength steel, which would reduce the overall weight and cost of pipeline steel. “We expect to use large, powerful trenching machines to help optimize the construction effort, and plan to employ automated

welding technology to help increase construction efficiency and lower overall project costs,” explains Fackrell. The design and operational plan for the pipeline will include a number of features to address operations, particularly pipeline monitoring, leak detection, safety and security. Specifically, Fackrell cites leak detection tools being built into the computer controls that will be used by control room operators to manage the pipeline system, as well as advanced inline inspection tools that will regularly inspect the line. Intermediate block valves will isolate sections of the line. “The outside of the pipe will be coated with a fusion-bonded epoxy resin to resist corrosion,” says Fackrell. “Further corrosion protection to appropriate sections of the pipeline will be provided by cathodic protection – the application of a carefully controlled electrical current to prevent electrolysis that can cause external corrosion.”

The first steps There is a huge amount of work involved before any building can get started, in fact, in the ‘success case’, the construction of the Denali pipeline won’t begin until 2013, and the first gas won’t be seen

Opportunity In addition to helping meet critical energy needs, this multi-billion dollar project will: • Serve as the economic engine to create jobs and new business opportunities for Alaskans and Canadians • Generate billions of dollars of new gas sales, royalties and taxes • Make it possible for Alaskan and Canadian consumers to obtain North Slope natural gas supplies from offtake points on the main pipeline • Promote new oil and gas exploration and production on Alaska’s North Slope and along the pipeline corridor in Alaska and Canada • Help extend the life of North Slope fields

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until 2018. There are four phases involved. The first three will take until 2013, and involve planning, application preparation and permit approvals. And phase four will be the execution, from 2013 to 2018. The Denali project will also involve the construction of a gas treatment plant on the North Slope. This gas treatment plant will be a mega project in its own right, and will be the largest plant of its kind in the world, requiring world-class project execution skills. The plant will remove CO2 and other impurities before dehydrating, compressing and chilling Bud Fackrell the gas before it goes on its way down the pipeline to Alberta. The first major milestone is open season in 2010. The key to a successful open season is having a quality cost estimate and construction schedule that shippers can rely upon. “The last cost estimate that was done for this project was in 2002,” explains Fackrell. “Over the next 18 months, we intend to update the cost estimate and develop a tariff structure. As part of this effort, we will be collecting field data in critical areas of the pipeline corridor and awarding preliminary engineering contracts for the gas treatment plant and the pipeline.”

impact The Denali pipeline will undoubtedly have an impact, both environmentally and socially. The question is, just how much of an impact will it have? Fackrell explains that steps are being taken to manage the pipeline’s impact, and that the Federal Energy Regulatory Commission and the National Energy Board will oversee a rigorous stakeholder engagement process to address these areas. “Denali will be holding a series of stakeholder engagement meetings along the pipeline corridor, and will be developing an Environmental Impact Statement to ensure issues are identified and addressed appropriately. If these issues are not addressed adequately in the planning stage, the pipeline construction could be significantly delayed,” warns Fackrell. Without doubt the Denali pipeline has the potential to become an economic engine for development. Fackrell anticipates, and welcomes, efficient pipeline expansion opportunities, encouraging new exploration and development on Alaska’s North Slope and along the pipeline corridor in Alaska and Canada, extending the life of North Slope fields. 

prOJECT in nuMBErS • The pipeline will be 2000 miles • It operate at around 2500 psi • 2-3 million tons of steel will be used • $60 million spent in 2008 alone • The gas will move to the Lower 48 markets

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EXECUTIVE INTERVIEW

THE COST OF CORROSION With overheads soaring and related problems multiplying, it is time to face facts: corrosion costs. John Muncaster, CEO of Polyguard Products, explains why modified gels could help. From looking at your website, Polyguard Products appears to be heavily focused on corrosion. John Muncaster. We certainly are. The cost of corrosion to the US alone is estimated at one to fi ve percent of GNP. Additionally, people sometimes forget that corrosion often causes serious environmental problems, such as spills. Within the set of corrosion opportunities, Polyguard has developed a number of products that address unsolved corrosion problems. Can you explain the main unsolved corrosion problems facing the industry today? JM. A major problem is corrosion on buried oil and gas transmission pipelines. Cathodic protection systems (CP systems) have been developed to act as backup protection to the pipeline corrosion coating system; if the corrosion coating, which is the primary protection, fails, the CP system delivers electrical current to the steel pipeline surface, which can effectively stop the corrosion process. CP systems have been accepted worldwide. However there are many pipeline operators whose cathodic protection systems are being rendered ineffective, because they have installed corrosion coatings with a solid plastic film backing on the pipeline. Solid plastic film backings have the property of high electrical resistivity, which means that solid plastic film backings block the passage of protective electrical current from the CP system to the steel pipeline surface. The phenomenon that takes place when protective CP currents are blocked by the backings of corrosion coatings is called cathodic shielding. Dozens of technical papers have been published on cathodic shielding

since the mid 1980s, so it is surprising to see that, by some estimates, as many as half of the pipelines worldwide continue to use corrosion coatings with solid plastic ﬁlm backings. Cathodic shielding is a problem for the pipeline operators, and an opportunity for Polyguard, since we have developed corrosion coatings that do not block the protective And there other unsolved problems?

“The cost of corrosion to the US alone is estimated at one to five percent of GNP. Additionally, people sometimes forget that corrosion often causes serious environmental problems, such as spills”

JM. A second unsolved problem is hidden corrosion, examples of which are corrosion under insulation and corrosion inside flanges. Polyguard has a heavily patented gel product which, when applied to steel surfaces, reacts with elements in the steel to form an extremely thin glasslike mineral layer. This gel product is under test on the Alaskan pipeline, and is rapidly becoming standard in the food and beverage processing industry, where corrosion under insulation has been a huge problem. Finally, a third unsolved corrosion problem is crevice corrosion. This is corrosion in tiny gaps, which are not subject to flushing by whatever fluid rinses off the major portion of the surface area. Because contaminants can become concentrated in crevices, crevices can develop a whole different chemistry from the rest of the surface. A good example of crevice corrosion is inside steel cables or wire ropes. Polyguard has modified gels that solve crevice corrosion problems. How long have the modified gels been around for? JM. Early versions were formulated for the US Navy. In the 1990s the Navy identifi ed several corrosion problems that they deemed ‘mission critical’. One of Polyguard’s gel formulations, using a customized locking mechanism, solved the Navy’s door locking mechanism corrosion problem. A second formulation solved the problem of corrosion of exterior steel elevator cables. These gels have been used by the Navy for the past 10 years for these mission critical problems, as well as some other corrosion problems. 

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EXECUTIVE PERSPECTIVE

The retirement of the babyboomer generation is only part of a far bigger challenge being experienced by the industry: that of plugging the capability gap. Andy Inglis, CEO of BP Exploration & Production, outlines how to manage the talent crunch.

“Our industry needs the smartest engineers and geoscientists. Increased computing power and better technology will also make a huge contribution, but they are not a magic bullet”

N OUR INDUSTRY, STRATEGIC CHALLENGES COME AND GO AND WE USUALLY CONQUER THEM IN THE END. That is what we do: we manage risks, whether they be technical, geological, commercial or political. And today, near the top of that list is capability. The really big strategic issue for all oil and gas companies is matching the earth’s resource endowment on the one hand, with the capability – technology, skills and know-how – required to bring those resources to market on the other. The days of ‘easy oil’ are well behind us. For international oil companies, and increasingly national oil companies too, new resources are harder to reach and tougher to produce. Resources are now found in reservoirs that lie at greater water depths, at higher temperatures and pressures and require complex drilling and completion designs. Bringing them into production is going to be difficult. It will require that capability gap to be filled.

The global context Recent developments in financial and commodity markets are just the latest reminder that we are definitely living in interesting and changing times. In the current chaos, it is easy to focus on the short term, but I want to maintain a longer-term perspective. Despite recent falls, the oil price remains high and volatile by historical standards, and prices are not being driven by a lack of resource because there is plenty of oil and gas around. In fact, prices are being driven by a confluence of factors. The first of these is the recent period of exceptional worldwide economic growth. Although the short-term outlook for worldwide economic growth is evidently deteriorating, the fundamental drivers of long-term growth in demand for energy remain in place. We have entered a new phase in global industrialization, led by China and India. When Europe industrialized, it involved 50-100 million people moving from a rural to an urban way of life. The US industrialization involved 150-200 million people. And those changes took centuries. But in the next decade, in China and India alone, over one billion people will be moving from a rural to an urban way of life. This will result in a dramatic increase in energy consumption to provide light, heat and mobility. According to the IEA, by 2030, world energy demand will be 50 percent higher than today and non-OECD countries are expected to contribute 85 percent of the total world energy demand growth between 2005 and 2030. Contrary to what you may hear from some quarters, there are more than

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50%

Expected increase in world energy demand by 2030

enough resources to meet that demand. At the end of 2007, total remaining proved oil reserves stood at around 2.3 trillion barrels of oil equivalent. At today’s consumption rates, we believe we have around 40 years of proven oil reserves, 60 years of natural gas and 130 years of coal. And let us not forget that enhanced capability would improve that resource-to-production ratio further. For instance, the worldwide average recovery factor for conventional oil reservoirs is around 35 percent of oil in place. If, as an industry, we can raise that by just five percent, it would add around 170 billion barrels to world reserves – enough for five years supply. The task facing the industry is to ensure supply rises adequately to meet demand by bringing this oil and gas endowment to market. These re-

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The

changing of the guard

sources are found in increasingly challenging environments – in the deserts of the Middle East and North Africa; in the deepest waters of the Gulf of Mexico, West Africa and Brazil; and in the Alaskan and Russian Arctic. Furthermore, many of these resources are controlled by NOCs that do not always have the same capability at their disposal as IOCs. Our industry needs the smartest engineers and geoscientists. Increased computing power and better technology will also make a huge contribution, but they are not a magic bullet. State-of-the-art software programs and seabed monitors are fantastic – but I’m not expecting them to walk into my office with a solution to the problem. Technology is only as good as the people who design and operate it. With capability, it is people

who make the difference. Turning these resources into reserves and then production is going to require leadership, ingenuity and innovation as well as technology. That is the capability challenge.

The capability challenge The first point to consider is the demographic pressures of our industry. Looking specifically at averages, the average employee working for a major operator or service company is 46-49 years old. However, this is a problem we have been aware of for several years and which we have been addressing. The good news is that we see an increase in the 20-34 year old bracket – reflecting more intensive recruiting in the last 10 years. The fall

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STAFF DEVELOPMENT IN ACTION

In Azerbaijan, development of local talent has been achieved through a number of BP initiatives: Special entrance and development programs for graduate recruits: This is through the Challenge program; 50 Azeri graduates completed the program last year in the percentage of 35-49 year olds reflects a lack of recruiting during the years of lower prices, when the industry saw the main strategic challenge to be increasing efficiency through consolidation and mergers as opposed to building organizational capability. I’m approaching 50 myself, so I am in that age group. And in some ways my own experiences are typical. I joined BP in 1980, and in 1990 was told that Mechanical Engineering was not considered core to BP’s strategy, that we would follow a track of outsourcing and use of the contracting industry. This caused me to broaden into other disciplines and areas. I’m happy to be now back in the core of E&P. I have kept my technical roots, I’m a chartered engineer, very proud of it, and very passionate about ensuring we do not repeat the mistakes of 20 years ago. The second point is that despite our best efforts, we have to admit that we are not attracting enough graduates from traditional recruiting areas such as the US and Europe. Even when people enroll on engineering degree courses intending to join the engineering ranks, this does not mean they will follow through. One recent study found that of the 90 percent of students who originally aspire to work in the sector when they began their degrees, only 65 percent actually do so. The overall impact of these pressures has been estimated by CERA as a potential 10-15 percent ‘people deficit’ by 2010, compared with the estimated number of staff needed to deliver projects. This is being felt across the industry – in oil and service companies alike. The issue is leading to project delays or deferral. Goldman Sachs’s study of the top industry projects shows that more than 40 percent have experienced a delay of a year or more. I believe the oil and gas industry is suffering from a number of what I would regard as misconceptions. Some of these misconceptions were true, but are now outdated. The industry suffered a boom and bust in the 1980s and early 1990s that left many with an impression of instability and a sense that there was no prospect here of a ‘career for life’. My earlier story regarding the outsourcing of engineering is evidence of that. The industry is

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The Caspian Technical Training Centre: A $12 million world-class training centre dedicated to training technicians to work in BP’s Caspian operations – to date it has trained over 1000 technicians, with a steady state now of 100 per year Professional development of national staff: In 2007, more than 100 employees were supported by BP in their professional education, whether attaining chartership accreditation, or advanced degrees at UK and US universities Overseas assignment in other BP operations: Where Azeri staff can learn best practices from other operations to bring back to Azerbaijan

also perceived as low-tech and out of date when set against other high-tech areas such as IT, media and pharmaceuticals. Nothing could be further from the truth. Historically, this was also a very white and very male industry so it has been perceived as lacking in diversity. As an industry we must address and correct these unhelpful and old-fashioned misconceptions, so that we can be competitive with the other opportunities graduates have in consulting, pharmaceuticals and the media.

Attracting and retaining talent First we need to retain the talent of our experienced employees. People are working later in life today – certainly later than the traditional industry retirement age of 55 – but this cadre of employees also demands more flexibility. At BP we have a scheme in place to access the skills of our retired staff for specific challenges and projects of interest to them. We offer flexihours and part-time working to encourage individuals to work beyond the

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ANALYZING REAL-TIME DATA The Advanced Collaborative Environment (ACE) is a high-tech environment where drilling, reservoir, facility and petroleum engineers can sit together and collectively analyze the data to maximize operating performance. An example of this in operation is a recent situation on BP’s Atlantis platform in the Gulf of Mexico, as Andy Inglis explains. “A control responsible for the start-up of automated equipment failed, resulting in the shut-down of instrument air systems and gas compressors. Onshore and offshore personnel working through the ACE were able to assemble a team of engineers and automation specialists and troubleshoot the issue. Within 30 minutes, engineers onshore were able to lead the automation team offshore through the reset process and bring the failed system back online. If another 10 minutes had passed without functioning water or air cooling systems, the team would have been forced to shut down production. The savings through lost production avoided was nearly $3 million. Today in BP, more than 35 of our assets now have ACEs. Cost savings run to the tens of millions of dollars – through reducing engineer and vendor trips offshore, as well as reducing non-productive time.”

statutory retirement age. We have to be accommodating to continue to access this talent. Then, looking at the other end of the age spectrum, we also need to be sensitive to the aspirations of people in their mid-20s – often described as Generation Y. From our own interviews with new graduate entrants, we know that their top motivations are quite distinctive and in many ways different from past generations. For example, there is much less emphasis on having a job for life and much more on the quality of experiences and the chance to make a difference. To attract and retain the top graduate talent, BP offers a development program called the Challenge Program. This began in 1993 with 30 people from the UK and US. Today the program has graduated over 3200 people and we currently have 1200 Challengers from all over the world in the program. Challenge is about building deep petrotechnical skills through a combination of on-the-job work experience, dedicated mentoring from experienced employees, clearly defined training and course curriculum, and field and operational experience. Graduation and intermediate reviews are based on competency assessment. This creates self-standing individuals, carefully placed into the right next roles with access to further learning offerings such as accelerated development programs. We also need to get closer to talented students, earlier, as they make their way through university. That’s the time at which we need to be there

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to correct misapprehensions and ensure the full attractions of a career in energy are made clear. We do that through partnerships with major academic institutions, but also by raising our profile on campus. To be honest, I think we have more work to do here.

