Peter Gaffney says the oil industry suffers from a negative concentration on cost reduction. "We need to remember that production defines your ultimate success."
David Knott
Senior Editor
- A History of Oil Price*[21845 bytes]
The world petroleum industry has become used to the ideas that oil prices are low and weak prices are here to stay.
As a result, much of the industry's effort in the last 5 years has focused on cost cutting and staff reductions.
From exploration through products retailing, companies have adopted a range of management techniques to make themselves lean and mean.
Few petroleum engineers (PEs) these days are not acquainted with buzzwords that describe such techniques: partnering, alliances, outsourcing, and reengineering.
Yet for all the frantic adoption of those ideas, companies seem not to be satisfied with their positions. They continue to announce layoffs and organizational changes.
For PEs, there is no longer such a thing as a job for life. Yet the outlook is not all bad, and certainly no worse than it was in the not-too-distant past.
Meantime, the role of the Society for Petroleum Engineers reflects the changing pressures on its members and the growing globalization of the oil industry.
So says SPE Pres. Peter Gaffney, cofounder of international energy consultancy Gaffney, Cline & Associates of Alton, U.K.
Gaffney told Oil & Gas Journal his experience as a PE, geologist, and consultant has convinced him the basic tenets of petroleum engineering are increasingly a key element for industry's future well-being.
Price influence
Gaffney maintains that, relatively speaking, current oil prices are not low at all (see figure, p. 24), but they are perceived as low: "If you were around in 1972, you would know that, even allowing for inflation, prices are better now than they were then".
Gaffney jokes that he is a believer the oil price will go to $25/bbl again. He just doesn't know when.
He adds, tongue still firmly in cheek, that the last 6-8 months have been the only time he has seen all oil industry gurus predicting oil prices will stay flat or fall: "As a group, they have never been right. So I think it is going to go up!"
Oil companies' attitudes toward spending money have changed dramatically since the early 1970s.
In the past, companies frequently employed the latest, biggest technology-not necessarily the right technology. This was particularly true for North Sea producers, and it is only in recent years that a perception that oil prices will remain low has caused operators to consider more carefully their application of technology.
Gaffney said, "As a business, the oil industry is out on the edge, and we deal with this by optimizing technology levels. When the oil price was high, perhaps we bought some technology for technology's sake. But now we need 'fit for purpose' technology to do the job economically and effectively."
Other trends
Among other world trends, Gaffney points out that onshore exploration and development has been increasing during the past 5 years for the first time since World War II.
In areas as widely spread as the C.I.S., China, Venezuela, and Argentina, for example, Gaffney says legislative developments have opened new opportunities for oil and gas companies.
There also is an increasing interest in gas production, particularly noticeable outside North America, and a rising appreciation of the value of gas.
In the wake of political upheavals in some countries and political changes of direction in others, privatizations of state companies have begun to change the world's oil industry.
Gaffney said, "We currently think of the world oil and gas industry as dominated by increasing consumption and demand from the Far East, fed by capacity in the Middle East, challenged by what's happening in the C.I.S., looking for ways to work in Africa, trying to cope with huge changes in Latin America, and underpinned by imagination and a substantial historical base of low cost operations and new technology in North America, which has already fueled so much development and change in the industry."
What to count?
"We live in a world where everyone counts," Gaffney said.
"Nearly every aspect of life is digital, so we all have to count something. For the oil industry, the trick is knowing what to count, as much for majors as for service people."
As examples of things counted in the oil industry, Gaffney cites footage drilled, barrels of oil and cubic feet of gas produced, dollars made, costs, revenues, people, and the all-important bottom line.
The oil industry has a problem of perception wherein a company may be doing something right in terms of oil asset management, but the markets are looking only at what will happen if oil prices go up or down.
"This raises the issue of how to measure oil company performance in a way shareholders will appreciate," Gaffney said. "This is very much a problem today, where there was never an issue previously. The increasing importance of shareholders is one of the key changes of the last 10 years."
