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Drilling for talent, part 1

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Oilfield Technology,

Petroplan examine the challenges facing UK North Sea oil and gas.

There can be no doubt that the UK North Sea will remain an important region for oil and gas for years to come. Most of its fields are expected to remain economically viable until 2020 at the earliest, and high oil prices have given a boost to exploration in the North East Atlantic basin in areas previously considered marginal and thereby uneconomic. The region still boasts estimated oil and gas reserves of 9.4 billion boe with a 50% plus chance of recoverability.

Despite this, UK drilling activity is in decline, and nowhere near the levels necessary to unlock the area’s remaining potential. Production drilling has remained constant at about 120 - 130 wells per year since 2009, but remains well below pre-2009 levels. More worryingly, the last three years have seen the lowest rate of exploration activity in the region’s history. 2013 saw 44 exploration and appraisal wells drilled, below initial forecasts, and down from 53 in 2012. This year may see a lower level of activity still, with plans to drill just 25 exploration wells and 11 appraisal wells. Around 66 further exploration and appraisal wells are expected to be drilled through 2015 and 2016, suggesting that the yearly rate is not expected to rise significantly.

This is not just a concern for the industry, but the entire country. UK offshore oil and gas continues to be the country’s largest industrial investor, paying more tax to the Exchequer than any other corporate sector. North Sea oil and gas supports around 450 000 jobs across the country and contributes to around 1.5% of national GDP. Without domestic production, we would have had to import an extra £31 billion worth of energy in 2012. But we can only produce as much as we drill – ultimately, the stakes could not be higher.

So what are the factors behind this dip in activity, and what obstacles do drilling companies in the North Sea face? Much of the issue comes down to the sector’s inherent volatility. Drilling companies largely operate on a project-by-project basis, the availability and location of which are highly sensitive to moveable factors such as the prices of oil and gas, the emergence of new technology and new discoveries. Opportunities can arise with little forward notice, leaving companies scrambling to ready themselves to take advantage. On the other hand, a dip in prices can lead to prolonged periods of reduced or low activity.

For drilling companies this volatility manifests itself in three major ways: access to rigs, access to financial capital, and access to human capital.

No money, no rigs

Demand for rigs, and their lack of availability during periods of high activity, is a major challenge facing North Sea exploration drilling. Of the 55-60 exploration and appraisal wells forecast to be drilled last year, 20 were postponed and four cancelled. 42% of these postponements/cancellations were down to a lack of rig availability. Another 8% involved cases where the company had in fact secured a firm rig slot to drill, but delays on other drilling sites ended up preventing use.

The number of mobile rigs deployed in the UK at the end of 2013 was the highest since 2008 (20 jack-up and 19 semi-submersible rigs respectively) – however relative to the region’s potential this still very much represents a shortfall. Current high rig rates (combined with the fact that the average drilling period has risen to 17 days) only increase the strain.

A lack of access to funding was also a significant constraint on exploration in 2013, accounting for a further quarter of the postponements and cancellations. As one might expect, this factor hit smaller drilling companies disproportionately hard relative to their larger, more resilient counterparts. As a result, small to medium sized companies contributed just 25% of wells in 2013, a lower share than in previous years (partly offset by increased activity on the part of energy utilities during the same period).

The people problem

Another major manifestation of volatility – though more subtle than the above two – are the difficulties inherent in getting the right people with the right technical skills to the right place for the right duration, often at short notice. To some extent this challenge is common to drilling companies across the world: the global oil and gas industry faces an acute skills shortage of workers with 10 - 15 years’ experience, thanks to a near universal shut-down of training and recruitment programmes during the 1980s oil gut, when prices hit record lows.

However there are additional issues particular to the North Sea region that exacerbate the challenge. Firstly, competition with other regions around the world – in an industry already short on human capital – makes it especially difficult to retain talent. Drilling personnel working abroad might typically command salaries 35 - 50% higher than equivalent UK North Sea-based personnel, and the difference becomes marked when one includes taxes and bonuses.

And it’s not merely a matter of pay. It’s also a matter of job satisfaction and the opportunity to work with cutting-edge technology. The North Sea is, of course, a very mature, developed region, filled with aging ‘rust-buckets’ and manually-operated drilling rigs built on older technology. These do the job, but other newer regions tend to have a higher proportion of newer generation rigs. At the very cutting-edge this includes ‘cyber rigs’ – high automated drilling rigs where instead of roustabouts and rough-necks rushing about switching pipes you are more likely to see staff in comfy chairs, pushing buttons and monitoring proceedings via highly sophisticated computerised control systems. Many newer generation mobile rigs boast far better conditions for workers, and come replete with a host of extra facilities designed to improve the living standards of those posted there.

Read part 2 of this article here.

Adapted by David Bizley

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