A diverse workforce Secondly, we need to correct some of those outdated misconceptions by continuing to diversify our workforce and celebrating that process. After all, that is simply a reflection of globalization in action. By 2020, over 50 percent of BP’s operated production will come from nonOECD countries, giving us much more geographical breadth and depth than in the past. Many governments want to see greater local participation in the development of their country’s resources and we fully support their aims. Over

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Improved efficiency through technology Thirdly, let me move to technology as a means to plug the capability gap. Technology improves productivity by enabling us to perform tasks faster and with greater effectiveness and efficiency. Let’s start with the basics in my own business. Historically our production engineers have spent up to 40 percent of their time looking for data. A quick win for us was to create a web-based information management system that allows our PEs to quickly access the data they need to do their jobs. Piloted in Alaska and now available across our operations, this tool has allowed us to reduce the amount of time spent on accessing data to less than 10 percent of the time, releasing our PEs to spend more time managing our wellstock and operations, increasing their ‘wrench time’. Go back not too many years and our reservoir engineers would spend a week doing one history match; it may have taken six months to run 25 cases to find the one deterministic answer that matched. Now, with improved workflows and computing power, we can do well over 1000 history matches a week, a huge step change in efficiency, and importantly allowing multiple solutions to be found – which in turn has greatly improved our understanding of risk and uncertainty.

THE ROLE OF IOCs

BP operate all over the world, including the North Sea off the coast of Aberdeen, Scotland. the last decade or so our operations have grown rapidly in countries such as Angola, Colombia, Egypt and Trinidad. In all of these countries and many others, we have made an early priority of developing local leaders as well as local frontline workers. We adopted an approach of developing local talent, using the global capabilities of the firm. Let’s look at the example of Azerbaijan. BP has been in Azerbaijan since 1992 and is the largest foreign investor in the country. We operate more than one million barrels of oil a day equivalent in Azerbaijan from two giant fields in the Caspian Sea – ACG, an oilfield, and Shah Deniz, a gas-field. We also had a leading role in the construction of the BTC pipeline that takes oil from the Caspian to the Mediterranean. In total, an investment of $28 billion by BP and our partners. At $100/bbl, this production is projected to generate more than $25 billion of revenue for Azerbaijan during 2008. But we also want to generate human capital for the region by accessing and developing local talent and using local suppliers. Over the last 15 years, we have built up a workforce of 2700 BP staff and 1100 contractors and we have made a priority of employing and developing local talent. Today 83 percent of that workforce is Azeri, and we are aiming to reach 90 percent by the end of the decade. What we are creating in Azerbaijan is a replica of what occurred in Colombia over the last two decades. Today in Colombia, more than 95 percent of the staff are locals, including all senior management positions.

International oil companies have a unique role to play in addressing the energy challenges of the 21st century. 1. IOCs shape the oil and gas markets and make them work. They are global multilateral energy vehicles. They form the bridge between producing and consuming nations. They are involved in the energy policy dialogue with all of the key resource holding governments and consuming nations 2. They lead the efficient resource development of oil and gas, working on the frontier of the energy industry 3. Only the IOCs – and one or two national oil companies, such as Saudi Aramco, Petrobras, Gazprom – have the skills, technology, know-how and balance sheets to effectively execute multiple complex and risky projects simultaneously, and apply the learning from them globally to drive efficiency 4. In terms of logistics, IOCs are the largest movers of hydrocarbons and most efficient managers of fuel infrastructure 5. They are pioneering investors into alternative energy solutions and energy efficiency 6. They also have strong diversified global asset bases not overly exposed to any single geopolitical risk

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“The really big strategic issue for all oil and gas companies is matching the earth’s resource endowment on the one hand, with the capability – technology, skills and know-how – required to bring those resources to market on the other”

Remote monitoring is another technique that enables us to achieve better performance with less labor-intensive processes. For instance, we are using remote monitoring on a number of our turbines in the Gulf of Mexico. Our vendor, who is located in California, monitors the operations 24 hours a day. Through remote monitoring, we have been able to increase the intervals between service shutdowns and push the operational limits of the machines. Benefits include real-time troubleshooting of the equipment by internal and external subject matter experts from around the world; production loss avoidance due to sustained equipment uptime; and deferred costs by extending the equipment lifetime through increased monitoring. In the past, one individual was able to monitor 40 engines. Today that person can monitor 4000 – a 100-fold increase – because the system works by exception, flagging up potential problems, rather than by constant surveillance of all the equipment. As an industry we are beginning to understand the full potential of predictive analysis as the next evolution of this technology. Anticipating events and hazards ahead of time, creating intelligent software to advise of, and in some cases make, corrective actions and adjustments. These are early days for many of these technologies and we are learning more all the time, finding ways to increase further the productivity of our scarce human capability.

opportunity at every stage of a career. To deliver this strategy we have chosen to partner with the best educational institutions in the world. We all benefit from these partnerships. BP gets to teach the ‘BP Way’, in partnership with world-class educators. Our staff get the chance to develop as individuals. And I hope our academic partners benefit too. We have built an impressive consortium aimed at building our capability by advancing our technical learning and development, involving five universities – Rice University, Baylor College of Medicine, Imperial College London, Herriott Watt in Aberdeen and the University of Manchester – each of which has its own distinctive area of expertise. Capability and managing talent have to be at the core of strategy for every company in our industry right now, and at the front of the deliberations for all boards. Sure, the guard is changing and that creates a major challenge for us. But it has to be seen as part of a far bigger picture. Our industry brings energy to markets from some of the most difficult places in the world. We are used to challenges. In fact we relish them. And we are managing the changing of the guard by seeing it as part of a bigger strategic challenge: plugging the capability gap. At BP we are addressing this challenge in four ways: Attracting and retaining talent; developing a diverse workforce; leveraging technology to increase the efficiency of our organization; and offering a powerful learning culture, notably through partnerships with some of the world’s leading academic institutions. There is always more to do, but we know that building organizational capability goes right to the heart of our competitive advantage. n

2.3 trillion

Remaining proved oil reserves at end of 2007 (barrels of oil equivalent)

Learning partnerships The fourth part of our strategy is to underpin the development of our staff with a world-class learning offer for all levels and ages of our organization. I talked earlier about one aspect of this, our Challenge entry program for graduates, and our goal is to provide the same learning

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HR FOCUS

Attracting the top talent Mahesh Puducheri, Senior Director for Talent at Halliburton, explains how he is building a long-term pipeline of engineering talent.

or Mahesh Puducheri, Senior Director for Talent at Halliburton, changing industry perception is fundamental in addressing the skills shortage in the oil and gas industry. He believes that in order to attract young talent to the industry it is crucial that the industry is perceived as the important, innovative and interesting workplace that it is. Puducheri believes that students are inﬂuenced by their university and therefore their faculty, and he has taken steps to work with

the faculty in terms of projects, technology and development partnerships. In order to succeed in his mission, Puducheri is building relationships with universities. “By building more strategic education partnerships and working with key universities we are identifying the long-term talent pipeline.” Eighteen months ago, Puducheri began targeting the key go-to markets, and chose specific universities in each of those countries, narrowing the list from 17 to six major countries that he was keen to focus on.

“We are constantly in contact with these universities, helping them put together a curriculum architecture, so that the students have an expectation of the oil and gas services industry, and are well prepared to take on jobs within the energy industry,” he says. “We have a series of metrics that we work with on those schools, so we provide scholarships, or some of the faculty awards, which all comes into play, when you think about building a long-term pipeline of engineering talent.”

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Work/life balance Puducheri believes that many students lack knowledge and exposure to the oil and gas industry, and perceive the industry as a low-tech, manual job. “It is changing,” says Puducheri, “thanks to the media and increased information about the industry. And we are working with companies, who are involved in perception surveys on campus, to talk about the current technology that the students who’ll be coming for work for us will train in when they leave college.” Puducheri is also keen to work on Halliburton’s college recruiting brand, ‘Go Further, Faster’. He wants the brand to define the engineering department and the graduates that he plans to hire from the various campuses. “We felt we should be in the campus, before we show up to hire them, and that means we have to invest in understanding the perceptions and preferences of the college students, whether they are in their first year or last year,” he explains. Puducheri believes that it will take time for perceptions around the industry to change, but every effort is being made to convince students that they will be working with the very latest high-tech technology. He goes on to explain that he is also working to expose students to a more collaborative learning environment, as well as understand the needs of this new generation of students.

Finding a work/life balance can be difficult, but Halliburton provides numerous benefits and resources to help find some balance: Education: Educational reimbursements are related to job-related workshops, off-site seminars and courses taken at accredited educational institutions Travel: With presence in around 70 countries there are many opportunities to work on interesting projects, experience new cultures and see the world Health: A wellness program promotes health and well-being through customized solutions to help lose weight, quit smoking and get in better shape

remain around the skills shortage still seen in the oil and gas industry. Puducheri believes that universities are now stepping up to offer more courses at various levels; for example, some universities are discussing the possibility of a petroleum engineering undergraduate degree where they never had one before. “Universities have a key aspect to play in terms of long-term thinking,” he says. “They need to invest in the long-term. We are working with several universities to help them understand this and providing support to help them achieve it.” Over the next fi ve years, the gap between new graduates and experts leaving the industry is estimated at almost 500,000. Puducheri believes that it is vital that ev-

“By bringing in more technology, the industry becomes more high-tech, therefore you need different types of people with different competencies and skills” “We are mapping their needs in terms of what we are doing in technology development areas, as well as in development and improvement areas so that it really matches up to their needs,” says Puducheri. “Barriers are being broken. People are recognizing that they need to understand each area’s input and that they are in the same environment, making decisions together as a team.”

Mind the gap While Puducheri has seen a huge amount of growth in students entering the industry since 2006 and 2007, many challenges

erything possible is done to close that gap. However, there is not just one silver bullet that can solve this potentially major problem. Firstly, Puducheri believes that companies should be investing in K to 12 education. He says that changing the mindset of potential employees to think of oil and gas as a clean and environmentally friendly industry is key. “Knowledge transfer will also be a key issue that will help close the gap,” believes Puducheri. “Formal mentoring programs haven’t worked in the past, but perhaps encouraging informal mentoring programs, would work? I know there are some companies out there trying to tap into the retired

population to create a network and people might want to remain engaged with the industry. As an industry we have to start thinking about the options we have on hand.” Puducheri says that the knowledge management systems currently employed at Halliburton are “pretty good”; particularly in the way that knowledge is exchanged and transferred. He is currently working with companies who have already engaged in the retired network and is trying to find out the people who would be interested in coming back to work for Halliburton on a part-time, mentoring basis, or on a contract basis in the training and learning centers. He does say however, that Halliburton is already extremely involved in the K through 12 grades, and is focusing on making people available in the energy industry itself. “We have programs organized around bringing students into our campuses and providing them with input in terms of our oil and gas services lifecycle – we help them observe some of the jobs going on and give them some idea about how this industry is going to be when it comes to the reality in terms of getting exposed to elements and working with technology,” says Puducheri.

Talent pipeline The knock-on effect of a shortage of skilled and qualified engineers can affect business in a big way. “If you think longterm,” says Puducheri, “the effects are going to be heavy – business is going to become harder and it will be much more difficult to find oil.” Puducheri sees some companies, who don’t have the right people in place, investing in technology and other

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Challenging times In 2007, Halliburton hired around 14,000 employees globally. Hiring this amount of people could have presented some huge challenges, but Puducheri had a clear plan from the outset. “We knew we were going to grow based on the market and company indications. From a system perspective we put in a new system to help us identify the requisitions that we have across the global so that we were better able to manage and monitor our metrics. And from a process perspective we invested more resources” explains Puducheri. “We had to think outside of the box in terms of hiring people. We needed to keep work schedules flexible so we could attract and then keep the new employees. We have addressed every aspect of it, whether it’s going through our system, working with vendors to actually do a job posting or, getting the mindshare on the campus and identifying people and bringing them into the places where we have work. Our strategy from a talent management perspective is integrated and aligned to the business operations. That is how we make the business more successful.”

assets as an alternative, but believes it is not going to solve the skills problem because it is people who run the technology and are key in bringing in their knowledge and expertise. “By bringing in more technology, the industry becomes more high-tech, therefore you need different types of people with different competencies and skills,” explains Puducheri. “Companies can and should invest and manage assets, but the biggest problem would not be investing in people. The company that gets ahead of investing in people, trying to attract, develop and retain the best talent is going to be the key winner.” Once you have secured the talent it is vitally important that it is developed to its full potential. In the past the oil and gas industry has been slow to embrace the development and retention aspects of recruitment, but Puducheri sees this changing. “We’ve got to be able to attract the best fit for the job and we should be able to continually accelerate the development of that person,” he says. “Today, our focus is not just looking at people in terms of development. This is a bottoms-up approach that we use to identify key talent within the company. We have a formal success process, or talent review session, by which we identify key talent that are crucial to the success of this business, and who are going to be our future leaders.” Puducheri goes on to explain that talent at Halliburton is identified through a process of leadership competencies that are assessed against each candidate. “We use a two-level process to talk about strengths and weaknesses, development areas and potential career moves. We do this in a very formal way, drilling down the entire organization,” explains Puducheri. “There’s a lot of commitment from the top, which helps, and a lot of focus on leadership development.” After the talent has been identified, Puducheri explains that communicating is the second step to developing and retaining talent. When the top talent has been identified they progress through a number of programs,

including a one-year leadership development course. These assessments and programs are formalized all the way though to executive development programs in order that people are able to progress quickly through different levels within the company. “You can attract, you can accelerate the development, but you’ve got to retain,” says Puducheri. “The only way you can do that is to focus on the development, focus on the key talent, focus on the high potential and provide them challenging opportunities. That could be job rotation, working on different projects or it could be an overseas assignment, for example. There are different aspects to development, not just training, that we focus on formally around identifying our top talent and focusing on development.” Over the past few years, Puducheri has made sure that the system in place signifies that Halliburton’s retention processes are working, and that it communicates that to both potential and long-term employees. “Whenever we have key management positions come up, we go back to our succession charts and identify people who could replace those positions. We want to demonstrate that we are serious about leadership and management development,” states Puducheri.

“You can attract, you can accelerate the development, but you’ve got to retain”

Long-term thinking Going forward, Puducheri is keen to make the systems side of processes more robust as well as continue to invest the same amount of senior management time and energy. He wants to send a clear signal to people that Halliburton takes the recruitment, development and retention of talent seriously. “As people come into supervisory roles we try to train them around the importance of evaluating talent and understanding the difference between performance and potential, so we prepare them for frontline thinking,” explains Puducheri. “The time we spend around people and development processes and talking about key talent in the company really pays off in the long-term, and that’s very important.” n

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asK thE EXPERt

Supply and demand How to tackle the crucial personnel challenges facing the oil and gas industry.

