Good afternoon ladies and gentlemen.
It is a special pleasure to be back in Dallas and to have an opportunity to talk to a group of petroleum engineers. I have chosen as my subject this afternoon the somewhat ambiguous yet all embracing title of \"Changing Times\". This is altogether intentional since I want to talk today, not only about changes taking place in the oil and gas business, but about changes that are taking place in business generally in our country and in the world.
I think it is human-nature to measure current activities against the background of one's own experiences. I can recall as a youngster thinking that Summer was forever and that the vacation days between school terms were almost without limit. At 6 years of age, I suppose 3 months was indeed a long time. At my present age of 66, however, I think about Summer as 13 weekends that pass almost as quickly as one can tear pages from the calendar.
As a child I can recall penny candy, and 5¢ for a candy bar seemed a small fortune. Today that same candy bar costs 40¢ and inflation has taken its toll in the price of everything we buy.
When I came into the oil business 45 years ago, the price of oil was about % 1.00 a barrel and the United States was producing about 3.7 million barrels a day. Natural gas sales were about 15% of current volumes, and much gas was being sold in the field at 7-10¢ per 1,000 cubic feet -- hardly enough to pay the cost of gathering, processing and compressing for market. In many areas gas had no market at any price.
During the 70's, we saw massive increases in the price of oil and gas to levels of % 35 a barrel for oil and in some instances % 8 per 1,000 cubic feet for gas. Demand seemed insatiable and worldwide concerns were primarily about whether supplies were sufficient to meet demands through the end of the century. It was widely believed that the price of oil would continue to rise steadily and reach % 80-% 100 per barrel by the year 2000.
These events, and the expectations they generated, caused a boom in the oil business that none of us had ever experienced before. New drilling rigs were built as quickly as they could be put in place. What had previously been marginal oil and gas prospects quickly became major development opportunities. Manpower demands became insatiable whether for geologists, engineers, geophysicists, drillers or oil field operators. Refineries were modernized, enlarged and even built from the ground up. New pipelines both for oil and gas crisscrossed the nation.
The downturn of activity in early 1982 was the steepest and deepest in the United States since World War 11, and the depth of the fall varied widely, depending on the product and/or service involved. In Baker's own case, the greatest impact occurred in our tool jointing facility where revenues dropped by 95% within 270 days and for the past 30 months have remained at about 10% of their previous high. The least impacted units were those heavily involved in maintenance and workover.
Thus, publicly traded companies have been hit with different amounts of revenue retreat depending upon the mix of their products, services, and market geographics. Using a sampling of published data from segment information of annual reports, the least impacted in revenue fall was Schlumberger at 16%; next was Halliburton at 29%, followed by Hughes Tool Company at 34%, Baker International at 35%, Dresser Industries at 36%, Smith International at 41%, and NL Industries at 48%. These percentages are from that company's all time high reported sales regardless of which year the high water mark occurred. Again, referring to our own data, the pricing structure generally broke between sales fall backs of 25 and 35% and that price break has ultimately averaged a rollback of about 25 to 50% of the 1981 price levels.
Against this backdrop, companies in the manufacturing, service, and supply sector are mandated to look toward their economic survival but even more important, every company and/or every product group must earn within the customer community a feeling that that company or that product and service has a right to survive now that the cold light of dawn has revealed that oil is not going to be $100 a barrel and gas is not going to be $15 per mcf. There are some products and services which sprang up during the heyday that will die because they are not perceived by the oil and gas community to be in a proper cost benefit relationship.
Turning to what Baker has done to meet our economic challenges, we have targeted the opening paragraph from the management primer on down markets. Be the lowest cost producer of a product and service your customer wants to buy while simultaneously aiming for the highest quality product, the highest quality service people, and the best deliverability out of inventory. Although it's easy to articulate this simple platitude, it's very difficult to achieve it in practice and the level of achievement will vary from profit center to profit center.
Of the items receiving intense scrutiny in our Company at the moment, the most dominant is an attempt to accurately assess where, when, and how much of the products and services will be needed by our customers, with a confirmation of this assessment coming from an understanding of where the cash flow will come from to support those customer activity levels.
All over America, companies are asking, \"How can we run faster? ... cheaper? ... better? How can we operate smarter?\" The answers vary, but in many cases companies are turning to computer technology.
That's where the auto industry turned in the face of stiff overseas competition. Complex robot systems have helped improve the quantity and quality of Detroit's assembly line products. The retail industry turned to computers too, and now cashiers ring up sales more accurately with laser scanners that provide instant inventory updates.
