What's Ahead in 2006

Doom and optimism co-exist in deepwater

Mike Weill, President, Operations & Technology, Americas/ Australia, BHP Billiton Petroleum, Houston

Nearly 25 years ago, I entered the oil and gas business, and had the good fortune to join an exciting industry that attracted the best and the brightest. Prices for petroleum products were on the upswing, and I landed a coveted position in New Orleans, among the most exotic and most entertaining cities in the US, and a hub for deepwater exploration, back when that meant water depths exceeding 800 ft. For those of us joining the industry at that time, we indeed were able to experience the curse and blessing of the Chinese proverb, “May you be doomed to live in interesting times.”

Clearly, we are operating in a high-price environment again, but one that in many ways is very different from what we have seen before. The industry still offers young petroleum engineers and geoscientists exciting opportunities, global experiences and a bright future. New technical hurdles continue to present themselves, as we move to more frontier areas to explore and develop hydrocarbon reserves. However, unlike the past, in 2006 and the years ahead, we will face unique challenges with costs, fiscal pressures, resource access, technological issues and talent recruitment. These items will require new ways of thinking to reach solutions of a meaningful and lasting impact.

Seeking equilibrium. The costs of the products and services that operators and joint ventures require to explore, develop and produce hydrocarbons rose dramatically during 2005. They continue to trend upward in the year ahead. Deepwater rig rates are approaching $500,000/day, and this is but one example of the higher costs associated with daily operations. When a couple of tie-back wells cost $100 million or more, they become marginally viable, even in a high petroleum product price environment. This is neither sustainable nor beneficial to the long-term interests of our industry.

In addition to cost pressure, there are also increased pressures within the fiscal regimes under which oil and gas companies operate. Whether driven by a country’s need for higher revenue, political gamesmanship from outsiders accusing the industry of price gouging, “excess” profit announcements, or governments increasingly wanting to participate in other parts of the value chain, fiscal margins will continue to be under pressure. Historically, the industry has re-invested its cash flows. Even with increased costs and fiscal pressures, operators will have extra cash. Spending it will require good resource opportunities and the time to mature them.

This leads to the issue of the industry’s ability to access resources for new exploration and production. While there are still opportunities offshore Brazil, West Africa, and in the Gulf of Mexico (among other regions), most prospective deepwater basins have been leased or licensed. Access to potential new sources of reserves in Alaska and offshore the US, outside the Gulf of Mexico, remains restricted. New acreage must be made available to the industry.

Because of the more limited opportunities available today, we are beginning to see greater rank wildcat leasing in more frontier areas, such as offshore Greenland, deepwater Pakistan and South Africa, where BHP Billiton has interests in two blocks that have yet to be tested. These are higher-risk areas to drill, with few analogues and little, if any, infrastructure. Discoveries at such locations will take much longer to develop and bring into production than in areas with more infrastructure.

Other opportunities exist for companies to pursue strategies in the Middle East and Former Soviet Union, as well as in unconventional production, such as oil sands, and in natural gas. Like deepwater areas, these arenas present significant technical, political and commercial challenges involving larger capital investments, potentially higher risks and longer lead times that inhibit their viability.

A technology wish list. Equilibrium will be reached as companies walk up the maturity curve in deep water. We are already beginning to see this. Deepwater operators and service company partners are pushing technologies to limit workovers, avoid interventions and pursue 100% reliability.

What else does the future hold? New seismic technologies that can see under salt or that overcome other obstacles to a better view of the subsurface are needed to find new commercial accumulations of oil and gas. Effective development of new and existing deepwater resources may rely on technological advances in subsea separation, pumps on the seafloor and a transition from hydraulic to electric connections in tie-back developments.

The industry must also seek solutions to commercialize and transport static natural gas resources. And we need new technologies to make the unlocking of oil sands and the production of oil shales and gas hydrates more practical on a larger, material scale. Any technology that reduces cost structure or can be seen to reduce risk will be readily accepted.

Good riddance. The 2005 hurricane season has just ended, and it didn’t come soon enough. The devastation wrought by storms from June through October will impact a generation of people who live along the Gulf Coast, from Texas to Florida. At this writing (November 2005), the effects of Hurricanes Katrina and Rita are not fully known. More than two-thirds of oil production and more than half of natural gas output from Gulf of Mexico wells remain shut-in. This, of course, pales in comparison to the impact on human lives these storms caused.

As an industry that’s just gone through the worst storm season on record, we need to step back and ask – and answer – pointed and poignant questions facing our operations. Are we designing to the right criteria? Are our designs robust enough? We can’t afford a reputation for failure, no matter what the operating conditions may be. This might be the most pressing issue our industry faces, if it were not for the questions about the next generation of professionals who will accept these technical challenges in the years ahead.

Please come in. Our industry develops and uses leading-edge technology that is unexcelled, yet this is a little known fact among college students today. We must convey to these young women and men that dynamic and promising careers exist in our industry. These are truly global adventures, if one desires them, and they offer long-term opportunities and the chance for rewarding, gratifying accomplishments with a global impact.

Fossil fuels have a future for the next 30 to 50 years. If one doesn’t believe so, ask any of the billions of people in Asia or Africa, who are eager to improve their standard of living. With mining operations ranging from aluminium to zinc – in addition to its energy portfolio – BHP Billiton is uniquely positioned to see growth across the commodity spectrum in the various global markets.

An un-boom-like boom. For the past couple of years, we have experienced what I describe as the most un-boom-like boom that the industry has come across in more than a century of up-and-down economic cycles…that is, until recently.

Some of the circumstances that we face today are similar to those of 25 years ago. In fact, the more seasoned among us may have a sense of déjà vu, as we assess the various challenges and opportunities facing our industry; but none of us have been here before.

Hurricane Beta? $70 oil? $14 natural gas! As much as those sound like phrases from a screenplay or science fiction novel, they were headlines this year in daily newspapers, nightly newscasts and trade magazines, such as World Oil. I’m sure that we will read and hear similar fantastic news in 2006. We are indeed living in interesting times, and I’m looking forward to reading about technical solutions, new acreage opportunities, and higher enrollments at petroleum engineering schools in the year ahead.

THE AUTHOR
	Michael Weill is president of Operations & Technology, Americas/ Australia, for BHP Billiton Petroleum. He is responsible for development and production of company assets in the Americas, as well as worldwide petroleum engineering, facility engineering and technology development. Prior to BHP Billiton, he spent several years in various assignments with Shell in New Orleans, Houston and The Hague. He has a broad background in production and reservoir engineering, economics and strategy development, and holds a BS degree in chemical engineering from Cornell University.