Johnathan Johnson

n recent years we have seen a dramatic change in the supply and demand of suitably experienced and qualified personnel within the oil and gas industry. An age gap has become apparent and we are seeing a declining expatriate workforce in the industry. Mix this with the increase in demand from the developing countries such as China and India, and the associated increase in the price of oil to what it was a few years ago, and we are facing a massive shortfall in the available expatriate manpower resources necessary to keep up with new projects being sanctioned. Over the next decade we will see the development of huge projects in locations such as Kazakhstan and Papua New Guinea, where there will be a workforce requirement of tens of thousands of personnel. Admittedly this workforce will be a mixture of qualified expatriates together with local semi-skilled construction workers but the message is clear. Questions that need to be answered are: How do we attract new personnel into the industry? How do we train and develop the right skills required? And how do we retain people within the industry? The oil and gas industry has many benefits that should be used as attraction strategies for young professionals. The industry is project driven and allows individuals to gain a wealth of experience in working with a multinational workforce, within many international cultures and to travel to some of the most diverse locations in the world. This type of experience can only be experienced within one or two professions and should be used as a great attraction strategy to the next generation. These benefits should also be utilized to attract personnel with transferable skills from other industries where the demand for ‘new blood’ is not so great and where remuneration and work location can be bettered.

This is a global industry that employs a multinational workforce, which should be greater utilized. The historical ‘expatriate workforce’ is changing. We can now see recruitment centers in places such as India, Indonesia and the Philippines where experienced personnel are being seconded to the Middle Eastern countries like Dubai and Qatar as a cheaper but equally qualified alternative to Western expatriates. Countries and regions such as Kazakhstan and Azerbaijan in the Former Soviet Union, which had very little in the way of industry-experienced locals, now has a growing young and qualified workforce that are keen to travel and experience different international cultures that were formerly forbidden. These individuals have spent the last five to 10 years gaining valuable industry experience by ‘ghosting’ or working alongside experienced Western expatriates learning their trade. Authorities need to understand that an international industry requires an international workforce and as such difficulties that arise due to visa and work permit hurdles, need to be addressed. So attracting talent to the industry should not be an issue, with the promise of international travel and attractive remuneration compared to other industries such as construction. Devel-

“Authorities need to understand that an international industry requires an international workforce” oping and managing talent can be achieved by ‘casting the net’ wider and looking at educating and providing experience to those in developing countries and regions such as the Former Soviet Union and South East Asia. Retention strategies are also a major issue and a common factor in the contract workforce is that candidates are not passed from project to project within the same company. Companies need to be made aware of when a particular contractor is nearing the end of an assignment, and when they can then look at available roles on new projects to enable the retention of individuals within that organization. n Johnathan Johnson is CEO of the Fircroft Group.

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HR FOCUS

Rebalancing talent It’s not easy to find a CEO aged 30 in the oil and gas industry, but that is all about to change.

YAGYA AHUJA

il and gas is a huge industry, probably employing over a million people across the globe. It is a mature industry and it has hundreds of billions of dollars of investment riding on it. The industry has long placed emphasis on the importance of experience for those in top management positions, and correctly so. Senior management is expected to have accumulated years of experience before they are able to take leading positions on projects, and this is one of the reasons why we see so much ‘white hair’ at the helm. It has become almost mandatory for a person rising through the ranks to have ‘done their time’. And while this is a valid reason, it has a ﬂip side, because occasionally there is too much emphasis on the necessity of experience and consequently you see less young people in senior positions within the industry.

Young talent The oil and gas industry is in many states of transition and faces some fundamental conundrums. The biggest issue, without doubt, is can you have energy without destroying the environment and the planet for future generations? To answer that will require a fair amount of innovation both in technology and processes, as well as a change to how people approach the question itself.

Some of the traditional solutions have to be thrown away because you can’t do one or the other. Younger talent has almost an obligation to come in and change things, to bring in new thoughts, to help break some of the paradigms that have existed. Indeed, the industry can leverage this palpable excitement about renewable energy to help bring more young people into the sector. Without doubt the mindsets and models that have existed particularly around how talent has been acquired, groomed and grown in the industry, has to be changed. We need to see buy-in from all the corporate people, from the academic institutions and from the professionals themselves, to see that the talent exists. To see that it is not only a mature sector, but that it is at the edge of technology. The complexities that are involved in proﬁtably harnessing hydrocarbons requires cutting edge technology. We should talk more about this to young graduates coming out of universities. Working in energy is exciting, it is innovative and it is fundamental to human growth and progress. We need to change the way the sector is portrayed. We need to break or at least change some of the old assumptions and restric-

tions of recruitment. The outreach of the industry needs to change, making people more interested and aware of the opportunities in the industry. We should be talking to young people, trying to get them more excited about the energy industry and to feel a nobler, higher cause for working in an industry that is fundamental to human growth and progress.

Geographical trends While there is no doubt that we will start to see younger talent take over top management positions, it will take time as changes work their way through the entrenched systems. However, in the shortterm, within the next five to seven years, I believe we will see geographical changes too, as economic focus shifts more eastward and towards newer economies in Africa. It will happen as the industry continues to embrace a rebalance, allowing for greater talent mobility and efficiency within the industry. Emerging economies are creating many young, hungry, ambitious people. By bringing them in and making them mobile they will travel around delivering efficiency. And in the meanwhile we will see a rebirth of people interested in energy, in the more developed world. A decade from now we will see a rebalanced industry, one that relies ever increasingly on younger talent, innovation and mobility.  Yagya Ahuja is CEO of Global Energy Talent.

TOP TIPS Yagya Ahuja’s advice for young talent: The spirit of adventure: The oil and gas industry is extremely exciting and offers you the ability to move to exotic places around the world. You can be based in the heart of London or New York for one posting, and find yourself on a rig off the coast of Angola or deep in equatorial Indonesia in the next. Recognize the importance of the industry: The industry is fundamental to modern human society and helping human progress. Your work matters to humanity as a whole. Be innovative: There is a talent gap emerging as baby boomers retire soon and younger employees will have to learn much quicker and embrace innovation. Stand up, embrace this change and drive the innovation that the industry needs.

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EXECUTIVE INTERVIEW

Reacting to a changing market Christopher Wood, Managing Director, AC Engineering, reveals his thoughts on the current challenges of recruitment and retention in the oil and gas industry.

In your opinion, what needs to be done to address the serious lack of skilled and qualified workers in the oil and gas industry today? Christopher Wood. For the individual companies in North Europe, the US and Canada they need to be willing to accept the skilled labor from India, China, Philippines and South East Asia. At the same time they need to develop the skills of the local workforce into lead and supervisory positions. With an initial strict selection process of new candidates from overseas, training and cultural learning can be kept to a minimum, this will fix a short-term problem.

league. To create a fun and friendly social network within the non-local workforce is crucial to retaining your workforce. A good agency will spend many hours devoted to keeping their employees happy and socially stimulated. This can be as much fun for the agency staff as it is for the candidate, and the agency will benefit from this more than they can imagine. The time and money spent on this will be well worth it, and the agency will gain loyalty from its employees and appreciation and respect from the clients. If a candidate leaves to join a new company because of a few more cents an hour, this person will probably do the same to his next employer.

What are the main recruitment and retention challenges in the oil and gas industry and how can companies ensure they are attracting, developing and managing the right talent? CW. The main problems to be addressed are job security, job satisfaction and plain old boredom. This is a worry for many skilled professionals thinking of entering into the oil and gas industry. What can you do about this? Firstly, invest some time training in key areas, such as in-house software and standards, and develop the candidate’s skills in all areas, so the candidate can be attractive to other departments within the same company. Boredom and loneliness is an issue that many companies brush under the carpet or just don’t understand. I have seen so many candidates wanting to leave main cities and large companies to come and work for AC Engineering because we have a cricket team, monthly quiz nights and bowling

Given that recruitment is not necessarily a core competency for oil and gas companies, how can they benefit from bringing in specialist recruitment professionals? CW. There are so many areas in which specialist recruitment professionals can help. The obvious one is a fresh new pool of skilled candidates from around the world. Specialist recruitment professionals are also more experienced at dealing with different cultures and addressing the individual needs that the culture demands, saving time on advertising, filtering of CV’s, and in some cases gaining a new professional project partner, which can supply skilled labor from project conception to commission. How do you see the future outlook for recruitment and retention in the oil and gas industry? What trends/developments do you think will have the greatest influence on the recruitment sector over the next 12-18 months?

CW. With the large number of redundancies in the financial and banking markets coupled with predictions that unemployment will soar next year, recruiters need to react to changing market conditions. There is little that can be done now but those companies that planned and built their businesses on strong foundations are more likely to be the winners. Recruiters operating in niche markets such as parts of the public sector, medical, energy and utilities will be well positioned. Some niche operators will get stronger, particularly if they operate in markets where there are candidate shortages and high barriers to entry.

“In the present market it is vital that management has up-to-date information about what is happening in the marketplace now to enable them to make informed strategic decisions” Christopher Wood Agencies with a strong client-service and ethic are more likely to maintain client relationships under pressure from other recruiters chasing a diminishing pool of vacancies. In the present market it is vital that management has up-to-date information about what is happening in the marketplace now to enable them to make informed strategic decisions. n

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SAFETY FOCUS

The importance of safety Hugh Williams, Chief Executive of the International Marine Contractors Association, debates the issues.

here is nothing more important to the International Marine Contractors Association (IMCA) and its members than safety. Indeed, the quest for ‘zero incidents’ remains at the heart of virtually every guidance published by the international trade association that represents, and works on behalf of, over 500 offshore, marine and underwater contracting companies in more than 50 countries. Heading our list of aims and objectives is our commitment to strive for the highest possible technical and safety standards. Nothing can, or should, override this key mission statement and associated action. Safety ranks so high up the list of IMCA activities that its two core committees – Safety, Environment & Legislation (SEL); and

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Training, Certification & Personnel Competence (TCPC) – work right across all the special interest divisions within IMCA (Marine, Diving, Remote Systems & ROV and Offshore Survey) and the four sections (Americas Deepwater; Asia Pacific; Europe and Africa; and Middle East and India). There are a number of ongoing safety initiatives, which include the IMCA safety flash system; publication of safety statistics and of annual incident reports; the continued development of safety aids such as pocket safety cards, safety posters and videos; and also the work of the Security Task Force that addresses such issues as piracy and security. These initiatives rely on sharing where IMCA is the conduit

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used to share individual experiences with the wider industry for the common good.

Current concerns

systems and reels for pipelines, umbilicals and cables. We’re moving into a new era, but there is a major concern about whether skills and safety levels will match the sophistication of this ‘new-look’ fleet; and, of course, there is a pressing need for current and new supply bases to accommodate these large vessels, and all the high tech equipment that goes with them. Progressively we should be considering new bases incorporating supply chain elements; for example, major contractors are establishing shore-based pipeline fabrication and spooling facilities in remote areas as close to offshore fields as possible. One item topping the IMCA agenda is the global concern about skills shortages. To operate just these new construction vessels, we need 2000 additional watch-keepers across the bridge, deck and engine room; 800 personnel in saturation diving and related positions; 1000 additional survey and inspection personnel; 1200 ROV personnel and many other diving, support, project and engineering personnel. It is a huge ask. With zero incidents in mind, all these people, newly recruited to the industry, must be capable of absorbing the available knowledge and taking on board industry safety objectives. Training must continue

With a strong oil price and exceptional levels of activity throughout the offshore oil and gas industry, we are living in exciting and challenging times. The $20 billion-a-year offshore marine contracting industry, key to the offshore oil and gas industry, is responsible for construction work on major oil and gas field developments globally as well as undertaking specific contract work for field improvements and extensions. Sophisticated vessels and platforms are vital for the safe and efficient support of underwater and surface construction, so many would expect the industry to be overjoyed by the knowledge that over $17 billion-worth of new vessels are in yards or in planning and engineering phases. However, there are very strong concerns. In a relatively short time, some 50 new marine construction vessels and 600 offshore support vessels will be in service around the world; to say nothing of 40 floating drilling rigs, 100 new work class ROVs, 10 new portable or modular saturation diving systems, and a whole new generation of dredgers and seismic vessels. “We are going to see very sophisticated vessels operating in The top-of-the-range installation vessels will be fitted with cranes of 3000t-5000t deeper and more hostile waters – it really is ‘new frontier’ country” capacity, whilst the top-of-the-range pipelay vessels will have up to 60” diameter pipe handling capacity. Except for vessels such as Allseas’ Solitaire and across the board to keep them safe – training establishments and Lorelay, nothing like these top-end vessels has been built for two or trainers will be in high demand. Yes, even more people will be needed three decades. A new breed of ‘single lift’ vessel with capacities from to man them. 20,000t-48,000t is also being built with decommissioning in mind. At It may be that many of the people new to the industry have transthe same time, more heavy lift transport ships are being added to the ferred from other sectors of the civil or defence marine industries, but fleet, and these, plus some of the offshore support vessels, may be whatever their background and wherever they are from, training to the used for offshore construction projects. high levels required by the offshore oil and gas industry, and adopting The offshore fleet is certainly about to become physically larger the ethos of our industry is vital. (in terms both of the number of vessels and their actual size), and more sophisticated, with the majority featuring dynamic positioning (DP) Sophisticated technology and state-of-the-art control systems. Many vessels will have the scope Within the offshore contracting industry we are used to multi-redunto fit and operate additional capacity such as cranes, ROVs, diving dant, fail-safe systems. The lack of new vessels over the past decade

Safety flash system A key tool of IMCA is its safety flash system, which enables prompt distribution of safety flashes across the industry on topics that would otherwise pose a latent hazard to other members. The purpose of an IMCA safety flash is to notify IMCA member companies of a significant hazard that could be present at their worksites and to provide solutions for controlling the hazards. Such a hazard may already have led to a fatality, injury or illness at a member’s site or it may be a recognized problem that could lead to an unwanted incident. In either case, the publication of such hazards through the IMCA safety flash system keeps people informed and helps prevent similar occurrences.

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Collective wisdom

Hugh Williams is Chief Executive of the International Marine Contractors Association (IMCA), which represents offshore marine and underwater engineering companies worldwide. The association has over 500 company members in 50 countries around the globe. Williams is a chartered civil engineer with 33 years of broad experience. His career has focussed on marine operations particularly heavy lifting and marine construction in the offshore oil and gas industry.

or so has meant working with vessels with long histories. Systems have been added and evolved, teething problems ironed out and performance improved. Now, fresh from the yards we are going to see very sophisticated vessels (with similarly sophisticated equipment fitted on them) often going straight out to remote oil and gas provinces. Almost without exception, this will see them operating in ever deeper and more hostile waters far from shore – yes, it really is ‘new frontier’ country. What can we expect?

Debating the issues There is no simple answer to the three inter-linked issues of skills availability; skills and safety; and the impact of new technology. We need to debate the issues, get feedback and views from across the industry and ensure we work together to identify challenges and set the wheels in motion to share solutions. IMCA’s real-time safety flash system will be used to share specific operational knowledge as it becomes available.