The petroleum industry is also turning to computers. A movement is underway to use them to monitor and control equipment, and to transfer information to main-frame computers. That can mean improved use of time and money, and, in some cases, a safer place to work. With today's economic climate and regulatory pressures, these benefits are too valuable to overlook.
APPLICATIONS OF COMPUTER-ASSISTED OPERATIONS
At Shell, we call the general use of computers in the field \"Computer Assisted Operations,\" or CAO. Typically, computers are used to monitor such oil field facilities as producing wells and injectors, field separators, dehydration units, pumps, compressors, chemical feed systems, storage tanks, pipelines, gas plants, and steam generators.
The computer systems come in a variety of packages, as Figure 1 shows. The typical Shell CAO system uses local host computers linked to electronic remote terminal units (RTUs) that are wired to individual pieces of equipment.
For example, Shell's oldest CAO systems were installed in Louisiana's Atchafalaya Basin and East Bay in the early '70s. They use minicomputers to monitor production and lift gas systems, report alarms, and status changes. They also automatically test wells and print routine reports. The Atchafalaya system also meters gas flow in the Crawfish Pipeline from Morgan City to a Shell refinery outside New Orleans. Besides substantially increasing well testing frequency in the Atchafalaya Basin, the systems are especially valuable in these marshy areas where routine travel is difficult and expensive.
During severe winter weather, travel also can be a problem in Northern Michigan. Up there, a Shell Oil Company subsidiary, Shell Western ECP Inc. (SWEPI), operates more than 400 wells from Lake Michigan to Lake Huron. In 1984, three CAO systems based on minicomputers were installed there. In addition to providing the basic services found in Louisiana, the Michigan systems also monitor tank levels and calculate daily oil and gas fluctuations for 37 central production facilities. Operators use this information as a daily audit tool for their production facilities. The logged data are also available for routine reports to state agencies.
FIGURE 1. SOME OF THE OPTIONS FOR COMPUTER ASSISTED OPERATIONS OR CAO (Available in full paper)
Several systems also operate in California's hot, dusty San Joaquin Valley. One was installed in 1980 by another Shell Oil subsidiary, Shell California Production Inc. (SCPI), for a waterflood pilot in the Belridge field. The system monitors the water treatment plant, the pilot injection system and producing wells, and provides critical alarms and reports. At one time it also monitored a steam injection pilot.
Before we can talk about managing productivity, we ought to properly define it. The generic definition of productivity is output divided by input -- it is the relationship between an organization's outputs and the inputs utilized to produce those outputs. Improving productivity simply means getting more out of what you put in. Now, while t h a t is a nice straightforward definition , it is inadequate for most organizations. It does not address the quality issue, for example, and it is of little meaning to an organization whose outputs are intangible, such as an engineering department. One of the first tasks of a productivity manager, therefore, is to develop a definition t h a t is meaningful to the organization.
Too often managers perceive that productivity applies only to the labor input and sometimes, even more narrowly, only to the hourly worker. In fact, productivity applies t o all of the inputs that are utilized in the productive process. The productivity of capital, materials, or energy may have even greater impact on the bottom line than does the productivity of labor.
If we look at the trend of labor productivity growth in this country, we note that the U. S. achieved a regular average annual growth rate in labor productivity of 3.2 percent per year for about 20 years after the close of World War 11. Beginning in the mid-sixties, however, that growth rate began to decline. From 1965 to 1973 the annual growth rate averaged less than 2-112 percent, and from 1973 to 1979, less than one percent. It bottomed out in 1979 and 1980, when outright declines in labor productivity occurred. This was the first time in recent history that the U. S. had experienced a consecutive two-year decline in labor productivity. While growth rates have accelerated again in the early 1980's, for the most part they have not returned to the r a t e s achieved in the early post-war period. In fact , another decline occurred in the third quarter of 1984.
When we examine the growth rates of other developed nations, we see that the U. S. has been dead last in labor productivity growth from the mid-sixties to the present, averaging only about one percent per year. Not surprisingly, the Japanese have led in productivity growth during this period, averaging a 5.5 percent increase per year. Even countries that have had well-publicized economic problems, such as the United Kingdom and Italy , have increased their productivity at a more rapid rate than has the United States.
When we look a t absolute l e v e l s of labor productivity, however, we see t h a t the United S t a t e s is still number one, with West Germany, France, and Canada close behind. The Japanese economy is only about 75 percent as productive as is the U. S., although in manufacturing, the Japanese are almost even.
