A global shortage of tools for the oil industry
By Jad Mouawad The New York Times
THURSDAY, OCTOBER 27, 2005
NEW YORK Kim Bennetts, an executive at a Texas-based natural gas company, traveled over 7,000 miles this year to the heartland of China to look for the right rig to drill four wells in the Piceance Basin, a booming exploration area in western Colorado.
That is how far he needed to go to get the basic tools of the trade. The shortfall in drilling rigs has become so acute that some executives blame it for slowing down new exploration projects.
"Sure, there's been some hue and cry," said Bennetts, the vice president for exploration and production at Presco. When the skeleton crew arrived, along with the rig, a local newspaper compared them to Chinese railroad laborers in the Rockies in the 19th century.
"But the Chinese are not displacing any Americans in terms of either technology or jobs, not when nearly every American rig and crew is spoken for," he said.
The oil and natural gas industry is awash in cash. Collectively, major oil companies are on track to earn more than $100 billion in profit this year. But even with all that money, energy executives cannot simply snap their fingers and bring on more supplies to meet strong demand. The bottleneck in drilling crews and rigs is only one piece in the giant jigsaw puzzle of infrastructure needed to produce energy.
Each piece that is needed to find, drill, pump, carry, refine and ship hydrocarbons has been stretched by years of underinvestment. Today, just about everything between the wellhead and the gas pump is in short supply.
Even before hurricanes sent energy supplies into a tailspin this year, the oil industry had been hard pressed to find drilling rigs and crews, petroleum engineers and geologists, contractors and suppliers, tankers, pipelines, storage tanks, refineries and import terminals.
"The supply side is stretched from an industry perspective," David O'Reilly, Chevron's chief executive officer, recently said. "It's a little reminiscent of the squeeze we had 25 years ago."
Today's shortages can for the most part be traced to the boom-and-bust cycle that has shaped the industry. Even with record prices now, industry executives still are haunted by the collapses of 1998 and 1986, when oil prices tumbled to $10 a barrel in a matter of weeks.
These oil crashes sent many smaller companies into bankruptcy and left a profound impression in the minds of today's managers. In response, they went on a massive diet, cutting costs, reducing research budgets, freezing investments, and ultimately seeking savings that led to the mega-mergers of the late 1990s. The trouble is that by the time oil prices recovered, a more nimble industry was struggling to keep up with high growth. By that time, the industry in the United States had a much smaller work force, the result of years of consolidation and big layoffs.
Meanwhile, the number of oil companies has shrunk sharply. For example, BP is what was created after various mergers of at least 10 separate companies since the 1950s, including British Petroleum, Amoco, Atlantic, Richfield, and Sinclair. Today's top 10 oil companies were formed by mergers of over 45 separate entities.
"The industry has gone through such a contraction that getting it to expand again is proving difficult," said Paul Horsnell, an analyst with Barclays Capital in London. "These companies are not equal to the sum of their parts. "
One problem common to most companies is finding new engineers and geologists to fill the shoes of an aging work force that is mostly expected to retire over the next decade.
In the United States, half of workers in the oil and gas industry are between the ages of 50 and 60 and will retire over the coming decade; only 15 percent are in their early 20s to mid-30s; the average age in the industry is 48.
"The industry is going to have a lot of challenges replacing all the graying people leaving in the next few years," said Mark Rubin, the executive director of the Society of Petroleum Engineers. The average age for oil engineers is 51.
Students have been scared away from petroleum engineering and geology studies by the oil industry's brutal layoffs and negative image, analysts said.
After reaching a peak of 11,000 in 1983, the number of students enrolled in petroleum engineering in the United States has dropped to 1,700, while the number of universities offering these programs halved to 17 over the same period, according to figures compiled by Lloyd Heinze, a professor at Texas Tech. Enrollment hit a low of 1,300 students in 1997.
According to the American Petroleum Institute, oil companies will need to hire more than 5,000 engineers and 1,300 geoscientists to meet their needs. Getting them will be challenging.
"The availability of talent across the globe is shrinking," said Navjot Singh, the global marketing manager for recruitment at Royal Dutch Shell, whose company said this year that it plans to recruit 1,000 petroleum engineers.
According to a recent study by Wood Mackenzie, an oil consultancy based in Edinburgh, oil companies have been finding much less oil in recent years than they are pumping out. Their reserve replacement level, which peaked in 2000, has slumped over the past three years as the world's top oil companies found only half the oil they produced, according to the study.