Gaffney maintains that one reason the industry is losing staff and repeatedly restructuring is that companies do not know what to count or focus on. Or they think they have been counting the wrong thing.
As an example of this problem he cites the shift away from using reserves replacement as a measure of performance in favor of judging by the bottom line of balance sheets.
Recent announcements such as the decision by British Petroleum Co. plc and Mobil Corp. to merge their European downstream divisions and Shell Oil Co. and Amoco Corp.'s plans to merge their Permian basin operations are further evidence the industry is still struggling to decide where its destination should lie.
"Each company is looking for ways of operating which suit it best," Gaffney said. "So we will see more joint ventures and restructuring until companies become comfortable and feel they have recovered from the excesses of the 1970s and 1980s and can deal with today's world."
Like other industries, in spite of its adoption of high-tech systems, the oil industry seems to be increasingly calling in consultants to advise top management on how to get their messages across to the staff.
"This tells me we have a long way to go in terms of communications. Conceptually, we are in a world where we need to think increasingly about borrowing, renting, or selling our problems whether they be projects, wells, production, or anything else. In this type of industry, an important question is whether you can communicate with your neighbor, let alone your staff.
"To complicate matters further, we are not as humble as we could be in the oil industry. This means it can take a long time to get new ideas accepted by the industry."
Production focus
In working for clients, Gaffney Cline spends a great deal of time looking for ways to improve production.
But Gaffney laments that often the industry is driven to a negative concentration on cost reduction, which sends the wrong signals throughout a company, whereas focusing on raising production would provide a much more positive message.
"Focus on output rather than cost," he said. "This is an important psychological point we have forgotten in the oil industry. We need to remember that production defines your ultimate success, can cover up those cost overruns, protects you against price falls, and is where the upside potential of oil industry really lies."
Gaffney says the industry needs to get much closer to the wellbore once again. Companies have increasingly placed PEs behind computer screens, and this means they are a long way mentally-not just physically-from "what mother nature gets up to."
Because of this, in some parts of the industry oil fields have been treated as if they were like refineries. That means companies have overlooked the fact that fields have a variable life expectancy and a less well-defined life cycle, suffer midlife crises, and are apt to present unexpected problems.
"If only companies can preset a field's cost structure-which is very difficult to do, but some have done it-they can concentrate on production. For example, wells that used to cost $7-8 million each are now down to $2 million.
"Companies have been able to achieve this by saying to contractors at the outset they are not going ahead with development unless wells cost only $2 million."
"One of SPE's challenges is how to get people to be nomadic in thought if they can't be nomadic in practice."
PEs' problems
All those trends have affected the way PEs have to work, but Gaffney reckons there is a certain cyclical character about many of the trends.
"There is less job specialization these days," he said. "Lots of SPE engineers are now being asked to change roles. Consequently, SPE gets asked to provide the tools they need.
"I went into this business in 1957, when multiskilling was already a popular idea. It went out of fashion with oil price rises of the 1970s, but it's now back in vogue. Companies are now under lots of pressure to reduce personnel. So PEs are under pressure to outperform their peer groups and take on diverse tasks."
A problem with the increasing need for PEs to do more is that they have to deal with too much information: "Delivery mechanisms have exceeded the analysis/filtering mechanisms we have."
Companies need information filters, Gaffney said: "There is still a tendency to take some things to ridiculous levels, when we should seek to focus on the relevancy of the data to the task at hand."
Another shift in the working life of PEs is the change in expectations about which part of the globe an engineer will spend much of his or her career.
"The petroleum engineer is by tradition a nomadic beast. When I graduated I knew I would have to go around the world to work. Now things are different. You can meet PEs in Aberdeen, say, who have never moved from there."
Yet the applied end of petroleum engineering is still nomadic, maintains Gaffney, even though more work is done through computer terminals.
SPE's role
Gaffney said,"One of SPE's challenges is how to get people to be nomadic in thought if they can't be nomadic in practice. Reading technical literature is simply not enough."
A benefit of the old nomadic lifestyle was that a PE could come across different ideas about how to deal with people and their governments and ways to solve problems.
