Personnel Drought Will Limit Oil Supply Growth

I strongly recommend the following report from the 7/30/08 Financial Times in its entirety to serious oil supply students, but I will offer the following summarizing comment:

According to the CEO of Schlumberger, a serious shortage of personnel trained to operate sophisticated oil drilling equipment, caused by two decades of low oil prices, will severely limit the ability of the industry to expand oil production.  It takes ten years to turn out a fully trained deep ocean drilling technician, apparently.

A key element of the problem is that “easy” oil is declining and being replaced, potentially, by “difficult” oil.  The latter is oil that requires very expensive and highly technical deep ocean and related equipment in order to harvest it.  New rigs can be produced faster than the people needed to operate them.

One might conclude that fully capable rigs will become in even shorter supply as time goes forward.  Thus the lease price of the rigs - or really of the rigs and related personnel - will continue to skyrocket.  This trend bodes well for the best run companies, like RIG, ESV, and NE, in the deep drilling space.  One reason they are the best companies is that they know how to train and retain the key personnel for the rigs.  This might be more of a problem for newcomers such as DRYS.

The report below cites the failures of the Thunderhorse and Kashagan projects as evidence of the E&P industry’s problems in tackling the most sophisticated recovery projects.

Warning over oil industry skills shortages
By Carola Hoyos in London

A shortage of skilled engineers threatens to limit oil supply growth in the coming three to five years as companies struggle to develop complex new fields, the head of the world’s biggest oil services company has warned.

Andrew Gould, chairman and chief executive of Schlumberger, said drilling in very deep waters would double during the next three to five years, but that projects risked being delayed because the ageing industry was unable to recruit, train and offer engineers experience quickly enough to fill the gap left by years of underinvestment when oil prices were low.

“The only kit that is really, really difficult to get is the human kit,” he said.

In the next three years, ODS Petrodata, which tracks drilling rigs and other industry equipment, expects 160 new offshore rigs - of which 75 would be for ultra-deep water drilling. These would require a crew and support staff of more than 30,000.

Any delays owing to staffing problems could have a serious impact on companies’ profit margins, especially if oil prices fall, and on the speed with which new supplies come to the market at a time when high demand from China and the Middle East means every barrel counts, analysts say.

Slipping deadlines will prove costly because rigs rent for $1.2m (€770,000, £600,000) a day, meaning a delay of an hour would cost $50,000. And with companies operating outside the Opec oil cartel barely able to grow production at all in the next five years, according to the International Energy Agency, the developed countries’ watchdog, any further slip could push growth in non-Opec output into negative territory.

“You can get a team, but whether it is the right team is a different story,” said Colin Lothian, an analyst at Wood Mackenzie, the industry consulting firm. “This is an element of risk making it more difficult for companies to make final investment decisions on some projects.”

With international oil prices trading at $127 a barrel, the industry cannot afford to wait the 10 years it takes to train an engineer doing basic work on a deep water rig. Companies are desperate to stop their production from shrinking as they are being pushed out of easier oilfields into ever more complicated terrain.

Venturing into these frontiers and deploying new technology at a time when the industry is so stretched has already had some disastrous consequences: BP’s Thunderhorse platform in the US Gulf of Mexico, and Eni’s Kashagan project in Kazakhstan’s section of the Caspian Sea, have been delayed by technical challenges for years.

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