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The new fleet and its new personnel will want to learn from the collective wisdom of the past. This is contained in new design codes that have improved since much of the current fleet was built. But a considerable contribution comes from the equipment specifications, procedures and personnel competence described within IMCA’s good practice guidelines. These also address trials and commissioning; ‘failure modes and effects’ analyses; audit and maintenance programs developed on past successes and occasionally from past incidents; and the development and recognition of competence in the workforce. We can certainly help to build strong foundations for the new fleet and new people who will be joining the industry. IMCA has published over 200 guidelines relevant throughout the world. The most pertinent to the new fleet may be DP for supply vessels (and many other DP documents including incident analyses); the Common Marine Inspection Document; training and competence framework; crane specifications and lifting operations; maintenance of wire ropes; communications (bridge and dive control); incident investigation; vessel and personnel security (including ISPS); as well as the suite of diving documents that support IMCA’s International code of practice for offshore diving. There are specific guidelines relating to various aspects of safety, and also our much-used safety promotional material aimed at individuals within the industry, but safety and efficiency are the goals of the content of almost all our guidelines.

A living example IMCA’s Common Marine Inspection Document (CMID) was developed originally to reduce the number of audits carried out on individual vessels, together with the adoption of a common auditing standard for the offshore marine industry. It is gratifying that the CMID is seeing ever-greater adoption around the world and members are actively promoting its use to clients, sub-contractors and other vessel operators. Indeed, a significant part of the international offshore industry has accepted the CMID as the standard for vessel inspections, and therefore when requesting copies of recent inspections they will expect them to be in the format laid out in the CMID. The CMID is treated as a living document. Some parts can be completed by the crew prior to an independent auditor’s arrival and, thereafter, the vessel’s crew can keep it updated wherever possible, so that the minimum amount of work is required at each audit, and auditors can spend their time on board as effectively as possible. We view it as so important that it was the subject of one of the workshops at our annual seminar, when we explored how the CMID is used in practice and how the use of the document can be enhanced. It is vital to ensure that the CMID meets (and indeed exceeds) all needs and that there is no need for duplication of effort, something that would dissipate the element of self-regulation, a key step in ever-increased safety standards, that is now working so well. In our desire to facilitate safe and efficient marine operations, we look forward to a challenging and far-reaching debate and resolutions to ensure the enlarged offshore fleet can operate optimally – and safely. n

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ANALYST VIEWPOINT

The price of oil Fadel Gheit, one of Wall Street’s top energy analysts, reveals who is to blame for record oil prices and who actually sees the profits.

oday, everybody is extremely worried about banks and financial institutions; nobody is concerned about oil companies. Oil companies have always been in very strong financial shape. They have never had low work debt on their balance sheets as they have now, but the future is uncertain. It is a double-edged sword. They have record earnings, but most of their stocks are trading, or at least sustaining, the biggest drop in history. The market is confused because of all these changes that are happening very rapidly; the prices are not reflecting supply and demand fundamentals. There is tremendous speculation in the marketplace. Most investors have no place to go, so they are bidding out commodities and oils. You can see the indecision, the confusion, the chaos, the lack of leadership, the little faith in government decision and officials, and all these things are factors that will have a long-term impact on the whole industry.

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We need speculation in any market; we all speculate, but these speculators are those financial players that have no intention whatsoever of owning the physical commodity. Excessive speculation is harmful and exaggerates movement in the price of a commodity, forcing companies into making decisions that are not good in the long-term. When oil prices were $148, many companies made decisions that they will live to regret a year or two years from now, because oil prices are not sustainable at $148 or even at the current level. We are going to see the impact of high oil prices on consumer spending and inflation. It also hardens the position of the national oil companies, which is why we have limited access to resources – because most of the companies that own the resources are in no hurry to open access as there is no compelling reason for them to allow foreign oil companies access. These companies make a great deal more money by producing less oil

than if they were to allow oil companies to come and develop and increase output. We are seeing that happening with BP in Russia and we’re seeing that happen in Venezuela.

At a loss Having been in the business more than 25 years I am no longer surprised to see anything happen in the oil market. People don’t realize that the oil markets are not free markets. They are far from free, because more than half of the oil supply in the world is coming from OPEC and Russia. By definition when you have a cartel controlling more than 25 percent of a commodity, there is no free market. On the other hand, the demand for petroleum product is also not free. Why? Because of taxation. On the supply side, it is distorted by a cartel; on the demand side, it is distorted by taxation and subsidies. In terms of the strongest players in the oil and gas industry, Exxon Mobil is by far the strongest. It has the financial flexibility,

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“Oil has been and will continue to be used as a political weapon. It is not a free market, it does not reﬂect supply and demand fundamentals” the global reach and the technology; however, this begins backfiring on it because it cannot grow production or reserves without attracting public scrutiny. Look at what happened in Venezuela, for example. Hugo Chavez is exacting revenge on oil companies because he says that their actions are representative of the US. But the companies themselves have nothing to do with the political leaning of Washington versus Venezuela, so you can see the larger the company, the bigger the scrutiny and the more pressure they have from politicians, from the public and from foreign governments. This is why large oil companies have lost more this year in terms of valuation and market value, than any time in their history. Although they are all going to have record earnings this year, Exxon Mobile’s market value dropped by more than its record earnings in the last two years, so here is a company that generated almost $100 billion of profi t, but its own market value dropped by more than $100 billion.

the end of the day they actually lose money. Now Russia wants to cut this tariff in half to get them decent profi ts of $5 or $6 per barrel. This is because government greed increased significantly with the rise in oil prices. This is happening all over the world. On

one hand, the governments of both the consuming nation and exporting nation blame oil companies, but they are also causing the problem because the consuming nations are putting huge taxes on motorists using gasoline and diesel, and taking a huge amount of profi t away from oil companies in the form of taxation and royalties, and the exporting countries are milking oil companies to the last drop they can get their hands on. Oil has been and will continue to be used as a political weapon. It is not a free market, it does not reflect supply and demand fundamentals, and it is creating a lot of mess around what is happening in Russia, Venezuela, Nigeria and Iraq; if it were not for oil, we would not be in Iraq. We have no interest in Afghanistan because it doesn’t have oil, but we are more interested in Iraq because Iraq has oil. 

OCS: TO DRILL OR NOT TO DRILL?

here will be a compromise on drilling the outer continental shelf over the next couple of years. Technology has improved significantly over the last decade. If people cannot see the drill ships, if they cannot hear the noise, if they can’t smell anything, it doesn’t exist. So drilling 20, 30, 40 miles away from shore should not be any problem to anybody. I cannot see it, I cannot hear it, I cannot smell it, so it doesn’t exist. The government has experimented with a lot of things that we don’t hear, we don’t see, we don’t smell, so we don’t think that we are doing it. But guess what: they are taking place every single day. I am not sure if I agree with the people who are opposing offshore drilling, but on the other hand, I cannot overemphasize how naïve the bunch of cheerleaders are who say, “Drill baby drill,” as if there is something that is guaranteed – I mean shooting fish in a barrel. It doesn’t work this way. They are a bunch of idiots and they are very flat-minded. They have no clue how this business works. Even if we allow the oil industry to drill tomorrow, we are not going to see a drop of oil for another five years if we are successful, and I’m not even sure we would be.

More tax Is seems like too much of a good thing is a bad thing. And now people are thinking that maybe we should put additional taxes on oil and gas companies. In Russia, oil companies are losing money. At $100, they are losing money. They were making money when oil prices were $35, but they are losing money when oil prices are $100 Why? Because Russia has a $35 per barrel tariff that is fl at. The owners imposed this tariff a few months ago, and by the time you incorporate the production and transportation costs, as well as the very high effective tax rate, and then hit them with $35 tariff, at

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INDUSTRY INSIGHT

A new era in offshore crew supply Few would dispute that the provision of safe and cost-effective crew supply is not a nice-to-have, but a pre-requisite for the offshore industry. Philip Strong looks at how this can be achieved.

any operators are now looking much more closely at their options The nine-man Frog capsule will transfer personnel from the vessel to platand re-evaluating their established crew supply methods. Choices forms in a protected and safe environment. This project sets an industry are being influenced by a number of factors, such as cost, downprecedent, as the first direct collaboration between a vessel operator and time risk, passenger comfort, journey times and transfer specialist. last, but not least, safety. The vessel is rated DP2, making for excellent Recent developments in the marine sector look station-keeping, and the catamaran hull provides set to have important implications for operators. superb stability, minimizes vessel roll and a wide From a safety perspective, by using better-designed deck reduces collision hazards. The landing area is equipmentand improvedoperationalcontrols,operpositioned amidships for increased stability, betatorscanexpectinjurylevelstofalltoafractionofcurter visibility from the bridge and improved access rent rates and fatalities to be virtually eliminated. for passengers. A special passenger flow system Many operators are already seeing major improveis under development and a number of special ments in their vessel-based crew supply operations. guidance and protective features are being develInthepastmarinebasedcrewsupplyhasreceivedlitoped to improve safety and increase the operatle priority incomparison toits more ‘well healed’avitional envelope. ation cousin. A lack of reliable information has also As well as providing a safe, efficient and reliable led to misconceptions about the relative risks of difalternative to helicopter crew supply, the CrewZer will ferent crew supply methods and has also tended to offer a highly capable evacuation capability. It will mask some important breakthroughs. Higher qualiallow hurricane evacuations to be performed in tyoperationalandincidentdatawouldaidrisk-based much less time than that required to perform a helidecision-making, and allow more effective tracking copter evacuation. This important provision will exof performance and allocation of resources. If the intend the decision window and allow operators to Philip Strong is one of the joint dustry can move in this direction, choices will be dereduce the length of (or even avoid completely) costfounders of Reflex Marine. He has termined less by myth and hunches and more by ly production shut downs. spent much of his career in drilling, rational evaluation. The CrewZer, designed by the world’s foreproduction and marine operations, The improving safety of crane transfer operamost catamaran designer Incat Crowther in New working with BP and Enterprise Oil. tions, combined with the introduction of a new genSouth Wales, Australia, has been constructed by Strong holds several patents and is eration of faster, more comfortable vessels could leading boat builder Gulf Craft in Patterson, accredited as inventor of the ‘Reamer soon change the face of offshore crew supply and Louisiana. It will enter service in the US GoM in Shoe’ winner of the Scottish Offshore should also result in significant cost savings for opearly 2008 and will also be marketed internaInnovation Awards (Technical Prize). erators. The issues of transit speed and passenger tionally. Conceivably, once the concept is proven comfort are now being addressed by some forwardand widely accepted, operators could use the looking vessel operators. Seacor Marine LLC has CrewZer (which has wireless internet, satellite TV just completed a new 170ft CrewZer Class DP2 high-speed aluminium cataand cinema) like a high-seas carpool, paying only for usage. maran, which will be the fastest vessel in the US-GOM, capable of speeds Change is afoot in the industry and many operators are now taking a fresh ranging in excess of 40 knots. This state-of-the-art vessel will carry up to 150 look at their crew supply activities. Exceptional progress has been made in the passengers and journey times are expected to considerably close the gap bedevelopment of safer, more efficient alternatives with operators, vessel owntween boat and helicopter transport. ers and transfer specialists all making important contributions. The CrewZer vessels will also incorporate a high capacity personnel transfer safety system specially developed for the vessel by Reflex Marine. Frog is a registered trademark

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TECHNOLOGY FOCUS

An industry going 110

HIGH-TECH

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O&G catches up with Stephen Brand, SVP of Technology at ConocoPhillips, for an alternative view of this energy giant’s operations.

Stephen Brand

few decades ago the capture of hydrocarbons was a fairly straightforward process: you drilled into some Texan scrub and if your luck was in, you struck black gold. The Beverly Hillbillies television show springs to mind. Nowadays, the search for oil and gas has become a precise science with millions of dollars ploughed into technologies to discover, develop and recover oil and gas from new and existing wells. The oil and gas giants are working smarter, as well as investigating alternative forms of energy in these carbon-conscious times that we live. Although fossil fuels will remain the cornerstone of the business for the foreseeable future, companies like ConocoPhillips, the third-largest integrated energy company the US, are looking to diversify in order to meet soaring demand. This couldn’t be achieved without technology. To illustrate its importance in the energy arena, ConocoPhillips has earmarked around $400 million for technology alone in 2008. The Houston-based company plans to spend approximately $150 million of this budget for research on the development of alternative energy, including non-conventional oil and gas resources. Stephen Brand, SVP of Technology, who began his career more than 30 years ago as a geologist in exploration and production (E&P) with Phillips Petroleum Company, feels the industry is light years ahead today. “Signiﬁcant advancements in drilling, well completion and seismic technologies have been made during my career and these advancements must continue in order to meet our growing energy demand and to maximize our energy resources.” He says feats accomplished in the seventies pale into comparison to exploration efforts we see now. “In 1976 [when Brand started out in the industry] we thought 600 feet of water was deep – now we’re exploring and producing in water that is 8000 feet deep.”

Fresh focus Although Brand’s career has been mostly in the E&P arm of the business, his new job is still intertwined with his old one. “My previous roles in E&P and my current role as SVP of Technology really have similar issues; both areas are all about portfolio management, risk assessment and ﬁnding long-term solutions to address the future of energy supplies while, in today’s world, also reducing the environmental footprint of energy development and usage.”

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FACT FILE

Brand’s remit encompasses pretty much most areas of this major’s operations. His technology organization within ConocoPhillips covers E&P technology such as seismic and drilling, downstream coking technology, research into second generation renewable forms of energy, carbon capture technologies, transforming non-conventional fossil sources such as heavy oil into clean fuels and converting coal into clean-burning natural gas. It also works with other alternative forms of energy such as wind, solar, geothermal and lithium-ion batteries. It is little wonder then that Brand says the oil and gas industry “relies heavily on technology” in order to function in a highly-competitive environment. A major project in the pipeline is the state-of-the-art Global Technology Center that ConocoPhillips is planning to build in Louisville, Colorado. The 432-acre plot of land, halfway between Denver and Boulder, is being established to support the R&D growth areas, says Brand. It will become a leading facility in the research of innovative technologies, including biofuels, environmental technologies, non-conventional and other alternative technologies. The goal is to open the center by 2011, although 2012 looks more likely. Colorado appeals to the energy firm, being home to the US Department of Energy’s National Renewable Energy Laboratory as well some of the finest learning institutions investigating renewable energy. “Colorado is becoming a hub of alternative energy development, and we are planning to build our technology center in a location that will capitalize on our relationships with and proximity to excellent research universities, government laboratories and think tanks,” Brand explains. “The technology center will focus on a wide variety of energy research activities across the upstream, downstream and alternative energy spectrum.” Brand goes on to say that the facility will also become a dedicated training facility to offer employees worldwide technical training in core disciplines, as well as personal development and leadership skills. Currently, there isn’t a fit-for-purpose training center available within the corporation. In addition, as this facility is being designed and developed, there will be a number of additional factors taken into consideration. “Anything we build in this center will be green, state-of-the-art, and set in an open, natural environment that reflects the beauty of the surroundings,” Brand says.

has gained practical experience with some different technologies.” Both ConocoPhillips and LUKOIL have a management exchange program, with company officials making the trip from Houston to Moscow and vice versa. This has boosted knowledge and efficiencies. “Through this program we have come to better understand each other and have shared best practices and knowledge,” Brand enthuses. “We see significant value from the program today and see increased benefits from having worked together as we expand our co-operation into other opportunities.” But with a company as large as ConocoPhillips, identifying which technologies to pursue and develop can create some tough decisions. So how does Brand make these choices? “We consider how new technologies complement our current asset portfolio in determining where and how we make new investments. We also consider the future, long-term strategy of our company and how new technologies can support this strategy.” He also notes how problems [he prefers challenges] are thrown up everyday in this industry. “We face unique challenges in every region in which we operate, including the Lower-48 and Alaska, and the Russia and Caspian region is no exception. The biggest challenges facing us, and the industry, are access to material opportunities, increasing cost pressures and timely availability of goods and services for new developments.”

