INTERVIEW Opportunities beyond the U.S. shale plays Dennis McKee, CEO, United Oilfield Services With low oil prices creating a very competitive and challenging environment in the USA, many companies are looking to expand their operations globally in an attempt to find new markets. Today we speak to United Oilfield Services CEO, Denis McKee, about developing an oilfield service company outside of the USA and some of the challenges faced. Monica Thomas (Shale Gas International): The first question I just have to ask: What made a prosperous Texan forsake the U.S. with all its rampant shale drilling and relocate to Poland, of all places to start a shale oilfield services business? Denis McKee (United Oilfield Services): It all boils down to five years ago, I came to a resolution for my investment company to come and look for some oversees opportunities to establish what we were doing in North America shale and do it internationally. The U.S. market seemed flooded and there wasn’t really anybody doing anything seriously internationally. I prepared a long list of many potential countries where shale plays were developing and Poland was the first stop in a list of about 23 countries. I basically found out that my very first two objectives were to ascertain that: One, we had a stable regime and the country was politically stable, and two, I was looking for an educated and motivated workforce. Poland fit that bill very, very nicely. I then spent the next year vetting the deal and drawing up the business plan and as of July 1st 2011 we were fully registered as a company. MT: UOS is the only company in Europe which has invested about 250 million dollars in shale industry. You certainly must have great faith that this business will take off. How do you see this industry developing in the coming years?
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DM: Our initial investment was 165 million dollars; obviously we’ve been terribly underutilised. Europe isn’t the biggest market in the world, but the political situation here changed about two and half to three years ago. Particularly due to the passage of unfavourable tax rates we started seeing investors exit the business fairly rapidly with all the things that were coming through the pipeline – politically. I call it “the Dark Ages of Poland”! This basically meant that even if you were successful in exploration, there was no way that you would make a commercial endeavour out of it. Then we saw all the majors pull out one after the other. This dried up a lot of the investment pool and then the independents having a huge problem funding major projects here because there is a delay in permitting and all this stuff takes extremely long, and then you’ve got the oil price collapse, which also collapsed the gas prices in Europe. It was just a perfect storm for another big slowdown and a lack of investment. MT: Do you think that this is likely to improve? I understand that in Poland the state-owned companies are still continuing the exploration. In the UK, before the election, all major parties supported shale exploration. However, it seems that the Conservative Party is the only one still supporting shale now; obviously they are in power for the next five years. So what do you think will happen to shale exploration in Europe within the next five years? DM: Well, we’ve been heavily invested in travel-time and talking to all the major players in the UK for the last two and a half to three years. Or maybe even more. Of course at first it was Cuadrilla that drilled the first original well and fracked it. And having seen some of the rock-data, UK has definitely gone for commercial gas. Then it is just attributable to the politics and of course the elections – everything was postponed on the 14th licensing round because of the elections and then of course it has been delayed even further now due to the legislations which need to be passed. It’s very disappointing from the industry point of view, because investors only have a limited amount of interest in sitting back and doing nothing with the investment that they’ve made. The concern now is that the UK drags this issue out for another year or two and doesn’t get off the peg and start going, all of the investment that there is in the UK will dry out very quickly. And that’s not a good scenario for the UOS in UK and Europe in general. MT: Part of the problem is that while in Poland there was a lot of support for shale gas, this is not the case in Britain and certainly in Western Europe. I watched your company’s presentation at Shale World in Birmingham in April where the presenter gave examples
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of how the company engaged with local communities in Poland. Do you have any advice to offer when it comes to managing the social perceptions of shale so that there is more support for it among ordinary people? DM: For sure, we have made one or two trips a month to England and Scotland and we’re strategizing; we’re in contact with all the current and the future players that are participating in the 14th licensing round. I have had some meetings with a couple of PR firms that are representing some of the E&Ps there and we were giving our input about the way it’s been handled here, in Poland.
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Conoco-Phillips has done probably the best job The fear is that things I’ve seen with regard to handling community gets kicked down the road affairs. They didn’t try to hide anything and another year in the UK. they definitely involved the locals and had them participate in what they were doing at all phases and it was an encouraging thing to hear the locals actually say: “Well, this isn’t “Gasland”. Where’s the noise, where’re all the trucks, and pollution?”
