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Sunday Times: Oil giants can't drill fast enough

Investment in new fields is being hit by shortages of skills and equipment. By Tracey Boles and John Penman
THERE were only two of them when Colin Manson and a colleague set up shop in Aberdeen five months ago. Since then Manson’s consultancy, Xodus, has taken on more than 30 people and is recruiting four new staff each week. Now the biggest consultancy in Aberdeen, it has ambitious plans to grow to a workforce of 250 in the next three years.
Xodus, which helps oil companies to assess the economics of new fields, is one of the growing number of support-services companies helping the world’s oil producers to record profits.
Last week, Exxon Mobil, the world’s largest oil company, posted a profit of $36 billion (£20 billion), the biggest in the history of corporate America.
On Thursday, Shell set a new record for a British company — $23 billion. The bumper figures are due to the rise in the price of oil and gas and to higher margins on refining.
The support-services sector — from contractors who carry out seismic surveys to consultants and rig providers — is making hay as the oil giants’ profits trickle down the industry. Many firms are reporting that turnover has doubled in a year.
Jeff Corray, UK senior oil and gas partner at consultant KPMG, said the service sector was now beginning to feel the benefits of the majors’ investing. He said: “Margins have been slim for years. Oil companies were reaping the benefit of the high oil price but not investing. Now service companies are reaping the rewards.”
Seismic-survey contractors are the first to benefit when the industry starts to boom, according to the oil-services firm Petrofac. Business at surveying firms such as Schlumberger and Halliburton is brisk. Seismic surveys, which cost about $2m a time, are designed to detect the kind of geological structures where oil might be found, such as rock formations whose outline resembles an upturned teacup.
Owners of offshore drilling platforms, such as Rowan, which offers the Gorilla and Tarzan rigs, are also among the first to profit during an oil-industry upturn. The most sophisticated deep-water drilling rigs cost up to $500,000 a day to hire, compared with $150,000 two years ago. With the world fleet of such rigs numbering less than 100, demand far outstrips supply.
The oil giants’ recent profits may be eyewatering, but they cannot spend the money as quickly as they would like on new developments. The sector is suffering from a lack of services, equipment and skilled workers.
Ayman Asfari, chief executive of Petrofac, whose customers include BP, Exxon, Total and BG Group, said: “Oil firms are spending as much as they are able to spend. Infrastructure is a bottleneck.”
The oil companies also have to overcome outdated attitudes to investment. They have been wary ever since the oil-price slump of the 1990s.
Manpower is another problem. Work in the industry is seen as dirty and arduous and this puts people off. Last year, only 200 petrochemical engineers graduated from American universities compared with thousands in the industry’s 1970s heyday. Britain produced 88 from three or four universities.
Some design engineers in the industry are on “superstar wages” because the demand is so high and their numbers are so low. Some have set themselves up as self-employed contractors charging more than £350 a day — and getting it. Most companies have no choice but to pay.
Stats UK, a specialist oil-engineering firm in Aberdeen which has contracts with leading companies such as Shell and Chevron Texaco, was forced to search for workers in Poland because the skills shortage in the British oil industry has become so acute.
Pawel Motyl is one of 12 Polish fitters, welders and machinists recruited by the firm. Late last year, Motyl drove more than 350 miles through the night to Warsaw to sit a complicated mechanical-aptitude test, which he passed with the highest score of any candidate. He swapped his $200-a-month job for a salary of £22,000 a year. Stats UK director Lorraine Porter is travelling to Poland again soon to look for more workers.
The oil industry stopped taking on large numbers of graduates after the sharp downturn in 1986. It is now paying the price — the average age of an American oil worker is over 50.
These days, oil companies are not spending as much as they could for several reasons, according to Richard Rose, analyst with Oriel Securities. “The companies continue to exercise capital discipline, wary of any potential reversal in oil prices,” he said. “There is also a lack of opportunity in terms of new prospects, and where there is opportunity, they are constrained by the strong demand for services and supplies.”
The dawning realisation that higher oil prices are here to stay for the long term has prompted some oil giants to stop being cautious and start loosening the purse strings, according to David Calhoun, president and chief executive of GE’s $42 billion infrastructure division, which includes its oil and gas unit. He said: “It is taking on a very different outlook with the long-term oil-price forecasts that are emerging.
“The big gains in energy prices are being reinvested. It would have been good if it had started on the first day [the oil price went up] but it is happening now that companies are realising prices are going to stay high.” GE is reporting strong demand for refinery upgrades and liquified natural gas (LNG) facilities.
Texas-based Exxon pledged last week to invest its bumper fourth-quarter profits — more than $10 billion on revenues of $100 billion — in new refineries and exploration. The move was part of a broader industry charm offensive aimed at countering the political and consumer backlash that erupted in America last year when the price of petrol rose to $3 a gallon on the forecourt.
BP, the leading British company, expects to spend $15 billion this year. About two-thirds of this will be on exploration and production, with the rest split between refining, marketing, petrochemicals and other sources of energy. With oil prices high, companies have been returning to reserves that were uneconomical to extract during the years of low prices. However, each $1 billion of new investment carries with it $1 billion of new overheads.
Oil firms are having to push into increasingly inhospitable terrain to find deposits, drilling to record depths to bolster production in older fields and exploring far-flung reaches of the globe in search of new reserves.
Exxon said that deep-water exploration, at present a fringe activity, will account for 20% of the oil it produces by 2010.
President George Bush said last week that Americans were addicted to oil. It appears that the oil industry, grown used to low levels of investment for 10 years, is addicted to its profits.
It may be constrained by the lack of services and personnel, but Oriel’s Rose warns that continued failure to invest could lead to structural problems in the industry.
“If they do not invest, where is the production growth going to come from? It will be left to Opec to fill the gap.”
Far from spending less, experts believe the oil industry should be spending more — on investment in new reserves.
Oil nuggets
Exxon Mobil’s $36 billion (£20 billion) profit announced last week was the largest ever for a listed company
The going rate for hiring a floating rig is $250,000 a day.
Two years ago it was $50,000 a day
Last year, American universities produced only 200 petrochemical engineers, compared with thousands a year during the 1970s. Britain produced 88 last year
There are fewer than 100 deep-water drilling rigs in the world
BP’s capital spending this year is expected to be $15 billion (£8.5 billion)

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