Related to all those trends is a growing uncertainty among PEs about employment: "Industry is making heroes of managers who let people go. A major concern is this lack of corporate focus on the very people needed for ultimate success:-those people still in the corporation!"
Yet Gaffney maintains that in many ways PEs are more in control of their careers now than ever before: "It used to be that a job lasted from the cradle to the grave, but now you must count on an average five or six jobs in your working life."
This raises the question of whether SPE is still relevant, Gaffney said. And the answer is a definite "yes" because SPE is an ideal place for PEs to maintain their contacts and keep their talents honed and for management to make sure their technology is appropriate.
SPE has about 52,000 members spread throughout 106 countries. It has offices in Dallas, London, Houston, and Kuala Lumpur. The Houston and Kuala Lumpur offices were opened within the last year.
"The need for these two new offices shows another interesting trend," Gaffney said. "The Houston area contains about 20% of our membership, but the Kuala Lumpur office serves the Asia Pacific region, which is our fastest growing, with members scattered throughout a huge area. Our London office, which serves the high-tech North Sea area and covers the C.I.S., Africa, and the Middle East, sees an ever-changing focus to this wide region."
In his term as president, Gaffney is pushing to increase SPE's use of electronics because members are increasingly asking for more real time services, such as the Internet and teleconferencing, to improve their collection, storage, and dissemination of information.
Back to basics
In evolutionary terms, Gaffney believes PEs have come a long way since the days when petroleum engineering was first recognized as a discipline in its own right but may have to retrace their steps quite a way.
"The petroleum engineer was created out of a need for engineers with a mixture of mechanical, geological, electrical, and other skills.
"We developed fluid flow equations, the fundamentals of petroleum engineering, in the 1920s to early 1940s. PEs had more control of their business at that time than we do today.
"The days of specialization began about 1973 and continued throughout the 1980s and into the 1990s. I believe we find we have specialized too much. The true PE has not become extinct, but PEs have become overspecialized and so in danger of losing some of the common sense that guarantees their survival."
To a certain extent, the PE is a gambler in cost assumptions, price predictions, reserves assessments, and production estimates, Gaffney maintains.
"Engineers in other disciplines may say they can predict things accurately, whereas the PE cannot. Our ability to call things doesn't compare with that of somebody who is building, say, a bridge or a space station."
Outsourcing
This uncertainty in petroleum engineering did not cause a problem in the prewar industry, where there was a cradle-to-grave attitude to PE's positions.
"Now companies subcontract just about everything, and major companies recently have even been outsourcing some of their petroleum engineering management.
"In the past, this is where oil companies have contributed their added value to projects."
Gaffney is concerned that excessive outsourcing will mean oil companies will not have the skills they require in the future: "We are already seeing some companies with skills shortages. Some of us would argue that downsizing has gone too far, and continual restructuring has shifted the focus away from the contribution of skilled PEs, who can provide 'added value' to the project."
Gaffney says the jury is still out on whether the outsourcing route is a direction the industry will continue taking, although he admits it could go a lot further.
He believes an about-face could lie ahead and wonders if instead of focusing on outsourcing, industry should be focusing again on 'insourcing,' using internal skills already available.
As with focusing on production rather than costs, this is simply a more positive attitude, he says.
"One of my questions to PEs is, Where will you be in 2001? By then, partnering, alliances, incentive contracts, 'drilling in the '90s', outsourcing, and all the other recent trends could well be gone or be absorbed into what we already do.
"By then, good old oil field business will be back. Just getting on with our mission, doing our job, will come back, and future success will continue to be very much at the margin: that few extra barrels of oil or cubic feet of gas, that slight reduction in operating costs, bringing on production just a bit sooner, reducing those acreage carrying costs.
"In the future, such small things added together will be what makes all the difference. Thus the petroleum engineering challenge in its broadest sense will continue to increase, and I am confident the industry has the people and will continue to have the applied technology to meet it."
Copyright 1996 Oil & Gas Journal. All Rights Reserved.