New frontiers

The outlook

Outside of the US, ConocoPhillips has a strong portfolio of investments that are delivering healthy returns thanks to the sharing of technology. An example would be the firm’s 20 percent share in Russian giant OAO LUKOIL. First-quarter results showed that profit soared to US$710 from US$256 million. It’s a deal that has flourished, says Brand. “We have found our co-operation with LUKOIL to be very productive in terms of knowledge and technology transfers. Our Naryanmarneftegaz joint venture is currently developing the YK Field with first production scheduled for summer 2008. This is a mainly LUKOIL-style development which ConocoPhillips has supplemented with our experience from Alaska and Canada. We have learned better how to implement projects in Russia while LUKOIL

In the meantime, the focus for the industry is on bringing oil and gas to market. However, increasing effort will go into exploiting new technologies in order to diversify US energy production. Increasingly, we are going to see investment in renewables like wind and solar, alternatives such as clean coal and nuclear, and biofuels. After all, oil and gas isn’t going to be around forever. But all of these alternative options come with unique issues: biofuels, for example, will only meet a tiny fraction of the soaring energy demand we are witnessing globally – largely generated by the rapidly developing economies like China, India, and parts of the Middle East. Also, fuel from food pushes up the price of many staple food types. Indeed, the food versus fuel debate looks set to run and run.

• ConocoPhillips is the third-largest integrated oil company in the United States • The fourth-largest reﬁner in the world • The sixth-largest worldwide reserves holder of non government-controlled companies • It currently has exploration efforts in 23 countries, producing 2.3 million barrels of oil equivalent (boe) a day (includes LUKOIL and Syncrude) • Has earmarked $12 billion for E&P in 2008

“We’ve increased our research and development activities in technologies that complement our existing businesses and provide strong growth opportunities in energy alternatives”

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Brand says ConocoPhillips believes that fossil fuels powering today’s economy are needed to serve as bridging fuels until the energy sources of tomorrow are developed in sufﬁcient scale. He adds: “Concurrently, we are working to bring non-conventional fossil fuels to market in cleaner forms while developing biofuels and other renewable energy sources. We are expanding our ethanol and biodiesel blending capabilities. We are also funding research into second generation renewables using non-food cellulosic materials that will not compete with the world’s food supply.” Last year, the oil giant announced that it plans to establish an eight-year, $22.5 million research program at Iowa State University dedicated to developing technologies that produce biorenewable fuels. It has also entered into agreements with Archer Daniels Midland Company to work together on the development of renewable transportation fuels from biomass. Another agreement has also been struck with Tyson Foods, Inc. to produce and market the next generation of renewable diesel fuel. ConocoPhillips says the alliance, which uses beef, pork and poultry by-product fat to create a transportation fuel, contributes to America’s energy security and helps to address climate change concerns. The energy major also produces renewable diesel fuel from vegetable oil in Ireland. Impressive stuff indeed. Although Brand has occupied this key post for little more than a year, it’s clear from speaking to him that he is relishing the challenge ahead. And his role is going to grow in stature and importance in the coming years with technology now engrained in the oil and gas industry’s psyche. So what’s next for ConocoPhillips? “Our investment in technology will be spread out among the topics I mentioned before, but we will also focus our efforts on innovative technologies that we believe will actually be successfully deployed in the future,” Brand responds. “We’ve increased our research and development activities in technologies that complement our existing businesses and provide strong growth opportunities in energy alternatives. The future will potentially see further expansion of technology innovation undertakings and investment.” 

Stephen Brand, who assumed his current role in October 2007, was previously, VP of Exploration and Development. Prior to that, he was President of Australasia following the ConocoPhillips merger in 2002. He had previously been general manager, Australia division. Brand graduated from the University of Minnesota in 1971 with a bachelor of science degree in geology. He received a master of science degree in geology in 1973 and a doctorate in 1976, both from Purdue University.

TECHNOLOGY AND INNOVATION INITIATIVES Fuels technology: ConocoPhillips is investigating greater use of ethanol in gasoline, removal of unwanted byproducts from fuel, identification of more effective refinery catalysts, potential molecular-level enhancements to fuel blends, and thermo-chemically converting cellulosic biomass – wood, corn stover and switch grass – into bio-oil. The company is also looking to use beef and pork by-product fat for a transportation fuel. Heavy oil: oil In partnership with EnCana, ConocoPhillips operates a heavy oil business. Its heavy oil capabilities are also aiding in evaluating the feasibility of producing shale oil in the US Rocky Mountains. A similar approach is being used to analyze the producibility of natural gas hydrates – methane trapped in ice in arctic regions and beneath seabeds. E-Gas: This technology offers the potential for coal industry customers to burn it more cleanly while generating purer streams of carbon dioxide that can be used in industrial processes or injected to recover more oil from aging reservoirs and potentially more methane from coal beads. Carbon sequestration: Research continues on capturing waste carbon dioxide and injecting it deep underground into depleted reservoirs, thus reducing atmospheric emissions. ConocoPhillips has developed technologies that reduce both energy use and emissions at the source. Water sustainability: In mid-2007, the company announced plans to establish a global water sustainability center that will examine ways of treating and using by-product water from oil production and refining operations. The center, jointly owned by GE and based in Qatar, will see $25 million of investment in the first five to seven years. Next generation biofuels: Last year, ConocoPhillips and Archer Daniels Midland Company announced an agreement to collaborate on the development of renewable transportation fuels from biomass. ConocoPhillips also announced a strategic alliance with Tyson Foods, Inc., to produce and market the next generation of renewable diesel fuel. This is in addition to a $22.5 million research program at Iowa State University into biorenewable fuels. Source: ConocoPhillips

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IT FOCUS

MISSION CRITICAL He controls a multibillion-euro IT budget and co-ordinates the activities of 96,000 employees worldwide. But for Patrick HĂŠreng, CIO of Total, the biggest challenge is yet to come as the oil giant prepares to upgrade its entire IT infrastructure. He meets Diana Milne to discuss the task ahead and the threats his organisation faces from cyber criminals.

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here is only one way for Patrick Héreng to convey the complexity of the operation he oversees, and that is through numbers. When I ask him at the start of our interview to give me some idea of the scale of Total’s IT systems, he sums it up with the following vital statistics: “The global IT budget first of all is around $1.5 billion. The number of internal IT staff is around 2200. We are managing 1500 physical sites and nearly 80,000 workstations. We probably use more than 2000 terabytes a minute.” These numbers should come as no surprise. After all, as CIO of Total, Héreng manages the IT operations of one of the world’s largest oil and gas companies with activities in over 130 countries and 96,000 employees worldwide. But they are, nonetheless, mind-blowing – and set to become more so since the launch of Perspective 2008, a colossal project that will see the company replace its entire IT infrastructure, upgrading all components from workstations to network security. The scale of Total’s IT operation is due not only to the size of the company and its workforce but to the complexity of its oil and gas exploration and refining activities, which rely heavily on technology for their success. To support these activities the company’s computing power expanded seventeen-fold in the past fi ve years – an increase which reflects the growing pressure on Total to source new oil supplies in a highly competitive global market. It uses highly complex technical computing methods such as digital oil field and geophysical analysis to source oil, and this year it become the global leader in scientific computing power after acquiring the high performance SGI Altix ICE+ computer from Silicon Graphics, which is capable of making 123 trillion calculations a second. “The most complex IT system is the technical computing that is used for exploration and production,” says Héreng. “An example of that is geophysical analysis such as reservoir modelling to find the oil and optimize the ways of producing it. Digital oil field is another complex IT system. We must find oil and to do that we are doubling our computing capability every year.” This system creates enormous amounts of data and Héreng says the company has reached around 1200 terabytes of storage capacity for technical computing alone. Equally complex are the company’s supply chain and logistics operations, which are supported with solutions from SAP and Microsoft. Describing the scale of the operation, Héreng says: “We have complex IT systems for supply chain, logistics and CRM as well as for petrochemical, refining and marketing activities. These systems are mainly based on global SAP. There are now 11 refineries in 10 countries and 10,000 service stations in Europe. That requires a complex information system, especially for the supply chain from the refinery to the service station. And we have millions of customers every day in the service stations so the CRM is complex there also,” he goes on to say. While Total’s operations require the support of cutting edge IT solutions, the delivery of that technology is often compromised by the remote and often hostile environmental conditions that it operates in. Total’s E&P activities span 40 countries, with production in 30 of those, including remote locations in Angola, the North Sea, Venezuela and the Democratic Republic of Congo.

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Total at a glance With operations in more than 130 countries, Total engages in all aspects of the petroleum industry, including upstream operations (oil and gas exploration, development and production, LNG) and downstream operation (refining, marketing and the trading and shipping of crude oil and petroleum products). Total also produces base chemicals (petrochemicals and fertilizers) and specialty chemicals for the industrial and consumer markets (rubber processing, adhesives, resins and electroplating). In addition, the company has interests in the coal mining and power generation sectors. Total is helping to secure the future of energy through its commitment to developing renewable energies, such as photovoltaic power, marine energy and second-generation biofuels.

Héreng describes how he is often required to deploy IT solutions in an environment where no infrastructure to support the technology exists, particularly on offshore oil platforms where establishing a telecommunications network poses a major challenge. “Usually we are located in the middle of nowhere and if we look at the infrastructure in those remote areas, there is nothing. Often there is no telecommunications so we have to create telecoms links using different solutions, mainly satellite equipment. Sometimes we deploy marine offshore optical ﬁbers. That is one of the problems – the limitations we face because of the platforms and because in a lot of the countries we can’t ﬁnd the level of service needed in telecoms – for instance in Africa and Asia – and that means we have to manage internally, locally, or we accept those limitations.” Given the scale of Total’s global activities, the company operates within a decentralized ‘federated’ structure which means operations are managed at business unit level. Total’s IT strategy and policies, however, are governed by a central IT department with separate IT departments within each business unit. The information systems of each business unit are supported by a common global architecture. This structure, says Héreng, creates its own challenges, particularly when it comes to decision-making.

TOTAL IN NUMBERS

th largest

publicly-traded integrated international

oil and gas

company in the world.

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“It’s not so easy to make decisions in this federated IT organization because the decisions must be accepted by every business unit. The current governance model is a mix between a decentralized organization which reinforces the alignment between IT and the business and the globalized architecture which optimises the cost of the information system.” The system will be put to the ultimate test during the upgrading of Total’s IT infrastructure for Perspective 2008, which aims to create uniform IT services across the organization. The project has been two years in the planning and so far the first phase – deploying telephony over IP for 2000 employees – has been completed. Héreng admits that the federated structure of the company’s IT operations created challenges during the planning stages of the project. “We have a federated organization but now we must align the IT processes of everyone in the group. This means, for instance, that if we want to deliver the same level of services to E&P and to our specialized chemical subsidiaries, we have to align the way we support users and the way we operate servers. That’s one of the main challenges and we face a lot of resistance to change inside the IT departments. Add to this the fact that we have to co-ordinate the deployment across 130 countries and it’s a very challenging project.” He hopes, however, that Perspective 2008 will help to address some of these challenges by providing uniform IT services across Total’s global business units. The project includes the upgrading of employees’ workstations to facilitate better collaboration across the different departments using Microsoft Vista technology. “The goal is to deliver for everywhere the same level of services. We will deploy collaborative workstations and we will deliver to the users the tools to improve collaboration such as instant messaging from computer to computer and integration between the workstation and voice communication. “We will provide unified communications such as a unified email system and Web 2.0 capability to provide social networking capabilities to improve collaboration inside the organization,” explains Héreng. But while facilitating better collaboration between Total’s employees will be a major benefit of Perspective 2008, it is not the project’s main aim. That, says Héreng, is to improve Total’s IT security.

96,400 employees Exploration and production operations in more than

40 countries

Operations in more than

130 countries

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Protecting Total’s networks is one of the most challenging parts of Héreng’s job – particularly given the huge amounts of highly sensitive data it processes daily and the increased security threats faced by oil companies from international cyber criminals. This, he says, clashes with the organization’s need to improve accessibility to its systems for remote Total employees and customers. “I have to face a paradox which is not simple to solve. We have to open the system but at the same time secure the system more. Because of the extended enterprise we have to link our information system to suppliers and customers for billing or procurement purposes. Our users also need to access the system from PDAs or non-Total workstations and they want to do that everywhere in the world, from Asia and Central Africa to the USA or France. At the same time, we have to secure the system. We are not as attacked as banks but there are risks. We have to protect our knowledge and our data and that’s the reason we increase continually the level of security in the information system. It’s the main reason we launched the Perspective 2008 programme – to be able to face the security threat in the future.” Perspective 2008 will see Total completely overhaul its security systems, extending its current perimeter limit security and integrating it throughout the system. “We will have embedded security inside the information system, inside the network, inside the LAN and inside the workstations and data centres,” says Héreng. “We will deploy a new ID management system which will allow us to have better management of the rights given to employees, contractors and partners accessing the information system. ”He goes on to say that under the new system data, will be classiﬁed according to the level of protection it requires rather than providing uniform security to all parts of the organization. A variety of security solutions will be provided by several vendors, which will be integrated by IBM. Héreng is remarkably calm about the mammoth task that lies ahead of him, claiming he relishes the challenge of managing IT within what is probably one of the world’s most complex operations. “I enjoy my job although it’s quite complex. One of the major advantages is to be working for a global company. That’s one of the pleasures I

Patrick Héreng, 51, was appointed CIO of Total in 2006. He is a graduate of the French Institut Superieur de l’Electronique du Nord (ISEN), joining the Group in 1998 as Chief Information Officer for the refining and marketing division. He began his career with a computer manufacturer and then with an information and telecommunication consulting company, later becoming the CIO of a large French financial institution.

have every day,” he says. I ask Héreng whether Total’s management places a high priority on IT. “No,” he replies. “The high priority for Total is to ﬁnd oil to renew the resource.” But with technology playing an increasingly crucial role in enabling oil companies to ﬁnd new oil sources and protect valuable data, Héreng’s role is pivotal to the success Total enjoys within a highly competitive global market. 

TOTAL IN NUMBERS

Approximately

2007 sales:

158.7 billion

540,000 French

individual shareholders

Producer of oil or gas in

30 countries

118

nd largest

capitalization on the Euronext Paris and the Euro zone:

136.1 billion at December 31, 2007

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ASK THE EXPERT

Global communications on the rise Magnus Wallmark, explains how connectivity and communications are changing as bandwidth improves. and more sensitive transponders, allowing for smaller IP-based terminals. The amount of data being transmitted globally over VSAT rises each year. New ways of utilizing the available bandwidth more efficiently are introduced continually through more efficient ways of compression and modulation like DVB-S2 and MPEG-4 as well as dynamic link optimization. Bandwidth is often shared for cost savings between larger groups of users by using TDMA for example, iDirect and mobility is often crucial.