I predict the same thing will happen in the UK if we ever get to the point of getting past the obstacles we’re facing in the UK at the moment. Like I say, the fear is that things gets kicked down the road another year in the UK. Of course the Greens are being very well-funded, but they know that if it ever goes forward and gets the first few wells drilled and they’re commercial, they won’t be able to stop this situation. MT: There is a lot of debate about regulation at the moment in the UK. Recently there was a report published by Taskforce on Shale Gas. So I’d like to ask about how you would compare regulations, or best practices, in the U.S., in Poland, and in the UK? DM: Well, the U.S. is obviously light-years ahead because they have privately-held mineral rights. The industry over there gets things done quickly. The permit-to-well in the U.S. takes a week or two at the most. The permit-to-well in Poland is about a year; six months to a year, and the permit-to-well in the UK right now – as is the case with Cuadrilla – it’s been going well over a year. And with the local council kicking the can down the road – which personally I don’t blame them – if I’m a 65-year-old retired non-paid government council member, I won’t be willing to take deaththreats and all the stuff that was being thrown at them, and make the decision. I’m going to kick the can down the road, knowing that sometime in the future – six months, a year, a year and a half – the UK national government will step in and take that decision-making from the local level. This is because the local people don’t need the headache. So the UK still has a long way to go as far as legislation is concerned. The industry as a whole is trying to push the UK government forward, explaining that now that they have a majority
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government, they really need to take advantage of this and pass the legislation instead of waiting two years and then: “Oh, heck, we’ve got another election in three years, so there is nothing we can do.” MT: But things like environmental protection and baseline monitoring, for example, or waste disposal, and these types of regulation – where are they the most stringent? DM: In the U.S., each state has its own evaluation on the EPA rules and things like that. And they can be either more or less stringent. So every state is different. I hail from Texas and we have no baseline monitoring. Of course we’ve had all industry in Oklahoma, Texas, Louisiana and New Mexico for the last 120 years. We’ve been doing fracturing and water injection and everything since the 1950s, so where there are new areas; in the Pennsylvania area, the New York area – of course there’s a political move there, they’ve just banned it, period. So it’s different from state to state and it’s difficult to say which state is better and which is the worst. I firmly believe that you need 3D seismic before you start drilling shale wells and cutting laterals and horizontal wells. Early on in a play in Dallas, Fort Worth, we found very quickly that the faulting and carsting in the area would limit your ability to extract any natural gas. And obviously if you’re already in a tectonically-sensitive area, such as Cuadrilla was in, if you drill next to an active fault that you didn’t realise was there and then frack it, there is a possibility that you might generate small earthquakes – which they did. This situation could have been avoided by the use of good 3D seismic, which they did not do. They only turned to 3D seismic after the fact. MT: I’m sure they’ve learned their lesson by now. DM: I’m sure they have. Then again, shale is not something that is exclusive to the U.S. and that’s what prompted us to explore the international market and various shale opportunities and try to bring the technology in to do it. We set up with the seismic equipment specifically for that and tried to make street-legal vibrators and all that so we could work within the European environment, to acquire good 3D and re-engineered the rig to meet the stringent noise and pollution problem that can be encountered in the U.S. and then of course our frack equipment, which is the fourth generation of frack equipment. MT: That’s exactly what I wanted to ask you about. Many would think that when an American company acquires a licence in Europe (say in the UK, or Poland) it is just a question of bringing over their equipment from the U.S. and starting drilling. But this is not the case, is it? Can you tell us the difference in requirements that the equipment in Europe needs to meet in comparison to the U.S.? DM: There are gatekeepers to the EU. I didn’t expect that it would take as long as it did for me to re-
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design the trailers and the frack equipment. I mean, the frack equipment is the same frack equipment – there’s no problem there. The problem is in the trailers and the transport and stuff like that. It took us a year-and-a-half to re-engineer the equipment to comply with the EU requirements. And then it took us two-and-a-half years to re-engineer the rig. In the U.S., frack equipment is three to four month delivery and a rig is six to ten months delivery. We paid the money in advance so as to get the re-engineering work done to bring the proper equipment in. MT: Why can’t the American equipment be brought in? Is it the size or the width of the equipment? Where is the point of difference? DM: It’s the spacing of the axels; it’s the weight-load distribution. On the frack equipment it’s strictly a trailer issue. As far as the actual pumps and the engines and that is concerned they were already at the lower emission factors for diesel engines, and the radiator systems were much less noisy. Like I said, we are on our fourth generation of frack equipment and I’m sure that the fifth generation is being manufactured as we speak, with the tier-four diesel engines and things like that. Ours are the tier-two diesel engines. They didn’t have a tier-three – never figured that one out! Then on the rig itself it was about meeting all the requirements for CEE certifications and all that. We had to get CEE certifications on the frack pumps but it was mainly a transportation issue on the axels and the breaking systems and light systems, etc. On the rig itself most of the requirements are based on offshore rig requirements; mainly surrounding ignition points and offshore safety. But those rules still apply so all those modifications have to be redone and, of course, when you start engineering a rig it requires a lot of engineering time. MT: So if shale exploration did take off in Europe, there would be an entry barrier for American companies preventing them from entering the market because of all these changes that they would have to implement. DM: It would be very restrictive. We have done the engineering and we probably would be able to get the equipment in here within a year to try to follow the market as it starts building, but Halliburton and Schlumberger and Baker Hughes – former Baker Hughes, that is – and Weatherford, they will have to completely re-design their fleets. Halliburton and Schlumberger is all old equipment that was grandfathered in the EU. They’ve never built any CEE-certified equipment for the EU.
