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Drillers look to lower costs to survive oil crash

News Article Sponsored by Aaron T Jones & Associates

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Offshore drillers have seen billions of dollars in cost overruns as they’ve ventured into deeper waters with bigger projects, with only one in five major installations coming in on time and on budget in recent years.

Those exorbitant costs must come down if the offshore industry wants to stay afloat through the collapse of crude prices, energy executives warned on Tuesday at the Offshore Technology Conference in Houston.

“If we don’t change, in this low-price environment, many projects aren’t going to be viable,” said Mick Kraly, a general manager of facilities engineering at Chevron Corp. “We have to come together and get innovative.”

Oil producers and their suppliers are searching for ways to make deep-sea ventures profitable even with cheap crude. Offshore drilling costs have declined somewhat in the past two years as oil field services companies cut jobs and reduce equipment prices.

BP, for example, was about to cut the cost of one major project in the Gulf of Mexico in half – from $20 billion to $10 billion. The reduced costs were largely the result of discounts from its suppliers.

“And we have to hold on to this even when the oil price recovers,” BP Upstream Chief Executive Bernard Looney said. “That’s when the true test will come.”

Analysts are skeptical that the cost reductions will stick if the market rebounds. To prove them wrong, Kraly said, the industry will need to improve how it preserves materials for the long years it takes to build and deploy major projects. Drillers will also have to improve metallurgy.

Though the industry has delayed billions of dollars in offshore projects, drillers have made big discoveries in Gulf of Mexico waters that are deeper than the industry has ever gone. Building a new generation of equipment – on the cheap – to tackle those challenges will require collaboration.

Each ultra-deep well costs about $200 million to drill, but several companies including BP, Royal Dutch Shell, Anadarko Petroleum Corp., Chevron and subsea equipment maker FMC Technologies have agreed to spend an equal amount of money developing the bigger, heavier equipment to withstand higher temperatures and higher pressures of the deeper oil reservoirs.

The key to holding down the costs of such equipment is to standardize components, so it could be produced in greater volumes for use by all operators. Oil executives say that would require a culture change. It would be hard for companies with rich, century-long histories of engineering achievement to rely on mass production, as the auto industry does in Detroit.

“As an industry, we’re in the process of stepping back and saying maybe we can accept these more cost-effective, more common specifications,” said Brad Beitler, vice president of technology at FMC Technologies. “But we have a long way to go.”

Another way the industry can help itself is by automating more drilling processes, a Baker Hughes engineer said at the conference. It’s a similar effort to the industry push to standardize equipment, in that it cuts costs by taking some of the work away from the oil workforce.

“Drilling historically was seen as an art, and we are, step by step, making it much more of a science,” said Mathias Schlecht, vice president of technology at Baker Hughes.

The first automated drilling control system was invented nearly 30 years ago when Germany commissioned one of the deepest wells in the world, one that would have to be drilled exactly straight to stabilize its descent. Automated drilling put the well on autopilot and steered it straight down until it was as deep as Mount Everest is high.

More automation, Schlecht said, would allow oil companies to use smaller crews on their offshore drilling rigs, reducing the number of people the industry has to retrain when crude prices rise again.

“The goal needs to be to get the cost per barrel down to where it’s competitive in the market again,” he said.


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