The NY Times article (© violation)
By AGIS SALPUKAS
ICKSBURG, Miss. -- Along the muddy banks of the Mississippi, a huge oil-drilling platform
is taking shape at a newly revived shipyard. About 700 workers are busily assembling the
drilling rig, which already towers over 300 feet and, when completed, will soar 552 feet toward the
sky -- taller than the U.N. building.
But this is more than just another giant rig. For many in the oil-service industry -- which covers
everything related to oil drilling, from rigs to helicopters for ferrying men and equipment -- it is also a
dramatic symbol of how much this business has been able to shake off a 10-year downturn.
The rig, being erected by Rowan Cos. of Houston at a cost of $175 million, is the first of its size to
be built since 1991. It is also the first since the downturn in the early 1980s to be financed with no
guarantee that it will be hired out to an oil company under a long-term contract.
Rowan's rig is not alone, though. The company has already begun work on a second rig and plans to
build a third. Meanwhile, a handful of other companies are building a total of about a dozen rigs. Yet
for all the frenzy of activity, demand for drilling capacity is so strong that a number of experts and
industry executives doubt that the industry will be able to keep up.
Some oil companies have already postponed or trimmed back exploration plans because of
shortages of equipment and skilled workers. Others are beginning to question whether some of the
more marginal fields are worth the investment, because while the price of crude oil has remained
fairly steady, the rental rate for rigs has soared.
Consumers clearly have a stake in whether companies like Rowan can meet demand for new
equipment. Over the long term, some experts say, the oil-service industry will be unable to gear up
fast enough. This might lead to tight oil supplies, which in turn could push up the price of crude.
The industry will be hard to get moving, the experts say, because the mind set of many
battle-scarred executives is still so cautious. Even the few companies that are expanding are having a
tough time finding skilled workers and rebuilding capacity, much of which was gutted by the long
decline.
Matthew Simmons, president of Simmons & Co. in Houston, estimates that if world demand for oil
keeps growing by 2 percent to 3 percent a year, close to 22 million barrels of oil a day of new
production will have to be brought on stream within five years, up from a world production rate
today of 75 million barrels a day.
Simmons, whose investment banking firm specializes in the oil-service sector, estimated that about
450 new offshore rigs will be needed over the next five years to allow oil companies to keep to their
current exploration schedules.
Few analysts and industry executives believe this is possible, since the drilling industry is having
trouble enough just keeping up with the current modest boom. And except for a few companies like
Rowan, most executives are still reluctant to invest.
This caution was voiced by Robert Jester, the manager of heavy rigging services at Lampson Co.,
which makes large cranes used on oil rigs.
"It's boom times again, but we whisper it," said Jester, who had flown in to help solve a problem at
the shipyard here. "We don't want to jinx it again."
To many in the oil industry, which has been through so many booms and busts, that attitude is
understandable. But what is particularly vexing right now is that it appears to be the most serious
obstacle standing in the way of exploiting the myriad new opportunities for finding new oil fields and
bringing them into production.
Huge deposits in Russia and the Caspian Sea region are now open to Western oil companies flush
with cash. More sophisticated use of seismic technology has greatly reduced the failure rate, making
exploration a more cost-efficient process. Meanwhile, mature offshore fields in the North Sea and in
the Gulf of Mexico, among others, are being rejuvenated even as a whole new frontier for
deep-water exploration is being opened up.
William Lowrie, president of Amoco Corp., said in an interview that the industry would find enough
rigs to explore promising prospects in deep waters and in other parts of the world.
"The industry is going to find and develop the resources to meet the growing demand," he added, by
buildings new rigs and refurbishing old ones.
Many in the industry call the current upturn in the oil-services business an "attrition boom," since so
much equipment was scrapped and so many companies went out of business.
"It was dwindling supply that created this boom, not surging demand," Simmons said. All it took was
a moderate rise in demand.
Some companies, in fact, are still liquidating capacity and downsizing. Even now, few are joining
Rowan in betting that this time the recovery will not be a will-o'-the-wisp.
Rowan, convinced it is ahead of the pack, has refused to play it safe and commit itself to a long-term
contract. Instead it has signed a one-year deal in which Amoco Corp. will rent the rig for $183,000
a day -- a rate that includes a drilling crew of about 90. Rowan's executives are keeping their
options open, expecting that within a year they will be able to get over $200,000 a day.