"The reserves exist," said Andrew Latham, vice president for upstream consulting at Wood Mackenzie, "but it's almost inconceivable that we will get full reserve replacement. There are simply not enough rigs available, not enough geologists."
One reason, he said, is that oil companies have simply not been investing enough in exploration. These budgets, he said, have shrunk by a third since 1998.
One thing that's not in short supply is cash. With oil prices averaging $41 a barrel in 2004 and $56 this year, oil companies have been enjoying record profits. But much of these gains have been going back to shareholders, either in terms of record high dividends or as share buybacks.
This year, the six largest oil companies are expected to buy back shares worth $40 billion, a 60 percent jump from last year, according to John S. Herold, a research firm. They will also pay out some $31 billion in dividends.
Only 34 percent of their cash flow, or $54 billion, will be invested in their so-called upstream businesses - drilling wells, building pipelines, and bringing new supplies to the market.
"The concern now is that there will be a backlash against big oil companies who do not seem to be doing enough to bring new supplies and push oil prices down," said Arthur Smith, Herold's chief executive. "The industry basically downsized itself into trouble."
"Eventually, the industry will come to the realization that it will need to go into a crash course of investments," he said.
Meanwhile, the crunch has pushed up prices, for example, with the day rate for renting a 1,000 horsepower drilling rig in the United States jumping to $15,000 from about $9,000 a year ago, according to Richard Mason, the Lubbock, Texas-based publisher of The Land Rig Newsletter.
For deepwater drillships, the jump has been even more substantial, jumping by more than a third to as much as $300,000 a day.
"The last time drilling was profitable like this was in 1981, making this a stars-are-aligned, once-in-a-generation moment," said Mason.
NEW YORK Kim Bennetts, an executive at a Texas-based natural gas company, traveled over 7,000 miles this year to the heartland of China to look for the right rig to drill four wells in the Piceance Basin, a booming exploration area in western Colorado.
That is how far he needed to go to get the basic tools of the trade. The shortfall in drilling rigs has become so acute that some executives blame it for slowing down new exploration projects.
"Sure, there's been some hue and cry," said Bennetts, the vice president for exploration and production at Presco. When the skeleton crew arrived, along with the rig, a local newspaper compared them to Chinese railroad laborers in the Rockies in the 19th century.
"But the Chinese are not displacing any Americans in terms of either technology or jobs, not when nearly every American rig and crew is spoken for," he said.
The oil and natural gas industry is awash in cash. Collectively, major oil companies are on track to earn more than $100 billion in profit this year. But even with all that money, energy executives cannot simply snap their fingers and bring on more supplies to meet strong demand. The bottleneck in drilling crews and rigs is only one piece in the giant jigsaw puzzle of infrastructure needed to produce energy.
Each piece that is needed to find, drill, pump, carry, refine and ship hydrocarbons has been stretched by years of underinvestment. Today, just about everything between the wellhead and the gas pump is in short supply.
Even before hurricanes sent energy supplies into a tailspin this year, the oil industry had been hard pressed to find drilling rigs and crews, petroleum engineers and geologists, contractors and suppliers, tankers, pipelines, storage tanks, refineries and import terminals.
"The supply side is stretched from an industry perspective," David O'Reilly, Chevron's chief executive officer, recently said. "It's a little reminiscent of the squeeze we had 25 years ago."
Today's shortages can for the most part be traced to the boom-and-bust cycle that has shaped the industry. Even with record prices now, industry executives still are haunted by the collapses of 1998 and 1986, when oil prices tumbled to $10 a barrel in a matter of weeks.
These oil crashes sent many smaller companies into bankruptcy and left a profound impression in the minds of today's managers. In response, they went on a massive diet, cutting costs, reducing research budgets, freezing investments, and ultimately seeking savings that led to the mega-mergers of the late 1990s. The trouble is that by the time oil prices recovered, a more nimble industry was struggling to keep up with high growth. By that time, the industry in the United States had a much smaller work force, the result of years of consolidation and big layoffs.
Meanwhile, the number of oil companies has shrunk sharply. For example, BP is what was created after various mergers of at least 10 separate companies since the 1950s, including British Petroleum, Amoco, Atlantic, Richfield, and Sinclair. Today's top 10 oil companies were formed by mergers of over 45 separate entities.
"The industry has gone through such a contraction that getting it to expand again is proving difficult," said Paul Horsnell, an analyst with Barclays Capital in London. "These companies are not equal to the sum of their parts. "
One problem common to most companies is finding new engineers and geologists to fill the shoes of an aging work force that is mostly expected to retire over the next decade.
