WHAT'S AHEAD IN 2000

Technology will pave a path to prosperity

Peter D. Kinnear, President, FMC Petroleum Equipment & Systems Division, and Chairman, PESA, Houston

ew things in the energy business can be regarded as certainties anymore. Perhaps the single safe assumption is that oil and natural gas will continue to be the world’s primary energy source into the next century, just as they were for much of the last. Beyond that, as evidenced by the extreme volatility of energy prices over the past two years, uncertainty abounds. Salomon Smith Barney’s 1999 annual survey of E&P companies indicates a substantial increase in expenditures next year, which bodes well for the industry. Alternatively, merger and acquisition (M&A) activity in the E&P sector makes it less clear when, and where, the money will be spent.

The requirements to provide the technology our customers need to exploit high-cost prospects in a low-price environment are likely to become more intense. In the energy industry, the oil price collapse and downturn of the ’80s brought us 3-D seismic and subsea technology. Today, we face new oil price pressures, diminishing reserves and harsh deepwater environments. To meet the technical challenges, we foresee an even greater focus on expanding product portfolios to provide enhanced packages of integrated solutions. To combat the economic challenges, we will continue to see consolidation among service and supply companies, as well as renewed emphasis on alliances and partnerships.

In this ever-changing environment, each company will have to forge its own strategy for success in the next millennium. As an industry, the service and supply sector will have to be prepared to add the resources, products and services to expand technology and increase profitability.

Technology. When the energy industry discusses the future, we are most likely talking about deepwater plays. West Africa, Brazil and the Gulf of Mexico (GOM) together hold more than 15 billion bbl of oil reserves, but they are technologically demanding environments. To meet the needs of our customers in this arena, new technologies must be developed. Through advanced subsea technology, we are just beginning to tap the deepwater areas of Brazil, the Gulf and offshore West Africa. Of particular interest to GOM operators is the future of floating production systems. As we go deeper in the Gulf, this will be an increasingly important technology.

Developments in 4-D seismic technology will tell the operators reservoir characteristics over time, allowing more intricate modeling, simulation and development of plans, accordingly. Rapidly evolving visualization techniques will allow companies to develop the data to test drilling plans and wellbore locations with greater accuracy than ever before, long before an expensive rig is on site. Intelligent reservoir management, smart wells and seabed separation all offer new technologies to increase production from existing assets and develop new prospects more economically at current prices.

Communications technology will play an increasingly greater role in the future, too. By combining high-tech communications and manufacturing methods, PESA companies are lowering costs and reducing cycle times. For example, drill bit designers in Houston are able to engineer and modify bits for a specific well, over a specific reservoir, virtually anywhere in the world, by viewing real-time data from the site.

These and other challenges require our industry to spur the rapid acceleration of information technology to organize and access technical data on a worldwide basis. What is for certain, though, is that there is no "silver bullet." The future will require integration of technologies and trained human talent for development and application.

Consolidation and new business models. No discussion of our industry would be complete without a few words on consolidation – both of our customer base and within our industry. According to Simmons and Co., we saw $14.6 billion of M&A activity in the E&P sector in 1998 and $63 billion in 1999, with another $122 billion pending. This is clearly an effort by these companies to address their cost structures.

For the oil field service / supply industry, the challenge put to us by our customers has been to provide seamless, reliable, integrated packages of goods and services in the most cost-effective ways possible. The integrated-solutions approach reduces transaction-related costs between companies and the number of interfaces required between suppliers.

Much of the M&A activity in our sector has been strategic expansion to package goods and services together. In our industry, M&A activity has grown from $4.9 billion in 1995 to $23.3 billion in 1998. Most of that has been for strategic expansion to provide packages of goods and services to our customers. We will continue to see more of this activity, especially between strong companies pairing up to enhance product lines, technology and experience.

Alliances between service companies, and between service companies and operators, allow for projects that are too massive for any one firm to manage alone. These arrangements allow for lower field development costs and shorter cycle times – vital considerations when weighing the substantial expense of complex projects such as those found in deep water.

Conclusion. We cannot eliminate the cyclical nature of this industry, but we must continue to manage our way through the cycles and preserve our industry’s infrastructure. We are getting better at it. We are still a technology-driven industry and will continue to be. As we invest through up-and-down cycles, we can more easily adapt to future economic and technical needs of our customers. Just as a set of technologies propelled us upward out of the ’80s and into the ’90s, we are developing a new set of technologies to propel us forward into the next century. The M&A trend will continue to steer the service sector and E&P companies toward new business models, such as alliances, while pushing the service industry toward providing more packages of integrated solutions. The challenges of tomorrow are just as formidable as those faced in the past, but if we continue to work together, we will adapt and succeed.

Peter D. Kinnear was named division president of FMC Corporation’s Petroleum Equipment and Systems Division, located in Houston, Texas, in April 1992. Previously, he was manager of the Western Hemisphere and Subsea Systems for the Wellhead Equipment Division. Mr. Kinnear joined FMC at its Chicago headquarters in June 1971 as a business planner. He subsequently held a number of marketing and operations management positions at the Wellhead Equipment Division and Fluid Control Division. He became president of the Fluid Control Division in 1985 and managed Wellhead Equipment’s Western Hemisphere from 1986 until 1988, when he became subsea systems manager. In 1990, he assumed responsibility for both the Western Hemisphere and Subsea Systems. Mr. Kinnear earned a bachelors degree in chemical engineering in 1969 from Vanderbilt University and an MBA degree in 1971 from the University of Chicago. He has served PESA as district chairman and secretary. He is on the board of Spindletop International, active in the American Heart Association and a member of NOIA.

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Copyright © 1999 Gulf Publishing Company