Core applications

E-D IS

H IP

TS uitc ase

il and gas exploration teams are often deployed in remote and inhospitable locations. Weather conditions are often extreme, at sea, in cold environments and in deserts. Oil and gas fields are often in deep water and ultra deep water, as well as onshore in remote areas. Emergency response facilities are usually put in place for the safety of the crews. Reliability and availability of VSAT equipment under such circumstances is critical.

Global connectivity The number of satellites for Ku-band and C-band continues to increase each year. The number of VSAT terminals in use continues to grow, resulting in increased connectivity globally. New satellites are equipped with stronger

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The core application areas of VSAT terminals are communications, crew morale, remote collaboration and network efficiency. Communications are data transmission for example, voice, internet, fax and backhaul. Crew morale includes calling to families and friends, internet hot spots and IP TV.

“The number of satellites for Ku-band and C-band continues to increase each year. The number of VSAT terminals in use continues to grow, resulting in increased connectivity globally” Crew morale solutions are important for personnel retention in remote locations. Remote collaboration is used for video conferencing, remote video streaming and asset tracking. Network efficiency is achieved by different types of acceleration of traffic on the application level, as well as web content filtering and anti-virus programs.

Mobile VSAT solutions SWE-DISH offers mobile SATCOM solutions for the oil and gas industry for exploration in remote locations. Today, the company is a global leader in the production of highly portable and transportable satellite communications solutions. We pioneered the development of small IP-based satellite terminals such as suitcase systems, fly-away and drive-away (vehiclemounted) systems and other related solutions. SWE-DISH also offers mobile telecommunications solutions with satellite reach-back, working jointly with Ericsson for ultra portable cellular GSM and WCDMA networks. The networks can easily be deployed in remote areas to be used for emergency response and oil and gas exploration. SWE-DISH specializes in reliable, highly mobile satellite terminals and solutions with antenna sizes of 1.5 meters and below, with compact, easy-to-use and quick-to-air for live transmission of video, data, internet and voice content from any location in the world.

IPT Suitcase The SWE-DISH IPT Suitcase is the world’s most compact and quickest-to-air satellite terminal. The Suitcase, with its one-person operation and exceptional technical performance, allows live broadband transmission from virtually anywhere in the world. The Suitcase is used for everything from ordinary satellite news gathering (SNG) to IP-over-satellite. The SWE-DISH Suitcase is one of very few antenna systems of its size and type to have an Intelsat type approval. A type approval ensures that the equipment meets Intelsat operating performance requirements, and that all units of the model perform in a similar manner. n

Magnus Wallmark is the Director of Business Development at SWE-DISH Satellite Systems. Prior to this role at SWE-DISH, Wallmark worked as Director of National Security Networks at Ericsson Microwave Systems AB. Wallmark has prior experience from working in leading roles within project management, product management and business development at several Ericsson companies.

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Stretching your dollar Cynthia Ramdial explains how mesh networking could transform how information is being delivered. urrent economic, political and environmental factors are motivating North American governments and private industry to undergo a phase of restructuring. The challenges of constraints on time and budget weigh in heavily as they choose how to best utilize existing infrastructure while maintaining an acceptable level of service. It requires innovative thinking and extensive planning. The introduction of wireless mesh networks and broadband wireless technologies is revolutionizing how information is being delivered and saving money at the same time.

Mesh network Mesh networking is a particular way of routing between nodes; it allows for continuous connections and reconfiguration around broken or blocked paths by ‘hopping’ from

network can still operate even when a node or a connection goes down. As a result, an extremely reliable network is formed.

Potential benefits Wireless mesh networks and broadband wireless technologies have recently become attractive to both municipal governments and the private sector due to their cost effectiveness, ease of installation and rapid deployment. They allow the industry to do more with less by using their current static infrastructure and extending it to a flexible, connected environment. Advancements in wireless technology have established its reputation as an extremely secure, reliable and flexible form of communication. It is highly effective for rugged data transmission applications and has performed consistently without compromising

“With the use of high-speed broadband it is now possible to monitor even the most remote areas, 24/7” one node to another to create a fully connected network. Mesh networks differ from other networks in that the component parts can all connect to each other via multiple hops. One of the most important characteristics of these kinds of networks is the fact that mesh networks are self-healing: the

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throughput. Wireless broadband solutions are ideal for long distance bridging, high performance point-to-multipoint links and mesh networking. These systems can be used in an array of applications, such as video surveillance, controller interconnect, broadband internet access, voice-over-IP

(VoIP), public and municipal Wi-Fi access, or any wireless networks for video, voice and data. It is this inherent ability to remain stable in harsh conditions that has put radio, and, more specifically spread spectrum radios at the forefront of the wireless data communications.

Field-tested The challenges of communication that must be met within the oil and gas industry are both difficult and distinct. Wired solutions are often impractical due to the high cost of installation and difficulties with terrain. This is where wireless mesh technology rises to the challenge and delivers reliability, flexibility and cost effectiveness. With the use of high-speed broadband it is now possible to monitor even the most remote areas, 24/7. This technology can be employed to prevent or contain potentially catastrophic events, such as fires and oil spills. Wireless networks, also allow supervisors to communicate with workers in the field with ease. They can contact each other via VoIP without concerns of interference, interruptions or security.

Long-term gain Overall, in these times of economic uncertainty it is natural to progress towards solid and steadfast investments. In the end, it all comes down to results. Wireless broadband has proven itself as a reliable and efficient means of communication for projects of any scale. The bar has been raised; advancements in broadband mesh network technology, its cost effectiveness, ease of installation and rapid deployment support the growing momentum of this media in the oil and gas industry. n Cynthia Ramdial has recently joined the ENCOM team as the Marketing Co-ordinator.

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9/12/08 11:05:22

ith the vast majority of industry wells lacking a continuous, reliable measure of well/reservoir performance, a key issue in upstream E&P operations is how to manage wells and reservoirs more effectively. Yet, if we cannot measure continuously, how can we manage better? How do we monitor well and reservoir performance? How do we perform hydrocarbon accounting? How do we report production for our wells? The industry has traditionally used discontinuous well testing to determine well performance, as wells are tested once per month and it is assumed that for the other 29 days the wells produce the same. Mother Nature, however, is usually not that predictable. Also, the quality and accuracy of well tests are often unsatisfactory, so some tests are rejected and have to be repeated. At the heart of this conundrum is multi-phase flow. Almost no wells deliver a clean, measurable, single-phase stream, and it is impractical to install multi-phase flow meters or test separators on all wells. Shell’s FieldWare Production Universe (PU) is a software application that continuously estimates oil, gas and water flows for all of an

operation’s wells, all of the time. PU enables improved well surveillance, more accurate hydrocarbon accounting, automatic production reporting and production optimization. It safeguards the technical integrity of wells and reservoirs (for example, it provides early detection and control of gas or water breakout). And it is cost-effective in that it requires minimal commodity instrumentation and IT systems, much of which may already be present in field operations. In some respects, the technology provides such a step change that successful PU deployment often requires changing the way one operates and motivating the people involved.

How does it work? PU uses dynamic data-driven models of the production system. The well models estimate water, oil and gas production flows in realtime, primarily from existing well instrumentation. Effects such as backing-out of weaker producers at headers are captured in these models. Physical models are not used – no well tubing diameters, no roughness, no fluid properties, no near well bore ‘skins’, and no pre-assumed multiphase flow correlations. Real-time well measure-

Producing smart fields, now Continuously knowing what a company’s wells and reservoirs are producing facilitates improved asset management and integrity, argues Shell’s Ron Cramer.

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ments are related to volumetric flows from test separators. The data-driven approach has been proven to be robust, usable and sustainable in the oil and gas production environment. A key aspect is the Deliberately Disturbed Well Test (DDWT), which is used to characterize well performance. These tests go beyond traditional production well testing. The objective is to relate well production (oil, gas, water) to simultaneously measured well parameters, such as flowing tubing head pressure, gas-lift rate, etc. The emphasis is on capturing the response of the well to step changes in controllable parameters. Once created, the individual well models are used to compute the well production per stream. PU accumulates daily flow per well, which reflects the actual producing conditions, including trips and restarts and plant operating mode changes. A simplified abstract topography is constructed relating wells to a calibration point. Typically, the calibration point is a bulk separator continuously providing oil, water and gas measurements from wells in a given production system. PU production data per well are compared and reconciled automatically against the installation’s overall export meter. This provides a reconciliation factor for each produced/injected stream on a continuous basis for the current day and the last 24 hours. Also in this graphical user interface is a diagnostics panel that alerts the user to production systems events. Event detection can be single point measurements or a complex logical mask to detect a specific event (for instance, contamination of the water disposal stream with oil). There is also an information panel, which alerts defective instruments and communications infrastructure.

“The technology provides such a step change that successful PU deployment often requires changing the way one operates and motivating the people involved” With this single screen, an asset manager can gauge the current health of the production systems. If all the reconciliation factors are within acceptable bounds, then the production system is under control. If this is not the case, it is possible to drill down to process, header and well-level. The output from the measurements on the bulk separator provide a 24/7 data stream at one-minute or more frequent intervals. PU uses the dynamic variation seen at the calibration point to further tune its well models. Plant trips and restarts are very visible and generate a lot of useful data, especially when the field is brought back online. The dynamic well models are updated every 24 hours to reflect the total information available in the preceding period, allowing tracking of decline in well rate and increase in gas oil ratio (GOR) and water cut. PU thrives on dynamics (for example, well bean up/bean down) to continuously update individual well models. Normal E&P operations provide a dynamic environment with well interventions, process trips, etc. If assets exhibit stable production with minimal dynamics, then

SHELL EXPERIENCES WITH PU Formal PU post implementation reviews (PIR) have been conducted in three Shell OUs. Operating Unit 1 PU was initially installed in June 2002. The objectives of the implementation were to test the technology in an operational environment and to document business benefits. The field consists of 15 wells producing from three reservoirs. The three reservoirs consist of a mixture of free ﬂowing, gas lifted and dual completion wells. The field is well operated, instrumented and maintained with more than 99 percent availability. Production data stem from the local DCS system. Field operational strategy is to maximize oil production within the constraints of the gas export to the local domestic gas company, which is achieved by operating wells with low gas oil ratio (GOR). A key requirement to achieve this strategy is knowing the relative composition of well outputs. Before PU implementation, wells were tested monthly and the test results used for the following month’s optimization, along with other calculations, such as deferment values. Well GOR changes frequently and PU quantifies these changes as they happen, facilitating continuous optimization, whereas prior to PU implementation they were operating ‘blind’. Continued on page 126

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Following PU implementation, the annual decline in production rate has decreased from approximately 20 percent to seven percent, and large monthly swings in oil production have been reduced, increasing the confidence with which production forecasts can be made. Total deferment has also been reduced by 2.2 percent. Production has increased by approximately 30 percent when compared to forecasts made before the introduction of PU. Other benefits include:

Ron Cramer dynamics can be introduced. Wells can be beaned up/down for short periods to cause transients to ripple through the process. Single or multiple disturbances can be introduced simultaneously. These pseudo-tests are known as Deliberately Disturbed Production Tests (DDPTs). If these tests are insufficient to re-align the models, then PU initiates a full DDWT. PU is currently running on more than 1500 wells in 14 Shell operating units (OU) and affiliates, covering about 35 percent of Shell’s global production.

What’s coming down the PU pipe? Real-time estimates of oil, gas and water flows for all wells is valuable for surveillance purposes. A logical next step is to use that information for real-time optimization of reservoir, wells and the production process. PU-based real-time optimization has been piloted for gaslift optimization and is being developed for beam pumps. For example, PU Real-Time Optimization (PU RTO) is currently operational on an offshore gas lifted platform. It incorporates the basic PU functionality extended to include an optimization algorithm for adjusting lift gas injected to each well for maximum production using minimal lift gas. PU RTO continuously computes optimal set points based on an inbuilt model and estimates of the amount of oil, gas and water that each well is producing; set points are automatically transmitted to the well gas-lift injection valves via the platform control system. The system controls eight wells to optimize the overall gross production.

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• Reduced well testing. The test separator was unusable for 15 months, and PU was the only method available for well surveillance. • A marked increase in the stability of monthly oil production – 50 percent reduction in monthly standard deviation of values. • Despite a 15 percent reduction in gas exports, oil production has met or exceeded targets since introduction of PU. • More accurate testing of dual completed gas lifted wells. • Instantaneous detection of process events. PU surveillance has enabled a number of events, such as water leaking into an export stream, to be quickly detected and remedial action taken. • Operation with 50 percent reduction in staff levels. PU enabled the production programmer to continue production system optimization with increased overall workload from other fields whilst reducing staff levels.

Continued on page 128

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The PU optimization was installed some two years after the basic surveillance module, which had already demonstrated significant surveillance/optimization gains (production gain of 370m3/day, increased well potential of 600-900m3/d and 20 percent reduction in utilization of platform lift gas). The subsequent PU RTO deployment has stabilized gas lifted production for this field. Individual wells have been optimized effectively and PU RTO has demonstrated its ability to rapidly detect dead wells subsequent to a well or platform trip (re-instating 670m3/d potential). It also has been demonstrated that sub-optimal lift settings can decrease gross production by more than 10 percent. The new system allowed header interaction effects on well production to be quantified. After experiments were completed, a new production line was installed in June 2004. Installation of this line provided a gain of 11 percent in platform gross production, and also generated a number of non-quantifiable benefits. For instance, changes in well performance are noticed quickly and countermeasures initiated. PU automatically notifies staff of well performance and of significant changes via email. In addition, since PU installation the performance of wells and instrumentation is highly transparent and the level of at-

“Shell’s challenge now is to scale up these benefits to full global brown-field and green-field operations and to transform the traditional manual operations culture into a new ‘Smart Fields’ way of working” tention given to the facility has much increased. Unscheduled deferment due to process problems is now significantly lower as compared to other similar platforms in the operating unit. As a result, PU is now being rolled-out across all Shell upstream assets. Each candidate field is assessed carefully in a readiness check to identify what repairs are required to existing instrumentation and, if required, where additional instruments need to be added before installation will start.

Operating Unit 2 PU was implemented in February 2005. PIR findings indicate a three-five percent production gain due to real-time production surveillance due to faster well-fault identification/correction. Other benefits include:

• Opex beneﬁt of $750,000 per year (one boat and two less positions). • FieldWare PU has reduced the need for intrafield travel and thus reduced HSE exposure. • Minimizing of hidden deferment – more accurate deferment reporting. In the first two months of 2005, a total of 14,000 bbl were reallocated (0.5 percent). • Reduction of well-test frequency due to PU calibration/maintenance to a level whereby decline behavior can be modeled within PU. • Improved surface process surveillance – PU ﬂagged unstable station operation due to process control instability.

The PIR team concluded that a sustainable installation of FieldWare PU has been achieved in the Operating Unit and recommended implementation of the PU Real-Time Optimization Module.