In the United States, half of workers in the oil and gas industry are between the ages of 50 and 60 and will retire over the coming decade; only 15 percent are in their early 20s to mid-30s; the average age in the industry is 48.
"The industry is going to have a lot of challenges replacing all the graying people leaving in the next few years," said Mark Rubin, the executive director of the Society of Petroleum Engineers. The average age for oil engineers is 51.
Students have been scared away from petroleum engineering and geology studies by the oil industry's brutal layoffs and negative image, analysts said.
After reaching a peak of 11,000 in 1983, the number of students enrolled in petroleum engineering in the United States has dropped to 1,700, while the number of universities offering these programs halved to 17 over the same period, according to figures compiled by Lloyd Heinze, a professor at Texas Tech. Enrollment hit a low of 1,300 students in 1997.
According to the American Petroleum Institute, oil companies will need to hire more than 5,000 engineers and 1,300 geoscientists to meet their needs. Getting them will be challenging.
"The availability of talent across the globe is shrinking," said Navjot Singh, the global marketing manager for recruitment at Royal Dutch Shell, whose company said this year that it plans to recruit 1,000 petroleum engineers.
According to a recent study by Wood Mackenzie, an oil consultancy based in Edinburgh, oil companies have been finding much less oil in recent years than they are pumping out. Their reserve replacement level, which peaked in 2000, has slumped over the past three years as the world's top oil companies found only half the oil they produced, according to the study.
"The reserves exist," said Andrew Latham, vice president for upstream consulting at Wood Mackenzie, "but it's almost inconceivable that we will get full reserve replacement. There are simply not enough rigs available, not enough geologists."
One reason, he said, is that oil companies have simply not been investing enough in exploration. These budgets, he said, have shrunk by a third since 1998.
One thing that's not in short supply is cash. With oil prices averaging $41 a barrel in 2004 and $56 this year, oil companies have been enjoying record profits. But much of these gains have been going back to shareholders, either in terms of record high dividends or as share buybacks.
This year, the six largest oil companies are expected to buy back shares worth $40 billion, a 60 percent jump from last year, according to John S. Herold, a research firm. They will also pay out some $31 billion in dividends.
Only 34 percent of their cash flow, or $54 billion, will be invested in their so-called upstream businesses - drilling wells, building pipelines, and bringing new supplies to the market.
"The concern now is that there will be a backlash against big oil companies who do not seem to be doing enough to bring new supplies and push oil prices down," said Arthur Smith, Herold's chief executive. "The industry basically downsized itself into trouble."
"Eventually, the industry will come to the realization that it will need to go into a crash course of investments," he said.
Meanwhile, the crunch has pushed up prices, for example, with the day rate for renting a 1,000 horsepower drilling rig in the United States jumping to $15,000 from about $9,000 a year ago, according to Richard Mason, the Lubbock, Texas-based publisher of The Land Rig Newsletter.
For deepwater drillships, the jump has been even more substantial, jumping by more than a third to as much as $300,000 a day.
"The last time drilling was profitable like this was in 1981, making this a stars-are-aligned, once-in-a-generation moment," said Mason.
NEW YORK Kim Bennetts, an executive at a Texas-based natural gas company, traveled over 7,000 miles this year to the heartland of China to look for the right rig to drill four wells in the Piceance Basin, a booming exploration area in western Colorado.
That is how far he needed to go to get the basic tools of the trade. The shortfall in drilling rigs has become so acute that some executives blame it for slowing down new exploration projects.
"Sure, there's been some hue and cry," said Bennetts, the vice president for exploration and production at Presco. When the skeleton crew arrived, along with the rig, a local newspaper compared them to Chinese railroad laborers in the Rockies in the 19th century.
"But the Chinese are not displacing any Americans in terms of either technology or jobs, not when nearly every American rig and crew is spoken for," he said.
The oil and natural gas industry is awash in cash. Collectively, major oil companies are on track to earn more than $100 billion in profit this year. But even with all that money, energy executives cannot simply snap their fingers and bring on more supplies to meet strong demand. The bottleneck in drilling crews and rigs is only one piece in the giant jigsaw puzzle of infrastructure needed to produce energy.
Each piece that is needed to find, drill, pump, carry, refine and ship hydrocarbons has been stretched by years of underinvestment. Today, just about everything between the wellhead and the gas pump is in short supply.
Even before hurricanes sent energy supplies into a tailspin this year, the oil industry had been hard pressed to find drilling rigs and crews, petroleum engineers and geologists, contractors and suppliers, tankers, pipelines, storage tanks, refineries and import terminals.
