Overall price reduction in the industry: 30%
Lifting costs: USD 50 per barrel
The long wait for an upturnDecember 14, 2016
TOGY talks to Graham N. Hibbin, regional director of Reservoir Development Services for Baker Hughes, about the operations of Baker Hughes in Congo, his company's impending merger with GE Oil & Gas Services and the overall market outlook. Baker Hughes is the second largest oilfield services provider in the Republic of Congo.
What have been the major developments for Baker Hughes in Congo in 2016?
We have been successful in winning the drilling work with Total E&P Congo for the Moho Nord Albian, which is the longest-term development project that we have going on at the moment in Congo. For Total, this is currently one of their most important projects worldwide, so we are very pleased to take on that work and we have been successful so far. We anticipate that the project will continue for four or more years and, during that period, we understand that there is a requirement to drill 17 wells, plus some additional potential wells, depending on enhanced understanding of the reservoir that will develop as the project progresses.
From a services company perspective, our goals are to provide flawless service execution and to show our clients the value of the new technology that we can bring to the game to improve understanding of the reservoir, the well placement, and eventually the production, that they can gain from their wells.
What is your view on the quality-versus-cost trade-off that is defining the current relationship between oilfield services and oil companies?
Value should be our focus. If we deploy services or products that are going to cost more, the only justification for that is added benefit. The operating company must get something back in terms of improved drilling performance, more effective well placement or eventual increased production or reduced operating cost. A great example of the technology we can bring to bear is with what we call “reservoir navigation.” We use measurements in order to understand, in real time as we drill, where the reservoir is going and where we are within the reservoir, so that we are able to adjust the placement of the well in order to access the resources most effectively. Of course, there are some expenses in doing that.
From the services company side, we invest in the development of new equipment and services and we would like companies to recognise the value and use the services.
From the operating companies’ side, in many cases they seem to be very conservative when it comes to adopting new technologies. During the current crisis many companies are almost exclusively driven by control of costs.
It is a matter of strategies. You see some of the companies are much more prepared to look at that added value equation and they have been early adopters of some of our reservoir navigation services. A good example would be what we call “ViziTrak,” which is a very deep-measuring resistivity LWD instrument that allows you to determine better where you are within the reservoir. For me, the discussion should be focused first and foremost on value, rather than cost, but this is not always what happens.
What has been the extent of the industry cost reductions for Baker Hughes in Congo?
A reasonable estimation of overall price reduction is around 30%. Bear in mind that this 30% comes from the bottom line, so that obviously has a substantial effect on our business. The more important issue has been the reduction of activity. If we look across Central Africa right now, there are currently no active drilling operations in Gabon, Equatorial Guinea or in Chad. Compared to two years ago, the impact is huge! This is the most significant reduction of activity that I have seen in the 38 years that I have been with Baker Hughes.
What is your perspective on the evolution of the industry?
I expect some small upturn in activity in 2017, but not very significant. The cessation of activity driven by the need to cut costs results, eventually, in a build up of need for workover operations and such, so there will be some activity around that. Business associated with production-related operations like artificial lift and chemical provision to the industry has been more robust through the downturn than well construction business. This will continue.
I do not believe that there will be major changes until global fundamentals come back into balance, so I anticipate that more significant activity upturn will not happen before 2018.
What do you expect from oil prices over the next few years?
We are now at around USD 40-50 a barrel. If we consider the “predictable” influences on price, significant increase will not happen until we have a re-balancing of global supply and demand and a draw-down of the large inventories currently in place. Short-term price increases encourage US operators to come back into the market and add to production, resulting in renewed downward pressure on price.
The dynamic of move-up and move-down is not going to change in the next year significantly, unless of course something completely unpredictable happens. I do not see a big upside, or a big downside, either. I think that price is going to be constrained in the USD 40-60 range until fundamentals start coming back into balance globally.
What would be the long-term effects of investment deferrals in the industry?
It is an issue for the whole of Central Africa. It becomes a big issue when the result is a permanent damage to infrastructure that is difficult to replace, thus necessitating a shutdown of your wells. Where maintenance is not performed there is a potential for permanent damage to infrastructure, particularly in the well stock, but also the reservoir in some cases.
I fully understand that for a company operating in the field, with lifting costs at USD 50 a barrel, they are not going to be interested in spending money in doing workover right now, but it can have a long-term impact.
How can the government further ensure a production increase in the coming years?
There are two fundamental ways to look at this. One is legislative control: how you manage and the way the business operates in your country. The other one is the business perspective. Because the government and the operating companies are business partners, there has to be a mutual benefit and a community of understanding. This is a world problem, not a Congo problem.
There is room for legislation in terms of ensuring that investments made in the past are maintained for the future. The government should ensure that there is an understanding of the requirements for maintaining infrastructure and production. In order to do that, the first requirement is a good level of technical understanding.
In my experience, you see this work more effectively in countries where you have strong national oil companies. Typically, within government you have few individuals who have a technical background from the industry or a deep knowledge of individual fields, reservoirs, and so on. You need that kind of knowledge to manage the industry effectively, and a strong national oil company can be an effective resource for a government.
I think that perhaps this is an area of development that could be looked at to further develop the capabilities of the national company as both an operator and as a strong technical partner within the industry.
What is the potential for gas development in Congo?
The legislation in place is banning flaring from any new developments and requires either reinjection or production and monetisation of the gas. There is a sizeable gas resource here, associated and non-associated, and there is a lot of potential for small-scale projects, power generation in particular. There is a lot of potential for new discoveries of hydrocarbons in Congo and I hope to see that this is reflected in substantial interest in the licensing rounds. Then we are going to have a different problem, because when the activity picks up you need to find resources to pursue that activity.
How will Baker Hughes benefit from its merger with General Electric Oil & Gas?
I have heard nothing but positive opinions around this deal. These two companies have quite different areas of business, and that is a good thing. This contrasts with the now-defunct Halliburton deal, where there was a lot of concern from operating companies and from the US and other international legislatures, driven by the large overlap between our business and Halliburton’s, and consequent concerns about a reduction in competition in the market. Our clients are not going to have the same concerns around Baker Hughes and GE.
GE is a big technology company, with a great record of market-focused technology development. Coupling this with Baker Hughes’ proven capacity for technology development focused on resolving the problems and issues of the oil industry will accelerate this process, provide the springboard for our future success and bring new solutions and efficiencies to the industry.
GE clearly has a long-term interest in developing a position within the oil and gas industry. We see that very positively and I see a similar positivity from the GE side.
What are Baker Hughes’ main business development objectives in Congo?
First and foremost, we will pursue our business agenda with a focus on safety, compliance and integrity. We will work to reinforce our position from the technical and operational points of view, with the goal of being the company of choice for operators in Congo. Baker Hughes has a strong focus on operational quality and we aim to offer excellent service to our clients. Even when there is a downturn in the market, we focus on excellent service and we will continue to do that because it is a big driver for our business.
What are the main challenges Baker Hughes will face in the coming years?
The major challenge in the next years is going to be around the upturn in activity. That will happen eventually, and will then require the rebuilding of resources. We have had a severe period of activity reduction, and have had to reduce resources during that period of time, including human resources.
There will be a challenge around recruiting and developing people and we are already applying solutions in order to be able to do that. In 2018, I anticipate that we will start to see some significant developments and an upturn of activity. We are already positioning ourselves to take advantage of that, and to ensure that we are in a position that enables us to meet the requirements. We want to be the number one service company across all the product lines we operate. If we did not want that, then we should not be in business! We want to do that on the basis of a collaborative and co-operative model, where there is a strong mutual benefit for Baker Hughes, for our clients and also for the country.
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