WHAT THE INDUSTRY EXPECTS IN 2008

The new energy crisis

Robert E. Warren, Vice President, Pride International, Inc., Houston

Come mothers and fathers
Throughout the land
And don’t criticize
What you can’t understand …
For the times they are a-changin’

Bob Dylan, 1963

The year 2007 surged ahead on a number of levels and set many new records. The Dow blasted through 13,000 and drove on to 14,000. Natural gas remained more or less flat relative to its volatility in 2006, but crude continued to remain historically high with recent trade orders in the high $90s/bbl. Oil may or may not hit $100, but the Bulls who forecast anything close to this picture still get a gold star. Here’s the question: who wants to bet their paycheck on where it goes in 2008 and beyond? There doesn’t appear to be much slack in the world economy at this point, but demand is still leading supply. Will this lead to a pullback, recession, higher prices, or a combination of those?

The cost of finding, producing and delivering energy increases every quarter, but when translated into higher prices at the pump, expect accusations of price gouging, windfall profits, and conspiracy theories from the public and some politicians. Those are reminders that much of Congress, government agencies and a majority of citizens do not understand the complex journey of hydrocarbons from the reservoir to the pump. Shudder at the thought of the public relations and political pounding for the industry as the cost of gasoline continues the burn toward $4/gallon, and beyond, in America. And as the Congressional majority is unfriendly to oil and gas, government observers predict the negative sentiment will be compounded if a different party moves into the White House.

We are absolutely at a fork in the road with the energy requirements of this nation. At a time of phenomenal technological progress and unprecedented growth in onshore and offshore markets, leaders in the contract drilling business, and indeed throughout the entire energy industry, face crucial decisions.

Unlimited opportunities. The onshore and offshore drilling sector continues to experience healthy gains; expect more in 2008. Attractive rates and contract terms are holding steady, but with some softness, primarily in the domestic land and GOM gas market. Following earlier consolidations by several major operators, some notable company-building is occurring within the drilling community. The consolidation of Transocean and GlobalSantaFe produced the largest offshore driller with 140 floaters and jackups, with the surviving company identity of Transocean, Inc. In addition, Hercules acquired TODCO to combine for 139 shallow water units strengthening its presence in the GOM market.

Pride International achieved several milestones in 2007. Following the strategic decision three years ago to transform the company into a purely offshore contract driller, we successfully closed on the sale of its Latin America rig business and E&P services group this year for about $1 billion in cash. Acquiring the remaining interest in two of our deepwater DP floaters from our Brazilian joint venture partner neatly added the equivalent of 1½ quality DP floaters to the deepwater fleet. In addition, Pride is currently constructing two new ultra-deepwater 12,000-foot, sixth generation drillships projected to be on location in 2010. These significant developments in the evolution of the company are expected to provide solid near- and long-term shareholder value from deepwater markets.

The fork in the road. Plenty of good news is alive in the oil patch right now. Weekly reports confirm that declining reserves, increased demand worldwide and some 130 planned and under-study deepwater projects should ensure a full drilling cycle through at least the next decade. In addition, there is consensus that drilling the planned and potential projects should absorb all of the new construction. This is an unprecedented period for our industry. We have the opportunity to achieve fleet replacement and upgrades, improve employee benefits and rebuild our human resources base. It is a time to emphasize being the employer of choice and for growing shareholder value. It is a time to increase safety awareness and stewardship of the environment.

This window of opportunity calls for initiatives and bold leadership, within our industry and trade associations. The response to these initiatives and leadership will define the next decade for the drilling industry. Consider three areas of urgency which require full leadership attention.

The first requires a stronger energy policy engagement. The level of pushback coupled with rank disregard from the elected halls of government and anti-groups impede fossil fuel development. The current effort made by industry executives and our association representatives to influence those who develop policy must prevail. The battle for public opinion requires unified strategic support at all levels, and the evolving adversarial landscape in our nation’s capital should be cause for major alarm.

Secondly, the good news of current opportunity should be the magnet that draws new manpower to this business in droves, however, sadly, that’s not the case. In addition, a breakdown in our educational system only worsens the economic outlook. The percentage of US undergraduates in engineering is the second lowest of all developed countries. More alarming, of every 100 ninth graders in Texas, 62 graduate from High School in four years, 32 enter college (only 11 will graduate) and one will graduate with a technical or engineering degree.

Not enough engineers and technicians are graduating to meet present requirements, and the existing plan to raise the bar for mandatory competency in math and science disciplines is laughable. The US education system fails to consider this void a priority and the majority of students have little incentive to acquire the basic skills and knowledge required by our industry, in addition to the many other industries competing for competent, talented graduates.

Some notable industry efforts offer hope to the current education crisis. Among them, the Offshore Energy Center and Museum (OEC) trains teachers and provides hands-on materials about the story of oil and gas to educators in area schools, but the OEC needs more participants and exponentially greater resources, including teacher stipends with field trips. The IPAA Education Center develops petroleum technology programs at selected schools, with plans to expand much further. IADC, SPE, AADE and other engaged industry organizations provide generous scholarships and training programs. API has a major effort in progress with API University. All need far greater support, including our participation as ambassadors to the schools, Career Day presentations and talks in our children’s and grandchildren’s classrooms. Each of us can and must contribute to this work.

Finally, the ongoing need for operational competence and emergency preparedness at the wellsite requires highly experienced supervisors. About 140 new jackups and floaters are scheduled for delivery between now and 2010. Calculations estimate 15,000-18,000 employees will be required to operate, maintain and support only those assets. Even if you disagree with the numbers, the massive training and competency requirements to ensure that individuals have the skills necessary to work safely and efficiently at every wellsite is daunting. And this scenario doesn’t consider the additional personnel required by the service companies, manufacturing and our operator clients. Companies in each of those sectors are working hard to develop and retain talent, but the numbers indicate we’re losing ground.

To whom much is given much is required. Extensive cooperation and visionary industry leadership will be required in each of the areas addressed to drive this industry to the next level. The wisdom of these words challenges us to rethink our future with the security of America in mind. In the words of Winston Churchhill, “It’s not good enough that we do our best; sometimes we have to do what is required.”

This article expresses the author’s views and does not necessarily reflect those of Pride. 

THE AUTHOR
	Robert E. Warren is Vice President of Industry & Government Affairs for Pride International, Inc., and is responsible for company interface with industry organizations and activities, regulatory agencies, and community matters. During his 16-yr tenure with Pride, he has served as vice president of Russian Operations, vice president of Marketing & Communications, and vice president of Investor Relations in addition to his present role. Warren has managed drilling operations in Iran, Libya, the UAE, Pakistan and Russia. He holds a BS in petroleum engineering from Texas Tech University and an MBA degree from the University of Texas.