"The supply side is stretched from an industry perspective," David O'Reilly, Chevron's chief executive officer, recently said. "It's a little reminiscent of the squeeze we had 25 years ago."
Today's shortages can for the most part be traced to the boom-and-bust cycle that has shaped the industry. Even with record prices now, industry executives still are haunted by the collapses of 1998 and 1986, when oil prices tumbled to $10 a barrel in a matter of weeks.
These oil crashes sent many smaller companies into bankruptcy and left a profound impression in the minds of today's managers. In response, they went on a massive diet, cutting costs, reducing research budgets, freezing investments, and ultimately seeking savings that led to the mega-mergers of the late 1990s. The trouble is that by the time oil prices recovered, a more nimble industry was struggling to keep up with high growth. By that time, the industry in the United States had a much smaller work force, the result of years of consolidation and big layoffs.
Meanwhile, the number of oil companies has shrunk sharply. For example, BP is what was created after various mergers of at least 10 separate companies since the 1950s, including British Petroleum, Amoco, Atlantic, Richfield, and Sinclair. Today's top 10 oil companies were formed by mergers of over 45 separate entities.
"The industry has gone through such a contraction that getting it to expand again is proving difficult," said Paul Horsnell, an analyst with Barclays Capital in London. "These companies are not equal to the sum of their parts. "
One problem common to most companies is finding new engineers and geologists to fill the shoes of an aging work force that is mostly expected to retire over the next decade.
In the United States, half of workers in the oil and gas industry are between the ages of 50 and 60 and will retire over the coming decade; only 15 percent are in their early 20s to mid-30s; the average age in the industry is 48.
"The industry is going to have a lot of challenges replacing all the graying people leaving in the next few years," said Mark Rubin, the executive director of the Society of Petroleum Engineers. The average age for oil engineers is 51.
Students have been scared away from petroleum engineering and geology studies by the oil industry's brutal layoffs and negative image, analysts said.
After reaching a peak of 11,000 in 1983, the number of students enrolled in petroleum engineering in the United States has dropped to 1,700, while the number of universities offering these programs halved to 17 over the same period, according to figures compiled by Lloyd Heinze, a professor at Texas Tech. Enrollment hit a low of 1,300 students in 1997.
According to the American Petroleum Institute, oil companies will need to hire more than 5,000 engineers and 1,300 geoscientists to meet their needs. Getting them will be challenging.
"The availability of talent across the globe is shrinking," said Navjot Singh, the global marketing manager for recruitment at Royal Dutch Shell, whose company said this year that it plans to recruit 1,000 petroleum engineers.
According to a recent study by Wood Mackenzie, an oil consultancy based in Edinburgh, oil companies have been finding much less oil in recent years than they are pumping out. Their reserve replacement level, which peaked in 2000, has slumped over the past three years as the world's top oil companies found only half the oil they produced, according to the study.
"The reserves exist," said Andrew Latham, vice president for upstream consulting at Wood Mackenzie, "but it's almost inconceivable that we will get full reserve replacement. There are simply not enough rigs available, not enough geologists."
One reason, he said, is that oil companies have simply not been investing enough in exploration. These budgets, he said, have shrunk by a third since 1998.
One thing that's not in short supply is cash. With oil prices averaging $41 a barrel in 2004 and $56 this year, oil companies have been enjoying record profits. But much of these gains have been going back to shareholders, either in terms of record high dividends or as share buybacks.
This year, the six largest oil companies are expected to buy back shares worth $40 billion, a 60 percent jump from last year, according to John S. Herold, a research firm. They will also pay out some $31 billion in dividends.
Only 34 percent of their cash flow, or $54 billion, will be invested in their so-called upstream businesses - drilling wells, building pipelines, and bringing new supplies to the market.
"The concern now is that there will be a backlash against big oil companies who do not seem to be doing enough to bring new supplies and push oil prices down," said Arthur Smith, Herold's chief executive. "The industry basically downsized itself into trouble."
"Eventually, the industry will come to the realization that it will need to go into a crash course of investments," he said.
Meanwhile, the crunch has pushed up prices, for example, with the day rate for renting a 1,000 horsepower drilling rig in the United States jumping to $15,000 from about $9,000 a year ago, according to Richard Mason, the Lubbock, Texas-based publisher of The Land Rig Newsletter.
For deepwater drillships, the jump has been even more substantial, jumping by more than a third to as much as $300,000 a day.
"The last time drilling was profitable like this was in 1981, making this a stars-are-aligned, once-in-a-generation moment," said Mason.
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