Good morning. It is a pleasure and a privilege to provide the overview for the annual meeting of the API Production Department.
In considering the theme of this meeting, \"Challenges in a Decade of Uncertainties,\" it occurred to me there is no uncertainty so great as that of a speaker who is -not first on the agenda. I owe thanks to Bobby Hall, Tut Ellis, and the program committee for giving me the first shot on this occasion. At least I know I shan't be left speechless. If I touch on the subjects of the 20 other speakers who will be addressing us over the next two days, let me apologize in-advance -- and say that if I do trespass in their areas of expertise, it will be only briefly.
What I intend to do is provide some perspective for the specific problems that will be discussed later. I'd like to begin by stepping back from the here and now and reviewing the wide sweep of changes that have affected our industry over the past 20 years. From this perspective, our current difficulties, which loom so large from close up, may take on more manageable proportions.
One of the most significant events of the past two decades was the emergence of the environmental movement, which became a major force in American politics and -- through the political process and the courts -- a strong influence on industry as well. For many years, it seemed that the goals of the movement and the objectives of our industry were in direct and irreconcilable conflict. This led to frustrating and costly delays in exploration and development, particularly in the new frontiers offshore and in Alaska.
But we have learned to live with environmental regulations and, in many cases, we take pride in going beyond the letter of the law.
Environmental challenges will probably always be with us, but there is no doubt in my mind that today we are better-equipped to respond to those challenges than at any other time in the past 20 years. One reason for this is the expertise -- you might even call it sophistication -- we have developed in dealing with the environment and with the agencies that have environmental responsibilities. That ability has carried over to our relations with many of the organizations that spearheaded the environmental movement. We still don't see eye-to-eye with those groups on many things, of course, but at least we have substituted rational dialogue for the brick bats that were hurled regularly from both sides of the fence in the past.
A second landmark event of recent history was the rise of OPEC, the growth of national oil companies and, to a large extent, the dispossession of the private oil companies in many major oil-producing countries. During this period, the international oil companies largely lost control of production to the governments. As a result, oil production in these countries became subject to national economic priorities; it also became a political and diplomatic tool.
The most obvious immediate economic challenge for the drilling contractor is to survive the overbuilt status of the industry. Only time, additional activity, and some hardware retirements will take care of this.
The challenges we need to look at are any steps or actions we can take to survive and come out of this difficult period in an economically viable condition. If we do not emerge from this period in a viable economic condition, not only we but our clients will suffer while the drilling industry rebuilds its capabilities.
Being a drilling contractor and probably somewhat biased, I feel our clients understand it is a great time to get low cost drilling work done, which it is, but have little real concern for the ultimate and not too distant effect on them, which is the quality of service they will not get from a drilling industry in economic shambles.
For this reason, I believe it is important for both we, as drilling contractors, and the operating companies who use our services to explore possibilities for keeping the drilling industry alive, if not totally well, until a better balance of rig supply and demand gives us some help.
At current prices, our ability to provide the hardware and quality our clients have come to expect cannot last. Our present efforts to continue that quality are based on an expected--no--rather a hoped for significant improvement in the profitability of our business in the immediate future. If this doesn't happen--we as contractors, even the strong ones, begin disappearing and the service you receive will degenerate to a level you may find hard to accept.
To illustrate this point, Table I, \"Industry Financial Review,\" shows the published financial results for a cross section of our industry during the last 12 months and latest quarter. Without some improved profits, there really isn't any question where this industry is going--right down the tube.
The simple, direct way for the contractor to regain his health is to receive day rates commensurate with the service provided, assuring sufficient profitability to retain top people and attract the capital required to meet our clients' technical hardware needs. I will give some long odds our clients are not going to be so generous any sooner than they have to. On this presumption, let's take a look at how we got in this condition, and then how we might improve the situation during this period of excess equipment supply and still achieve for our client the best results for the least cost.
Table I - Industry Financial Review (Available in full paper)
As a result of our listening to what we wanted to hear about the limitless requirements for our services, some misguided optimism, and resulting poor judgments, we now have our clients in the position of having a high quality service available at very low cost--a quality developed significantly during the higher day rate period.
The title of my talk today--API's Quality Initiative-- suggests two things. First, major changes are occurring in the API standardization program and, second, these changes impact on most of you in the audience. Both are true.
Today, I will discuss the motivations for changes to the program, describe the changes, and outline the potential benefits. To set the stage, let's examine the reasons API became involved in standardization and look at the standardization program's metamorphosis over the years.