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They’re going to be barred from pursuing their model which is just moving their old equipment around the world wherever something needs to be done. EU is a blocked market, so you cannot just bring anything you want in here. So if you look at it from that point of view, Halliburton and Schlumberger would be the only two countries that could react to a growing market from their budget cycle and build-out cycle. You are talking about a 3 to 5 year delay to get equipment for them. MT: So that puts United Oilfield Services in a very good position when it comes to the European market. DM: That’s why I’ve chosen this place! It’s a high-risk, high-reward type market. Because we could virtually rule the market as it is the case in Poland where we are the only frack company in the country now. We do 80-95% of the frack-work, because we’ve got the right type of equipment to do the work. And that would be true in the UK, and the rest of Europe. We have two fleets and we would be very interested in putting a fleet in the UK, unfortunately with what you were talking about – 12-month monitoring and things like that – we can shoot seismic, but then we have to wait for months before we get a drilling rig in there, drill the wells, etc. So the best case scenario would be, perhaps, two years from now doing fracks in the UK. Obviously we will add rigs and seismic to support a growing market. The key to the UK is to get this 14th concession round done. This has been dragged for a long time. MT: If, or when, shale exploration finally takes off in the UK, there will be a considerable need for qualified personnel. Can you perhaps share with us your approach to finding and training, key personnel when you’re moving your operations to a new country? DM: There’s great anticipation in the UK that the educational system will adapt and get the qualified personnel for us. I look at it the same way I looked it here in Poland. I’m very steady in the way I start companies – I don’t employ a lot of Americans. I get local talent, that has got the educational background – engineering and things like this, and then I send them to the States for a year of training. I envision a similar situation happening in the UK now I’ve got a good stockpile of qualified engineers, supervisors, operators, etc. here in Poland. We are qualified to work anywhere in the world, including the United States, and that is because of the people and other things like the safety records. I envision in the UK the initial will be tippy-toed and we will have quite a few Polish people there, especially at supervisory and engineering levels, but at the same time we will also hire UK citizens and mingling them in and they will be catching jobs not only in the UK; they will be catching jobs wherever we are pumping.
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But the real concern is that if the UK mishandles this, Europe in general is going to lose the entire investment community for good ten to twenty years. That’s just the way it goes and unfortunately politicians don’t seem to understand that. MT: My last question is about your future plans. Since you’ve pretty much monopolised the fracking industry in Poland and at the moment you’re concentrating on the UK, which other countries are you potentially interested in? DM: Our plan A was Poland; plan B was continental Europe, and plan C is outside of Europe. We’re in the process of pre-qualifying with several Middle Eastern companies. There is quite a bit of activity, especially in Saudi Arabia. It’s the most active country in the world – including the United States – right now. But then, all over Northern Africa there are a lot of opportunities to pursue. I just find it painful that, at best, to stick the equipment that took me so long to get developed and set for environment of minus 30 (degrees) and send it down to plus 50 area that you can bring equipment from anywhere into. We’ve been working on that for well over two years – getting pre-qualified in all of those countries, realising that this doesn’t happen overnight. Especially with large companies like Saudi Aramco and KOC, PDO, so we’re definitely along with that. And we can probably pull the trigger on that as early as this year or early next year. MT: You mentioned Saudi Arabia – would that be shale? Because, obviously, they’ve got enormous amounts of conventional deposits.
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DM: They’ve got shale and tight gas too. They There is quite a bit of activity, do have a shale play on the Jordanian border especially in Saudi Arabia. It’s that they’re pursuing. They need gas. They’re the most active country in the burning 20 percent of their oil production for world electricity and water desalinisation. They’re being pushed hard to find gas. So that’s why they’re running over 300 rigs and all of that – and it’s all mostly unconventional, which means fracks, because it’s tight gas in sandstone, limestone, and shale. So they’ve got a lot of potential for frack-work there and drilling, and seismic, and everything. MT: Wouldn’t that be quite a competitive market?
DM: Not really. Not as competitive as one might think. It takes a long time to get pre-qualified. You have to jump through all kinds of hoops to get there. And when you finally get there, you need to be self-funded for at least nine months to a year before you even start making any money. So you’ve got a huge cash flow problem, and of course that’s why in the States, they all would like to move all their stuff there. It’s a captive market for Schlumberger and Halliburton, and Saudi Aramco and other
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companies are worried now that Baker Hughes is now going to be sold off, so now there are just going to be two competitors. That’s why they’re courting outside companies to come in but you still have to put up with the two-year’ worth of pre-qualifications and then you have to go a year without any revenue flow. And there aren’t many people lining up for that in the United States right now. The margins are pretty good but the interesting thing about Saudi is that they award up to a thousand frack in each tender. The tenders are also awarded all through the year, making it possible to pick up ten thousand fracks a year and if you get utilisation, your prices can go way down and you still have your profit margin. What kills you in Europe is that you catch five, six, seven jobs a year and you’ve got a full year worth of stuff. This is not the case in the States whereby you’re doing twenty jobs a week, 52 weeks a year, or you have exhausted the capacity. In this case utilisation is what matters to lower prices down on services and everything else, but at the end of the day the actual profit margins are great as long as you get that kind of utilisation.
Published: 10th August, 2015
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