| LONDON/PERTH, March 3
LONDON/PERTH, March 3 Oil engineering consultant
Steve earns 550,000 Australian dollars ($560,000) a year and is
seeing new graduates signed up for six-figure salaries.
These pay rates, along with other rising costs the oil
industry cannot control, are sharpening its focus on mass
production methods, clever supply deals and investment in
"For oil and gas executives, the need for operational
excellence has never been greater," says industry consultants
Bain & Co in a March 1 study on costs.
"Exploration, development and production costs are rising
... Activity levels are also increasing, causing sector
inflation. A shortage of technical talent and capability has bid
up the cost of employees and services even further."
Australia, where 39-year old New Zealander Steve works as a
drilling specialist for an international oil company, is one of
the industry's inflation hotspots.
Although less rampant than a few years ago, costs are rising
at over 10 percent a year there, and at similar rates in
Canada's oil sands regions, according to a report by analysts
Wood Mackenzie. Annual cost increases of 5 to 10 percent are
also the norm onshore and offshore in Latin America, in
sub-Saharan deepwater, the North Sea and Russia.
Even onshore in the United States, a boom in development of
so-called tight oil is outweighing the impact of a glut of gas
capacity. Only in the Middle East and North Africa are costs
flat, and nowhere are costs falling.
Royal Dutch/Shell and its Chinese partners China
National Petroleum Corp (CNPC) are addressing costs head on in
one of the hottest areas of the oil and gas industry -
land-based shale gas and coal bed methane (CBM).
In this type of extraction, thousands of wells get drilled
over a period of years. Traditionally, a costly, complex,
multifunctional rig sits over each drill site along with a crew
that will include specialists in the various skills required for
Shell and CNPC's Sirius project, aimed initially at Shell's
Arrow CBM acreage in Australia but also at tight gas formations
in China, tries a different approach, one that Shell's Projects
& Technology Director, Matthias Bichsel, describes as "more akin
to a factory production line".
After the appraisal stage, relatively simple, specialised,
truck-mounted rigs drill a top hole - the first stage of
development drilling. A fleet carrying the next-stage rigs
arrives behind them to drill into the reservoir. The well
completion rigs arrive after that, and automation and
computer-driven directional drilling and hydraulic fracturing
techniques are applied, too. Shell has plans for a fleet of 50
Arrow is still waiting, largely for cost reasons, for a
final investment decision, but it is particularly well suited to
the production line approach, because it is likely to drill some
10,000 wells, all of similar type and depth.
"It's a combination not just of creating a manufacturing
mindset but of adding technology to it to make that process even
slicker and leaner," Bichsel told Reuters in an interview. "It's
creating a conveyer belt that allows you to do the whole thing."
Shell is not alone finding ways to squeeze out costs through
innovation and efficiency improvement.
In the United States, where the gas price has collapsed
below cost for some producers, innovation is becoming a simple
matter of survival, and there is no sign it is slowing down.
French drill-pipe provider Vallourec's fourth
quarter 2012 pipe sales remained strong in the United States
despite a 5 percent decline in the rig count there. This, it
said, was because the wells-drilled-per-rig ratio rose, and the
length of lateral pipes used in horizontal wells increased.
U.S. oil services group Baker Hughes told analysts
last month that U.S. drilling efficiency increased by 15 percent
in 2012, and that the largest players would squeeze out a
further 10 percent improvement this year.
GIANTS OF PREFABRICATION
Although the scale of equipment required for oil and gas
projects can be huge, and is getting bigger, prefabrication is
increasingly widely used, in part to avoid concentrating demand
for welders and pushing up their pay rates.
Faced with the fierce cost of doing business in Australia,
UK-based BG is having 80 LNG modules - pieces of
steelwork as much as 10 storeys high, 75 metres long and
weighing 2,500 tonnes - built in Thailand by Bechtel Oil, Gas &
Chemicals Inc for its QCLNG project on Curtis Island in
The first of these arrived in August last year. In total,
Bechtel has secured orders for some 260 modules from QCLNG and
two other LNG projects in the region.
Back in Shell's camp, the company has used its financial
firepower to develop a new class of offshore drillships with rig
specialist Noble Corp. A handful of these "Bully" and
"Globetrotter" rigs are already in operation.
In an unusual departure for an international oil company,
Shell has helped finance their development and part-owns some of
them. Bichsel believes this approach has forced a step-change in
rig design that might not otherwise have happened.
"They're smaller, they're cheaper to run, and they're
demonstrating that you can do things faster," said Bichsel. "If
you pay a million dollars per day for a (contracted) rig, then
if you can shave 10 or 20 percent off your time to drill a well,
that's a heck of a lot of money that you can actually save."
Steve, who did not want to give his full name, is based in
Perth in Western Australia, at the leading edge of industry cost
inflation, where a strong currency combines with high standards
of living and a tight resource industry labour market.
The trend that has multiplied his salary 16-fold in U.S.
dollar terms since he started as an employee engineer in 1999
shows little sign of abating.
"The operators themselves are creating the cost pressures by
offering higher and higher wages to get the best people," he
said. "There's a lot of movement around Perth - people going
from Woodside to Chevron and to the other
operators because they just get offered more money wherever they
For Shell's Bichsel, who spends $60 billion every year of
his owns company's money and that of its project partners on
contracting and procurement, there is one more tool in the
"One of the best mitigants is not to follow the herd and
don't go where there is a big boom starting," he said. "It helps
to know where the shortages of labour or materials could occur."
(Editing by Will Waterman)