What's Ahead in 2005

So kid, they tell me you have talent…

Douglas C. Nester, Chief Operating Officer, F-W Oil Exploration L.L.C., Houston

Every year, I take this opportunity to write about shortages that impact our industry. Two years ago, I discussed the shortage of investment capital that was available to independent operators. Last year, I focused on the apparent shortage of quality E&P projects.

Since those articles were authored, both shortages have been reduced or nearly removed by favorable commodity prices. The potential for higher profits, and the opportunity for large returns commensurate with the risks, are attracting an ever-increasing amount of venture funds to the industry. Heck, some of that money is even being invested in the Gulf of Mexico.

Fund managers can access more capital than there are good investment opportunities. The long-term projection for favorable prices has increased the number of available projects, as companies exploit prospects that were considered marginal just 18 months ago. Higher profits have also allowed firms to increase exploration budgets.

A talent shortage. This year, I am discussing another shortage that, while not as tangible, has begun to impact our industry. As foreseen for quite a while, an overall shortage of industry talent affects our ability to efficiently identify, discover and produce oil and gas. For me, the word, talent, can be interchanged with knowledge or experience. This talent shortage is a “workforce risk” that is an increasing concern, whose impact is not fully appreciated.

Much has been written about the “aging” or “graying” of industry personnel. Average age of our workforce is 48, which makes us the oldest employees of any US industry. Over the next 10 years, 40% of us will likely seek retirement.

As we start losing this experience base, worldwide demand is outpacing our ability to seek, find and develop energy. As a result, prices have hit record levels, and we see new vitality in our industry. Investments are being made, equipment is being modernized, rigs and boats are being built, and new companies are being formed. All of this breeds a need for additional, qualified personnel in all industry companies.

Workforce risks. Unfortunately, our ability to increase the workforce and replenish the experience base is very limited. Twenty years of contraction, including the loss of more than 500,0000 employees, has deterred a new generation of potential workers from entering our business. As evidence, 8,300 students attended universities in 1982 to become petroleum engineers. Today, this number stands at 1,500. Similar trends are also seen for those majoring in geophysics and geology, forcing us to do more with less. Our dwindling talent pool, plus the wide gap between experienced and entry level professionals, helps to create this workforce risk. Difficult to detect and quantify, this workforce risk can result in significant losses.

Risks abound in nearly every E&P facet. Our industry struggles to identify these risks, and goes through great efforts and costs to utilize technologies and design operations to mitigate such risks. Many companies routinely use complex risk analysis in daily decision-making and budgetary processes. In all of these analyses, I have yet to see factors associated with human incompetence, inexperience and poor judgment – and, oh my, bad things happen. Beware of this workforce risk – it is real and likely exists within your company, and also within the service providers that you rely on so heavily.

Inexperience hurts. An example of workforce risk impacted one of our Gulf of Mexico wells this year. As readers know, drilling an offshore well is a concert of risky operations involving multiple service providers, company personnel and magnificent equipment. To work, faith must be given to equipment stability, and to the capabilities and focus of rig personnel.

During the drilling of our well, all operations and equipment seemed to function normally, until conditions began to change downhole. Like doctors, those on the rig evaluated the status of the patient, (our wellbore) and prescribed a series of treatments. These treatments were begun, but unfortunately and unknown to the doctors, the patient was already mortally wounded. The hole was lost in a matter of hours.

During the days that followed, it was found that symptoms of sickness were present for a day or more before the illness became plainly evident and lethal. In our post-well appraisal, we became aware of a crew change just five days prior to these symptoms occurring. Did this well's drilling risk increase significantly because the new doctor on watch had only three years of experience? I have been haunted by this question ever since.

Bad things do happen. Perhaps even a more experienced doctor would have misdiagnosed or dismissed the symptoms. However, I found it profound that two of industry's largest service firms apologized for not performing to their best abilities on our well. It was made clear that all crews are not equal, and that preference is generally given to operators with large workloads. Implications were cold but true – due to a limited talent pool, the experience of some personnel we rely upon in multi-million-dollar operations is on the edge of acceptability.

I did not say that these individuals are not smart or good; they just do not carry great experience. Yes, experience comes with time, often gained through mistakes. I am, however, not so understanding of others gaining experience through mistakes made on my nickel. In the past, a lost hole might have been treated as just one of those things that happens. Like any good, paranoid executive, I view this incident as a warning of things to come and of the need to be more aware of workforce risk.

Risks within one's own staff. As I said, workforce risk also exists within operating companies. One example is use of computer-aided exploration. Computer advances have reduced manpower needs, but they have not reduced the knowledge required of staff. Advanced toolkits are only as good as the people who use them. As Duane Radtke, my friend and CEO of Dominion E&P said in 2002, “What good does it do to have the technical means to collect and analyze data from 1,000 wells in a fraction of the time it used to take to analyze 100, if the people looking at the data don't know how to interpret it?”

Software's ability to manipulate and render data in dazzling displays is powerful, yet dangerous. Technology thrills can easily overshadow exploration fundamentals and, without care, lead to poor decisions. While the “falling in love with technology” syndrome can affect even experienced staff, it is certainly prevalent among more inexperienced personnel. Armed with powerful displays, explorationists can hide inexperience and present compelling stories to management.

We have all seen dry holes drilled on bright spots and AVO anomalies that never exhibited oil or gas characteristics, because fundamental geological and reservoir questions were never addressed. But hey, the displays looked really nice, and shame to those firms without strong technical supervisors to mentor inexperienced employees and help guide senior management.

The workforce risk is real. As the talent shortage increases over the next few years, companies will try to make do with what they have. Individuals will be stretched thinner, resulting in a reduced focus on any particular project. When seasoned personnel are not available, the gap may be filled with talented individuals of limited experience. On-the-job training will become the norm as the market tightens. Experience does take time. I just don't want someone learning from mistakes made on projects I am funding.

THE AUTHOR
	Douglas C. Nester is chief operating officer at Houston-based F-W Oil Exploration L.L.C. Mr. Nester was previously with Devon Energy, where he served as vice president of international exploration. Prior to Devon, he helped to co-found 3DX Technologies Inc. in 1993, serving as vice president of exploration. Prior to that, he worked at Pennzoil. Mr. Nester received a BS degree in geology from Indiana University of Pennsylvania and performed graduate studies in geology at the University of Houston. He received an MBA in finance from the University of St. Thomas in Houston.