"The reality is that steel rusts and there will be a shortage of drilling rigs," said C.R. Palmer, Rowan's
chairman, in an interview in the company's boardroom on the 54th floor of the Transco Tower,
which looms over Houston.
So far, that gamble looks smart.
The stocks of companies such as Rowan have been soaring. Since the beginning of this year the
Standard & Poor's index of oil-well equipment and services was up 70 percent. Rowan, whose
stock price languished between $5 and $10 a share from 1994 to 1996, has seen its share price
spurt into the $20 to $35 range this year.
Only a few years ago, Rowan's rolling of the dice would have been heresy, both on Wall Street and
within the industry.
In 1994, when Palmer and the directors of Rowan bought the LeTourneau shipyard in Vicksburg for
a fire-sale price of $52 million -- down from an original asking price of $150 million -- there was
widespread skepticism. Most industry executives and analysts "thought we were crazy," recalled
Edward Thiele, senior vice president for finance.
Palmer, however, believed that big money could be made by getting in on the initial stages of an
upturn. He also saw a danger that skilled engineers and supervisors, not to mention manufacturing
equipment, were disappearing so quickly that he had to move quickly to salvage what was left.
LeTourneau owned four shipyards throughout the South, and all were being liquidated, with
machinery being sold off. A work force that totaled about 5,000 in the mid-1980s had been cut to a
handful of supervisors and security people.
The shipyard gives a vivid sense of the herculean effort Rowan and other oil-equipment companies
have to make to gear up.
The intricate rigs so crucial to the oil industry must be able to stand in up to 400 feet of sea water,
and then drill as deep as 38,000 feet below the surface. Building such long-legged monsters, not
surprisingly, takes a web of skills that, once disbanded, cannot easily be woven together again.
In the 1970s and early 1980s, the oil industry -- under the illusion that the price of oil would soar as
high as $100 a barrel -- spent billions of dollars drilling in remote areas, often with little success. To
feed this appetite, the oil-service industry built scores of new rigs every year, and the shipyard
employed more than 1,000 workers.
By 1991, with the price of oil steady, the last new rig was completed and the yard was mothballed.
The following year all its machine-shop equipment was auctioned off. Plans for a new type of huge
drilling rig, the Gorilla 5, moldered in filing cabinets.
Skilled workers like Donald Neihaus Sr., a supervisor who had followed his father to the yard in
1969, were forced to find new work. He started driving 74 miles each way to Natchez to supervise
welding at another shipyard. Many workers, however, left the area, going back to farming or finding
jobs in other fields.
"I thought it would never come back," Neihaus said.
Now he and some fellow workers are putting in 12-hour days six days a week. For this area, being
a welder is regarded as having a good entry-level job. The company, with the help of the state
government, has set up five training schools. The starting salary is $9.96 an hour, with medical
benefits and a generous 401(k) plan.
It is tough work, though, in cramped, noisy spaces filled with fumes, and some workers do not stay
long.
It is even harder to hire roughnecks, the lowest-rung workers on the drilling platforms. These jobs
require two weeks of 12-hour shifts, seven days a week, followed by two weeks off.
The shortage of roughnecks has become so severe, in fact, that the Texas Railroad Commission,
which regulates the production of oil and gas in Texas, is considering setting up a school to train
prisoners for the jobs.
"What you're seeing are very inexperienced crews," said John Crum, vice president for drilling at
Apache Corp., the United States' largest independent oil company.
This has forced his company and others, he added, to put on more supervisors. Nevertheless, there
have been more breakdowns and downtime, increasing costs.
Crum also recalled that the company once had one of the legs knocked out on a rig in Australia. It
took seven months to repair it because of tight supplies of spare parts and the special steels.
The squeeze has since gotten worse because more oil companies have tied up rigs under long-term
contracts. Similar scrambles are under way for support equipment like boats and helicopters to ferry
crews.
Even in the face of the scramble, however, wariness remains.
"There have been so many false starts," said Roderick McKenzie Jr., an oil-service analyst for
Jefferies & Co. of Houston who once worked as an engineer in the oil industry. "In 1987 we thought
it might rebound. It didn't. In 1990 it looked like it would rebound. It didn't. In 1993 it began to
rebound and we had a downturn. People have good reason to be a little suspicious."
"This is the first time we've had the whole world going on all eight cylinders," he added. "We're set
for some really good years." |
