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.
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.
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.
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.
For its first ten years, OPEC was ignored by all but its own members and even by many of them. The consumers and their oil companies were dominant; no changes could be conceived. This comfortable state ended with the Mideast war of 1967. Although no immediate move was made by OPEC, it began to flex its muscles in the early 1970s. The industrialized countries began to grasp the fact that an organization of oil exporters existed. OPEC was taken very seriously after the overwhelming American assistance to Israel in the Mideast war of 1973, the inevitable oil embargo, and the consequent skyrocketing of oil prices. Immediately after the initial shock, the incredible nature of OPEC struck our economists who predicted its imminent demise.
A well-known economist, Milton Friedman, who subsequently won the Nobel Prize in Economics, said in 1974 that OPEC could not possibly sustain a price of $10 a barrel. At that price, he said, so much additional production would come on-stream that the world would be awash in oil ; the United States would again become a major exporter. This gives sterling proof (if any were needed) that economics ( at least oil economics) is not a science but an art, and an arcane one at that.
There were some disruptions in the world economy as the price of oil went up much too rapidly in 1973 and early 1974. Whether it went too far is another matter. Apparently it did not; consumption was barely affected by the price increases; in fact it continued to rise through the remainder of the '70s. Then the world was faced with the second great oil shock of 1979-80 which . sprang from western concerns over the Iranian Revolution and the Iraq-Iran war. The price of oil trebled again. Again, the rise was much too fast. There were severe repercussions in the industrialized world and in the Third World. This time, consumption was affected.
The price increases of 1979-80 resulted from a frantic bidding by the industrialized countries for the available oil . This should not have happened. Had there been consumer discipline, some rationing and some modest draw-down of stocks, the crisis could have been avoided. Instead, the main industrialized countries built up their stocks thereby exacerbating rather than alleviating the relatively small disruption in oil production. But there are limits as to how far stocks will be built up; when every storage tank and every surplus tanker is full , the realization dawns on consumers that the feared crisis has not materialized and that there will probably be no further cuts in exports. Consumers then start to draw down their stocks. They did this in 1981 and 1982 and put considerable pressure on OPEC to reduce its prices or to restrain production.
The title I was assigned for this presentation is \"When Will The Gas Bubble Break.\" Accordingly, I want first to answer that question, and then go on to give you our views on the natural gas supply/demand situation and the many areas of mutual, indeed vital, interest that API and A.G.A. share.
A.G.A. has forecast that the excess short-term production capability (\"gas bubble\") will last at least another two years and possibly for the rest of the decade. Our view is reinforced by the change in Canadian Government pricing policy for gas exports -- a policy that is making more gas available to U. S. energy consumers at price-s that the marketplace will accept.
We estimate that the domestic gas \"bubble\" will be about 2.9 Tcf in 1985, up slightly from 1984 and down from 3.9 Tcf in 1983. After the continuing surplus has ended, we expect that gas supply and demand will be in balance. That is, there will not be a gas shortage -- but rather there will be increased incentive for a dynamic new growing supply to serve a growing demand, and there will not be the upward pressure on wellhead prices that some analysts have forecast.
When examining short-term natural gas availability, it should be borne in mind that we currently have about 21 Tcf/year of gas available to U. S. markets. This includes a significant quantity of unused Canadian gas that is currently under contract but not being taken. This level of gas deliverability will not be dissipated quickly by rising demand or by the current slowdown in gas well completions. Indeed, despite all anecdotal evidence to the contrary, the figure available to us indicates that U. S. peak gas deliverability remained nearly constant between 1981-1984 -- even though gas well completions declined during this period. It should be noted that gas well completions turned around during the second half of 1984.
Our assessment of lower-48 states gas supply stability also is supported by the fact that replacement of production with new reserve additions has far exceeded the expectations of just a few years ago. In the period 1980-1983, aggregate reserve additions in the lower-48 states were 96% of production, 1983 being the third consecutive year when additions nearly equaled or exceeded production.
In 1979, A.G.A. conducted a survey of producers, pipelines and government agencies to assess the outlook for lower-48 states gas production and reserve additions. Overall, seven producers and five pipeline estimates were accumulated and these companies in aggregate forecast 11.8 Tcf/year of lower-48 states reserve additions between 1980-1985. However, between 1980 and 1983, lower-48 states reserve additions in fact average 16.8 Tcf.
In summary, the U. S. is currently in its seventh year of what was predicted to be only an 18-month delivery surplus.
It is indeed a pleasure to participate in this meeting and speak on the proposed API Quality Program.
As many of you are aware, I have been privileged during my long petroleum industry career to serve as an equipment user during my Exxon career, which concluded with ten years as Chairman and Chief Executive Officer of Exxon Company, U. S. A., and as an equipment manufacturer in my position as Chairman and Chief Executive Officer of Cameron Iron Works, Inc., for the past seven years. I also served as an active director of the API for ten years, and was then made a Lifetime Honorary Director upon my retirement, and, as such, continue to attend board meetings.
Because of this rare background, I was urged by your organization, as well as some of my manufacturing friends, to accept the assignment to develop a I' manufacturers' viewpoint of API's Quality Program.\" Since the objectives of the program are so obviously worthwhile for both segments of this great industry, I succumbed to flattery and accepted. I will address my comments specifically to the SPEC 6A document that will be voted on in a few weeks, but many of the points will equally apply to the entire rewrite effort.
My first step was to have a series of meetings with Cameron people who were acquainted with the background as well as the details of the proposed SPEC 6A. Following that, a small team called upon executive and technical people from six of the largest SPEC 6A wellhead equipment suppliers. This was to ensure a common understanding by manufacturers of the proposed standard, and that I could report to you regarding these manufacturers' views with some confidence.
I have been very interested in Tom Sawyer's review of the past activity of the API Production Department and the developments in more recent years that have stimulated this quality effort; i. e., deeper drilling, production of more corrosive and dangerous gases and fluids, extension of drilling into more hostile environments (such as offshore and the arctic), as well as increased government regulations in some quarters.
Other developments that came about during this period included an expansion in research and development by both the manufacturers and the producing oil companies. In our own case, we brought into the market the more exotic metals of the aerospace industry, as well as new elastomers and equipment designs. Needless to say, our competitors also made their contributions. Some of the oil companies created new technical groups to attack equipment problems, and in several instances they set new specifications for their own companies, some of which were then adopted by other companies. Entering the picture, also, were third parties offering inspection services as well as quality assurance specifications. On the manufacturing side, the number of wellhead competitors we can identify increased from 15 in 1979 to over 47 today.