Operating Unit 3 The PIR covered readiness check, implementation and initial operation of PU on a field producing 7000 boe/ day with 10 electrical submersible pumps. Following readiness checks, the PU implementation project started in January 2005. The following was concluded:

Conclusions PU is well established in multiple Shell OUs, sufficient to establish significant benefits for more than 30 projects completed to-date: a fi ve-20 percent increase in production due to improved surveillance and optimization; up to fi ve percent reduced operating costs due to optimization (for example, reduced gas-lift gas and logistics savings due to reduced travel to the wells); and safer operations due to reduced operator exposure to hazard. Shell’s challenge now is to scale up these benefits to full global brown-field and green-field operations and to transform the traditional manual operations culture into a new ‘Smart Fields’ way of working based on remote surveillance and control. Good progress is being made along this road, with some 60 projects in global assets planned over the next two years. 

• The daily deferment volumes automatically calculated by PU are more accurate – 30 percent differences in deferment reporting were noted. • PU can help unlock hidden deferment using accurate real-time rates for well oil, gas and water flows. • PU has flagged multi-phase flow-meter calibration problems. • PU is effective for real-time monitoring, as it provides timely information to those who need to know. • Above benefits have led to a decision to roll out FieldWare PU to all Shell assets over the next three years.

Ron Cramer works in the area of oil field automation and production systems and is a Senior Advisor for Advanced Production Management with Shell Global Solutions in Houston. He has 30 years’ experience with Shell International E&P in upstream oil field operations and production systems.

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ASK THE EXPERT

Expanding the limits of wireless field automation Paul Gregory, Chairman and CFO of OleumTech Corporation, reveals how wireless field automation can improve efficiency and safety on location.

mprovements in wireless products are quickly changing the and communications without an external power source, thus elimidesign of automation at oil and gas production locations. nating the need for cable or solar panels to recharge batteries. At Free from the distance limitations of cable and with increaseach of the five well locations, a Base Unit is utilized to manage ingly sophisticated processing and control capabilities, local plunger lift control. These units provide valve control at each recent installations demonstrate the long distance capability location and monitor chemical injection. and complexity of wireless automation. The system functions in the following manner. At the tanks, OleumTech Corporation, based in Irvine, California, one of the the LevelMate Monitors ‘wake up’ every 15 minutes and power up early entrants into wireless automation, has accomplished this imthe probe for the interval required to obtain a stabilized reading. proved capability through its new WIO line of products. Since the This method of operation conserves power and allows a typical company’s inception in 2002, the industry and OleumTech’s prodbattery life of three to five years. Data is then communicated via uct line has steadily progressed from simple single well location radio to the Base Unit and is available to the control unit and monitoring to more complex monitoring and control applications to SCADA System. Should a high tank level or other alarm occur, today’s long distance, multi-well control applications. An example of the capabilities of current wireless technology is demonstrated in a recent Barnett Shale application located near Fort Worth, Texas. “With increasingly sophisticated The subject location included a central processing and control location with five-meter runs for gas flow capabilities, recent installations measurement and an associated RTU for demonstrate the long distance flow calculations. The RTU serves as the capability and complexity of master or control device for the application. OleumTech’s WIO Base Unit is integrated wireless automation” with the RTU via serial communication at the central location and manages the wireless end devices and control operations. the well can be shut down via the Base Unit thus preventing a Located 500 feet from the RTU is a central tank battery that spill. Each well is equipped with a Base Unit to manage plunger serves five wells in proximity to the central location. Well #5 is lolift control. The WIO Base Unit utilizes external power provided cated a quarter of a mile, well #2 and well #4 are located half a mile, at the location due to the frequency that pressure data is read well #3 five miles and well #1 10 miles from the Base Unit. and transmitted. Functions performed at the well include reading Wireless devices utilized in the installation include the aforepressure data every second, performing valve control in accormentioned WIO Base Unit, which manages the wireless devices and dance with the plunger lift optimization program, detecting the provides a link to the RTU and the host SCADA system via RS232. plunger lift arrival sensor and monitoring the chemical injection The Base Unit also accepts commands from the RTU utilized in the tank located at the well. plunger lift optimization of each well. Each of the 10 tanks is moniThis installation provides a great example of the increasing catored by float type digital tank measurement device. Power and pabilities and complexity of wireless field monitoring and control. communications to each tank measurement device is provided by Such installations maximize utilization of high-powered flow coman OleumTech WIO LevelMate Monitor. The LevelMate Monitor is a puters and RTUs while increasing operating efficiency and safety CSA and FM approved, self-contained product that provides power at the locations. 

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CRUDE AWAKENING

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After decades of sanctions, sabotage and chronic mismanagement, Iraq – with perhaps the largest unexploited oil reserves in the world beneath its desert sands – could finally be waking from its slumber, as investment and technical expertise comes flooding in from the international energy giants. Could this be the dawn of a new era of production? Julian Rogers investigates.

t’s been 36 years since their unceremonious expulsion, but finally, international oil companies are back in Iraq. Through three wars, more than a decade of isolation and a fi ve-year, US-led invasion, the IOCs have had their noses pressed against the glass looking in like a bunch of kids salivating over a shop full of sugary sweets. They could look but they couldn’t touch – until now. The security situation, although still a major worry, has improved in recent months and there seems to be no shortage of companies looking for a piece of the action. With rock-bottom extraction costs

and billions of barrels of proven reserves beneath Iraq’s dusty surface, you can just imagine the dollar signs flashing before the eyes of Big Oil bosses. Even the official 115 billion barrel figure looks wildly short of Iraq’s true potential; it hasn’t been updated since 2001, and is largely based on 2D seismic surveys from almost three decades ago. And with huge chunks of the country still unexplored, opinions remain divided on how many barrels of proven black gold exist. Indeed, vast swathes of the western desert region have never even seen a drill bit. To add to the conjecture, Iraq’s deputy prime minister, Barham Salih, was quoted in April as claiming that reserves could be

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as high as 350 billion barrels, tripling previous estimates and putting the country way ahead of Saudi Arabia. Salih said the optimistic forecast came from ‘reputable sources’ after seismic surveying and exploration drilling. Unsurprisingly, Dr Hussain al-Shahristani, Iraq’s oil minister, has since tried to distance himself from these remarks. It was the same during O&G’s recent unscheduled meeting with the softyspoken al-Shahristani inside Baghdad’s imposing Ministry of Oil building. “The statement is not accurate,” he responds firmly in perfect English but with a hint of frustration in his voice. You get the impression that he has been fi elded this question more than once in the past few months. “It is not industry practice to add probable to proven reserves, which is perhaps the source for the figure you mention.” However, the 68-year-old former nuclear scientist does concede that through recent studies and the application of new technologies, many of the discovered producing and non-producing fi elds had seen reserves “upgraded measurably.” He adds: “We are conducting an integration study to come up with the new proven reserves figure within the next few months consistent with this exercise of re-evaluation.”

Output projections Iraq’s oil industry, which has been nationalized since 1972, currently pumps 2.5 million barrels of oil a day (bpd) – two million of which are exported. This is the highest level since the Saddam-era prior to March 2003. Nevertheless, the immediate goal is to raise this to 2.8 million barrels by the end of the year, al-Shahristani explains confidently. “Our plan to increase levels is going to include tying new wells to production facilities and optimizing completions of others, as well as bringing some incremental initial production from some discovered but not yet fully producing fields. However, the main thrust would be to arrest the decline and get the increments from our producing giant and super giant fields in the south and north.” He states that any surplus production will be sent for export.

The oil minister holds the key to energy supplies as booming economies like China and India increasingly look to foreign producers.

CRITICS TELL BIG OIL TO STAY AWAY Unsurprisingly, there are those vehemently against the oil giants plundering Iraq’s resources, accusing the IOCs as being nothing more than a pack of vultures circling a stricken animal. The American majors being involved in the no-bid TSCs has only added fuel to fire with anti-war critics arguing that oil was the main reason the US invaded Iraq. Last year, Alan Greenspan, the former chairman of the Federal Reserve, said the war was ‘largely about oil.’ Back in 2003, Defence Secretary Donald Rumsfeld

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famously dismissed similar accusations as ‘utter nonsense’ but this did little to dispel concerns. Oil workers’ unions and nationalist parliamentarians feel that Iraq should pay for the re-development of the industry, not the IOCs through PSAs. They want the foreigners to be employed as contractors and paid a fee for their services and expertise. Hassan Juma’a, President of the Iraqi Federation of Oil Unions, has stated that if contracts last 30 or 40 years IOCs could make more money than the government.

Al-Shahristani rebuffs these fears and says the deals will be on terms beneficial to Iraq. For ordinary Iraqis the main priority is getting essential services back up and running, not lining the pockets of the energy giants. You only have to look around Baghdad on any given day to see queues of vehicles snaking around the streets from the gas stations. For all its tremendous oil wealth, the country still can’t supply enough to its people. With this situation it is little wonder that hostility exists over the involvement of the IOCs.

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But output won’t plateau out at 2.8 million bpd; the Ministry of Oil plans to ramp up production to 4.5 million bpd by 2013. In 10 years time, levels could top six million bpd. “In the short-term up to 2010, we envisage taking production to 3-3.5 million bpd through national effort and technical service contracts (TSCs) with the IOCs,” states al-Shahristani. “Some 500,000 barrels will come from this source.” The oil minister is all too aware that a crippled country like Iraq cannot achieve these targets without the technical expertise and knowledge of the IOCs. One energy expert described Iraq to O&G as being “light years behind on a technological level.” The country also has to fill the gap in the ‘brain drain’ as blue and white-collar oil workers have either fled abroad or been killed since 2003. On top of this, many oil facilities are either dilapidated, looted or war-damaged; a great deal of what is operational dates back to the sixties and seventies. “It seems that Iraq has hit a ceiling as to what it can do with the in-house resources,” says Samuel Ciszuk, Chief Middle East Analyst for Global Insights. “It needs help from technicians and foreign companies, as an inflow of foreign cash.” Although the IOCs are clambering to get in, they are naturally panicky about committing investment and manpower to a country that still doesn’t have a concrete hydrocarbon law in place that will

“We have inherited a situation that was subject to 10 years of international embargo and gross internal mismanagement, not to mention several wars” – Dr Hussain al-Shahristani govern the industry. The draft law was agreed by the cabinet in February last year but parliament has failed to rubber stamp the legislation because the government and Kurdish Regional Government (KRG) in the semi-autonomous north have been at loggerheads over who will control reserves and contracts. Even after two-and-a-half years of political squabbling, there is still no date as to when this piece of landmark legislation will finally be ratified. “The oil minister has been promising that it will happen before the end of the month for about 18 months,” argues Ciszuk. “Without it, getting anything underway will be very hard.” Iraq’s old oil law still bans private participation in the country’s oil business. The new one would authorize production-sharing agreements (PSAs) that would guarantee a profit for the IOCs. It would also allow provinces freedom from central government to award contracts. Since 2004, around 40 foreign firms have been assisting the Ministry of Oil free-of-charge through memorandums of understanding. So how much longer do we have to wait for the new law? Al-Shahristani smiles before divulging his carefully composed response. “We have always advocated the importance and necessity to enact the new oil and gas law as quickly as possible because we are confident that it would properly organize and facilitate the work in the oil sector. However, the delay in promulgation is a political matter to be finally resolved by parliament and the composing political spectrum. If this

delay were to last longer, things could still be processed under the prevailing oil and gas law in the short-term.” So is there a date? The question falls on deaf ears. The lack of a new law hasn’t stopped around 20 foreign energy firms from Canada, Norway, US, Turkey and a handful from Asia from setting up operations in the northern Kurdish region, thought to hold as much as 40 percent of the country’s reserves. In fact, Iraqi Kurdistan could have more hydrocarbons than Nigeria. The Kurdish Regional Government in Irbil say the PSAs the companies have signed are legal but the Iraqi government states that the contracts are invalid and the IOCs should leave. Those companies that have shied away from entering have done so out of fear that Baghdad could later annul contracts. The Kurds have accused the Iraqi government of “former regime tactics” but an unrepentant al-Shahristani says the oil is the property of the Iraqi people and should be left alone. There have also been threats to blacklist any companies agreeing to oil concessions with the Kurds.

Bringing in the money In an attempt to kick start the process of reintroducing muchneeded overseas expertise to the ailing sector, October saw the Iraqi Oil Ministry open the first round of oil and gas licensing since the 2003 invasion. At the Sheraton Park Lane hotel in London, al-Shahristani met executives from 35 pre-approved foreign companies, including Chevron, ExxonMobil, Shell, BP and Total, to discuss deals to develop

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the country’s six largest oil fields – Kirkuk, Bai Hassan, West Qurna, Zubair, the Maysan fields (Bazargan, Abu Gharab and Fakka) and South Rumaila. Two gas fields – Akkas and Mansuriyah – are also included. Under the terms of the proposed 20-year contracts, state-owned companies will have a 51 percent stake in the entities operating the fields and foreign companies would hold 49 percent. In return for committing to spend money on rehabilitating infrastructure, drilling wells and reassessing recoverable reserves in each field – something that is long overdue – foreign firms would recover their costs and earn additional revenue from any oil produced above current output levels at the fields – and could choose whether to be paid in oil or cash. Oil companies have traditionally steered clear of such service contracts, preferring deals that give them equity in the oil in the ground as this allows them to book reserves. But the majors have been squeezed out of so many oil-producing regions – such as Venezuela, Russia and the Middle East – that they can’t afford to turn up their noses at the conditions alShahristani is offering; the overseas firms need Iraq’s oil.

Did you know? The world’s oil majors first started drilling in Iraq back in 1925 when they held a stake in Iraq Petroleum Company, which had a stranglehold on the country’s reserves until 1961. In 1972 Saddam Hussein oversaw the seizure of international interests and the foreign players were thrown out.

Together, the trio have 120 years’ experience in the energy industry of Iraq and the Middle East. During a recent meeting with O&G over lunch in London, Shafiq expressed his disappointment at the current situation. “It is a stalemate,” he claims. “Without improvement, there is little hope of a solution in the future.” Shafiq, who is a former executive director of the Iraqi National Oil Company, says his first draft put an emphasis on revitalizing the ageing and damaged infrastructure in order to boost production levels, not new E&P efforts. “The proven reserves can raise today’s production of 2.5 million bpd to 10 million bpd and maintain it for decades at high levels without the need for one barrel of new oil. Investment and discovery by the regions or provinces, besides being unjustified investment, would lead to unhealthy consequences among the haves and have nots and on account of lack of infrastructures.”

“Iraq has a huge potential but it cannot be seen as anything but the region’s wildcard right now” – Samuel Ciszuk

The security situation Likewise, Iraq needs the overseas firms. “We see their [the IOCs] complementary role as important for the future,” al-Shahristani explains in between a quick sip of still water. “The participation of the international oil industry will complement our national effort to reaching our new production objectives through providing new investment and new technology. Starting in 2010, we foresee the implementation of Investment Service Contracts through licensing rounds with the IOCs to redevelop, improve and enhance oil recovery mainly from the same giant and super giant fields (those fields with over fi ve billion barrels of reserves), and perhaps the development of a limited number of discovered but not yet developed fields.” Those companies in the running for contracts will be mindful of the fact that Russian oil giant LUKOIL signed a deal with Saddam Hussein back in the nineties that went sour. The contract, to develop the super giant field West Qurna, was subsequently cancelled and left in legal limbo before finally being torn up last year. Cuszak says the IOCs will need confidence in the contracts that they sign – not easy, given the continued procrastination over the passing of the hydrocarbon law, which still has the potential to derail any existing agreements if ratified. “There needs to be some kind of political stability so that companies can trust that the law that is there will remain for the foreseeable future. If it remains a politicized environment like Iran, where parliament can go in and pick a single contract to pieces, then it will be extremely difficult.” Petroleum consultant Tariq Shafiq was co-author of the draft petroleum law two years ago along with two other ‘technocrats’.