The API Division of Standardization, now known as the API Production Department, was formed in 1923. At that time, there was chaos in the marketplace for production equipment. There was little interchangeability between different manufacturer's pipe, fittings, equipment, and tools. Purchasing was a nightmare. Inventories were high; discrepancies caused delays, higher costs, and safety hazards. If the situation were the same today, you can imagine the impact it would have on operators' and manufacturers' operations.
During the first 50 years, the API standardization program focused on dimensional uniformity and interchangeability among the same products made by different manufacturers. Gradually, the standards increased in complexity. Standards began to include wider ranges of sizes, materials, chemistry, and working pressure, as well as strength and other physical requirements.
Early on, an API monogram was adopted to identify materials that conformed to API standards under the Institute's licensing system. Manufacturers certified that their products complied with API standards. With this self certification, they could then mark products with the API monogram. Today, more than 1700 manufacturers worldwide are licensed to use the mark.
The system worked well and it provided the desired benefits. However, even good things must change with the environment or perish. And the environment did change.
The change of emphasis from onshore to offshore operations created demands for improved equipment and materials. It also made national governments, here and abroad, not-so-silent partners in the petroleum industry's operations.
Prompted largely by environmental and personnel safety concerns, Federal regulatory agencies began adopting or referencing API standards in their regulations. What had been voluntary became mandatory.
Where standards did not exist, or where regulators judged existing standards to be inadequate, pressure fell on API to fill the gap with new standards or improve existing standards.
In addition, pressure was directed toward assurance that equipment would perform adequately under field conditions.
It became evident that the API standardization program had to be accelerated, broadened, and strengthened.
A beginning was made more than ten years ago. In 1973, the Committee on Standardization of Offshore Safety and Anti-pollution Equipment was formed. In ten months, the committee produced its first standard. This standard went far beyond the scope of previous standards. For the first time, the specification required quality control testing and a review of the manufacturer's qualifications to use the API monogram.
In 1980, another step was taken in the evolution. The Production Department began using third-party surveyors to assess capabilities of manufacturers of tubular goods to produce material to meet API specifications.
Thank you for this opportunity to present the environmental viewpoint of the oil and gas industry. But I must warn you: I hope to shatter forever your stereotype of environmentalists in the same manner that we at the National Wildlife Federation are attempting to shake up the environmental movement's view of the business community.
If there is one major message -- one penetrating question -- that I want to leave with you today. . . that I want to travel far beyond this room it is: \"Why do environmentalists and business people keep repeating the mistakes of past decades? Why do we insist on being adversaries, fighting the same battles over and over again? Aren't we bone weary of drawing battlelines when together we could chart an effective and positive strategy for both economic development and environmental protection?
Unfortunately, an event just two weeks ago proved again that the answer is \"no\". That's when Interior Secretary Hodel announced his five-year program for the Outer Continental Shelf. And, as predictable as the sunrise, industry dashed to its corner, shouting \"resource lock-up.\"
And what did the environmental community do? What else? Some of my most vocal colleagues screamed \"They're going to rape our resources\" as they ran for the opposite corner. Who won with that kind of rhetoric? Absolutely no one !
Why should the environmental and business communities always approach issues from such predictable and adversarial positions? How can we -- working together -- break the stereotypes that bind us to outdated thinking and outrageous fears? How can we in the environmental community and you in the oil and gas industry move beyond a discussion of motives to a consideration of merits?
I challenge you to initiate the change -- here and now -- first by erasing the skepticism that makes business people and environmentalists too leary of one another.
I'm reminded of a story President Kennedy used to tell.
Shortly after his election, Kennedy had some run-ins with the steel industry about prices. As a result, he earned a reputation for being \"anti-business.\"
To counter this perception, Kennedy invited industrial leaders to the White House -- where he spoke enthusiastically about his administration's work on behalf of industry. As he ticked off his accomplishments, he became more and more excited. Finally, he got a little carried away and declared, \"Why, if I weren't President, I'd invest in the stock market right now.\"
In fact, your opportunity is here now as the Federal government opens thousands of new acres to offshore energy development and as onshore exploration becomes more widespread. We urge that corporate and governmental decisions regarding oil and gas development be based on solid scientific and economic information. Such information should clearly lay out the benefits of development and the inherent environmental risks..
There is no such thing as a risk-free society. But we must have enough thorough and objective data to assess those risks and weigh them against economic realities and national needs.