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As well as the wrangling over the legislative framework, the government is all too aware of the need to continue to focus on security in order to protect oil workers, plants and pipelines. For the past fi ve years, Iraq has been synonymous with sectarian violence and killings and although the situation is improving, it’s still an extremely dangerous place to do business. The government has been protecting oil workers and energy facilities with gun-toting guards and lofty walls, while the coalition forces have played their part too. It is expected

$70 billion 90%

predicted Iraq oil revenue for 2008

of the Iraqi government’s budget comes from oil

80%

of production comes from fields in the Kurdish north and Shia south

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that those after contracts will be required to have a manned office in the Iraqi capital during the bidding process and negotiations, which will present a scary prospect for some. Iraqi oil officials say the security situation is being kept under control. “With improved security conditions in Iraq, the Ministry of Oil has already been able to protect installations and pipelines, which has allowed increased production and export,” al-Shahristani asserts. “Therefore, the IOCs can evaluate the matter more objectively now and start getting involved, on the ground, with us. We are co-operating extensively with the army and police forces to provide the secure conditions needed for their work in the field under acceptable conditions.” The minister also reports that none of the bidding foreign firms see the security or the stalled oil law as serious deterrent to going into Iraq. Another major headache that the authorities have to address is smuggling, with a conservative estimate of 105,000 barrels worth of oil stolen from pipelines every day and sold on the black market. Politicians may not be able to agree on the petroleum law, but they have given the green light to an oil anti-smuggling bill. The crackdown will mean those caught facing punishments ranging from fines to imprisonment. So is security and smuggling the key issues that the Ministy of Oil faces today? Al-Shahristani leans forward in his chair to emphasize his point. “The main challenges for the Ministry of Oil now are the security threats, which have been reduced measurably in recent weeks, as well as the need to optimize reservoir management, surface installations and de-bottlenecking.” The oil chief is also quick to point out that repairing an industry brought to its knees by the old regime will take time. “We have inherited a situation that was subject to 10 years of international embargo and gross internal mismanagement, not to mention several wars that affected the oil centers directly. Since April 2003, we have relied almost entirely on our own efforts to bring back production now to 2.5 million bpd and exports to two million.” The Iraqi cabinet has given the green light to a fourth state-run oil business 200 miles south east of Baghdad in the province of Maysan. The new company will be created by reorganizing the Maysan Oil and Gas Commission after splitting it from the Basra-based Southern Oil Company. Al-Shahristani has also pledged that each Iraqi province producing at least 100,000 bpd would get its own state-run oil com-

pany to focus on developing oilfields there. Increased capacity and rebuilt infrastructure cannot come soon enough for the minister. “We recognize the need to reconstruct and renovate all aspects of our industry to ramp up production and rehabilitate and renew plants, installations and management practice, as well as make a quantum leap forward in the training and development of Iraqi oil personnel. These we are hoping to achieve in co-operation with the international oil industry in a measured and balanced manner to avoid implosion and chaotic expansion.”

Bright outlook Once the foreign firms finally arrive, full-scale production won’t begin overnight as extensive seismic surveying and analysis will have to take place. For instance, even though the country has 80 discovered oilfields, there are around 400 structural anomalies waiting to be explored. As for natural gas, no one seems to have a clue how much exists, although conservative estimates put the total at 112 trillion cubic feet of reserves (cue those dollar signs in the eyes again). Industry experts are predicting that if the country fulfils its true potential, earnings could swell to somewhere between $200 and $300 billion a year. When you consider that hydrocarbon revenues account for 90 percent of the government’s budget, it is easy to see why the hopes for regeneration are being pinned on black gold. For consumers, increasing Iraq’s oil would ease global supply fears and would probably bring crude prices down. For the time being, the country is an uncut diamond – enormous potential but much work needs lies ahead. “Iraq has a huge potential but it cannot be seen as anything but the region’s wildcard right now,” suggests Cuszak. “When looking at future production there are so many question marks over

“The Iraqi nation’s deep routed culture remains the only safeguard for the country’s return to normality” – Tariq Shafiq the political situation and the levels of violence. Iraq should be able to double its production in the long run if everything goes well.” He continues: “The country could overtake Iran as the world’s second largest producer but it will take a time because of the sheer size of the projects and the time it will take for the country to heal properly.” That healing process is slowly underway – which cannot come soon enough for Iraq’s citizens. “The Iraqi nation’s deep-routed culture remains the only safeguard for the country’s return to normality,” Shafiq concludes. n

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Ask the expert

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The next generation Frank Lloyd explains how a relationship with a business school can help the oil and gas industry develop the next generation of leaders.

n today’s volatile and challenging business environment, oil and gas companies need leaders at every level who can see what lies ahead, understand the issues facing their organizations, and initiate actions to meet the challenges. This is a change from the past when it was enough to train technical professionals to produce shareholder value as well as oil and gas. But the leadership game has changed. Listen to what a CEO of a gas transmission company says she now needs in her leaders. “We believe that our 21st century leaders must reflect strong ethics and values, emotional intelligence and a cohort approach. Good leaders need to be able to embrace change, overcome failures and foster a culture that demonstrates they are vigilant in sustaining growth, learning and embrace the right course of action.” Why is leadership development now a CEO’s game, and why are they looking for a new kind of leader? One reason is the complexity and volatility of the global marketplace. These forces drive an expanded definition of leadership throughout an organization. The world is too complex and fast changing to accept anything less than the ability to make money, grow strategically and mobilize and motivate a workforce at all levels. The second reason is demographics. Remember Y2K? Companies in the oil and gas industry face a demographic crisis of even greater proportions: the potential retirement of up to 80 percent of skilled oil and gas professionals in the next five to 10 years. Call it ‘Gray 2K.’

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Through relationships with top business schools, energy firms can develop high-level leaders to meet the challenge of the changing leadership game. For example, a mid-sized exploration and production firm that had grown through acquisition and merger needed to integrate a management group that was widely dispersed throughout the AmeriWhy can oil and gas CEO’s and their senior HR teams turn to business schools to help them address critical strategic problems in leadership development? Oil and gas firms, like any company, should expect four things from a top business school: • Broad research-based content that is true and tested • A purpose built learning environment that removes managers from the pressures of day-to-day operations to think and behave differently • Professional educators who build capability, not dependence • Access to a full university where the right experts are available regardless of discipline cas. They worked with a business school to give the group a common business language and leadership tools through a set of programs tied to their succession plan. They provided internal learning opportunities for mid-level managers through custom programs and externally

focused learning for high-level executives through participation in an open enrollment program. Over time, the school and the company worked together to adapt program content to changing organizational needs. And oil and gas firms should expect a fifth thing from a business school: an understanding of the industry that assures relevance. Firms should not expect business schools to teach experienced managers the oil and gas business – they know it better than most academics. Rather, business school instruction should enable experienced oil and gas managers to apply cutting edge business thinking to their industry. It all adds up to a true educational experience: one that is not solely about business results but that challenges assumptions, connects with fundamentals and fosters openness to change. Companies can expect this from today’s leading business schools because the best ones use relationship-based and learner driven delivery models that blur the line between formal training and real life. They utilize tailored and flexible teaching methods to promote application of learning. And they bring a sophisticated ability to assess the return on investments of time and money in leadership development. As a result, oil and gas firms can expect the best business schools to provide them with an industry-oriented resource to develop tomorrow’s leaders today. n Frank R. Lloyd is Associate Dean of Executive Education for the Cox School of Business at Southern Methodist University.

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IN REVIEW

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Hot off the press Leadership can make or break a business, particularly in a tough climate. O&G reviews the best of this quarter’s management books.

Chasing the Rabbit

How Market Leaders Outdistance The Competition and How Great Companies Catch Up and Win, by Steven J. Spear In this insightful book, Spear examines the internal operations of dominant organizations, including Toyota, Alcoa and top-tier teaching hospitals. These are organizations that are operating in vastly differing industries, but with one thing in common: the skillful management of complex internal systems that generate constant self-improvement at faster rates, longer durations and wider breadths than anyone else. O&G says: Chasing the Rabbit contains ideas that form the basis for continuous learning and improvement in every aspect of our lives. It is an important book that will challenge and inspire executives in all industries and help leaders generate better results using less capital, leaving competition in the dust.

The Secrets of CEOs

150 Global Chief Executives Lift the Lid on Business, Life and Leadership, by Steve Tappin and Andrew Cave In this fascinating, authoritative book, 150 of the world’s top chief executives share their advice for getting to the top, and, once there, how to be a successful leader and still have a happy life. The book reveals frank discussions with some of the West’s most inﬂuential CEOs and incorporates radical and thought-provoking comments from the heads of new corporate champions of India, leading companies in China and US corporate giants. O&G says: The Secrets of CEOs contains a wealth of strategies that individuals and organizations alike can use to encourage a new standard of leadership. It could well be an essential guidebook for those wanting to know what its really like to be a CEO – and the health warning that should come with the job.

Total Leadership

Be a Better Leader, Have a Richer Life, by Stewart Friedman The more you strive to win at work, the more you have to sacrifice performance and satisfaction in the other dimensions. Not according to Wharton professor Stewart Friedman. His Total Leadership program has shown that success at work is actually enhanced if you embrace a fulfilling personal life too. Friedman explains leadership can – and must – be learned. O&G says: Applying a new method of thinking, Friedman offers a completely different guidebook to becoming a better leader. Total Leadership suggests both an innovative and sustainable model for leadership that can benefit every facet of life.

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Opinion The E&P squeeze As oil prices start to slip so do budgets, but will we see any long-term affect on the technological advances of the industry?

he gloomy global recession has caused a sharp fall in prices, sparking fears of cutbacks in E&P costs and elevated financing costs. Benchmark oil process have declined by almost two thirds since peaking over $140 a barrel in July and natural gas has fallen from around $12 per thousand cubic feet to about $5. So what affects do these substantially lower prices have on drilling projects and new technology? Well, while lower prices could slow the most difficult drilling projects, it seems that energy companies will continue spending on new technology, at least in the short-term, but in the long-term it is a different story. The combination of low oil prices and the current economic crisis will begin to constrain exploration and new production in the future as projects (and people) get dropped. Under a rule-of-thumb, production costs for a new, marginal barrel is at around $65 today, and it simply doesn’t make sense for oil companies to throw millions of dollars at drilling new wells when oil futures are selling for $50. Most recently Chistophe de Margene, CEO of French oil giant Total, warned that many new projects would be delayed at current oil prices. The same is happening with natural gas. And with the long lead times and high capital requirements that E&P projects require, it means that there will be little new oil to replace what we’ve used while prices slumped. Yet, as the credit crisis continues, it seems there is less of a way out of this vicious circle.

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Banks remain reluctant to lend money and we all know energy projects require a great deal of capital. Investment seems to be focused on the short-term supply, when it should be focusing on the inevitable long-term shortage. Investment is already falling short of what is needed to ensure a future supply of the expensive barrels that everyone will be counting on in the coming decade. Although I am loathe to admit it, we need to see oil prices rise if we want to see projects and technology improve, and in order to see advances in the energy industry overall. That said, whether the oil and gas industry will ever manage to maintain a steady – and fair – price for oil and gas remains to be seen. n

Cutbacks The most expensive barrels are found in the tar sands of Alberta and costs have run up 50 percent this year, even as oil prices fell, resulting in a double-squeeze for producers. Shell, Suncor, Petro-Canada, Nexen, Teck Cominco, UTS Energy and Opti Canada have all announced delays in their planned investments in the region, resulting in hundreds of billions of dollars of investment withdrawn or delayed.

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Final word

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Addressing the skills shortage

The talent pool is certainly shrinking, but what can be done about it? Dina Pyron offers her advice.

here has been much talk about the skills shortage in the oil and gas industry and attracting new talent has been challenging for a number of years now. Dina Pyron, Partner in Ernst and Young’s Human Capital practice, believes that the problem is simple: the talent pool is too small. “When commodity prices collapsed in 1986, technical, professional and field workers were forced to leave the industry by the hundreds of thousands,” she says. “When the recovery came, workers didn’t return and weren’t replaced with new talent. More devastatingly, the industry was left with a serious image problem.” And that image problem remains today, as many young people perceive the industry as staid and unmoving. There is a widespread belief that energy just isn’t as exciting or as high tech as other fields. Generation X and Y are attracted to diversity and change and they just can’t see it in the energy industry today. The number of students studying petroleum engineering, or just engineering in general is a quarter the size it was in the early 1980s. The trickle-down effect of the shortage of skilled and qualified engineers in the oil and gas industry has transformed the talent issue into more than an organizational challenge; it is now a critical business issue. “The lack of key talent could potentially impact corporate growth, financial performance, safety and reputation,” says Pyron. Ernst & Young’s Strategic Business Risk Oil and Gas 2008 report lists human capital deficit as the number one business risk facing oil and gas companies today. Pyron believes that essentially, without adequate staff, the ability of the

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Dina Pyron recently conducted a workforce study, Overcoming Recruitment and Retention Challenges in the Oil and Gas Industry, which was conducted with 25 high-level HR executives representing 22 different oil and gas companies. She identified six key steps that companies can take to recruit and retain workforce talent:

1. Adopt a hybrid organization 2. Redirect energies from process to strategy 3. Improve co-ordination and communication 4. Invest in culture and language training 5. Develop creative retention plans 6. Train the next generation oil and gas services sector to expand and meet future growth demand is questionable. “Project delays and abandonment are as much a result of capacity constraints as financial calculations. And this risk is closely linked with the inability to control costs – it becomes much harder to control costs effectively if all the experienced staff retire while

your company takes on more and more large projects.” Over the next five years, the gap between new graduates and experts leaving the industry is estimated at almost 500,000, which could have a devastating affect on the industry as we know it. Pyron believes that it is vital to look beyond the baby boomers and focus on recruiting and retention strategies designed for the next generation, getting them involved in today’s oil and gas industry. “Firstly, recruitment needs to happen in bulk; we need to expand and diversify recruiting methods. Providing training programs for a variety of areas can improve and diversify a company’s talent pool,” explains Pyron. Secondly, she suggests customizing culturally appropriate approaches. She cites 76 percent of HR executives who believe retention issues vary around the world for their company. “Oil and gas is a global industry with a global workforce, and a one-size-fits-all approach does not work.” Pyron also suggests leveraging retiring workers’ knowledge. “One important tool that is often underutilized is mentoring. Mentoring helps young employees navigate through the difficult waters of a new job and, at the same time, ensures knowledge transfer to the next generation.” Ultimately, Pyron believes that the oil and gas industry has reached a point where certain oil and gas companies have a chance to lead in addressing workforce challenges. “Those companies known as the employers of choice will have an advantage in attracting and retaining talent,” she says. “This cycle will enable them to solidify a leadership role in the industry.” n

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